FairPoint Communications 2004 Annual Report Download - page 110

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as
of December 31, 2004 and 2003 are presented below (dollars in thousands):
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Deferred tax assets:
Federal and state tax loss carryforwards $91,929 91,527
Employee benefits 1,620 784
Restructure charges and exit liabilities 968 1,917
Allowance for doubtful accounts 458 375
Alternative minimum tax and other state credits 2,218 2,209
Total gross deferred tax assets 97,193 96,812
Valuation allowance (66,011)(64,392)
Net deferred tax assets 31,182 32,420
Deferred tax liabilities:
Property, plant, and equipment, principally due to depreciation
differences 11,527 17,244
Goodwill, due to amortization differences 13,496 10,654
Basis in investments 6,159 4,522
Total gross deferred tax liabilities 31,182 32,420
Net deferred tax assets $ — —
The valuation allowance for deferred tax assets as of December 31, 2004 and 2003 was $66.0 million and $64.4 million,
respectively. The change in the valuation allowance was $1.6 million and $(0.2) million, of which $1.8 million and $0.0 million was
allocated to continuing operations and $0.0 million and $(7.3) million to discontinued operations for the years ended December 31,
2004 and 2003, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies
in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of
$180.9 million prior to the expiration of the net operating loss carryforwards in 2024. Taxable income (loss) for the years ended
December 31, 2004 and 2003 was $(10.9) million and $7.6 million, respectively. Based upon the level of projections for future taxable
income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company
will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2004, based on facts
and circumstances known as of December 31, 2004. The Company's initial public offering on February 8, 2005 (see note 2) and its
anticipated reduction in interest expense and corresponding increase in taxable income was not considered when evaluating the
valuation allowance at December 31, 2004. Subsequent to the initial public offering, the Company will continue to reevaluate future
taxable income and determine when and how much of the valuation allowance can be reversed in future periods.
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