FairPoint Communications 2005 Annual Report Download - page 89

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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, 2005
and 2004 are presented below (in thousands):
 
Deferred tax assets:
Federal and state tax loss carryforwards $109,569 $91,929
Employee benefits 1,865 1,620
Self insurance reserves 1,389 968
Restructure charges and exit liabilities 493 458
Allowance for doubtful accounts 800 —
Alternative minimum tax and other state credits 1,857 2,218
Total gross deferred tax assets 115,973 97,193
Valuation allowance —(66,011)
Net deferred tax assets 115,973 31,182
Deferred tax liabilities:
Property, plant, and equipment, principally due to depreciation differences 11,996 11,527
Goodwill and other intangible assets 17,883 13,496
Change in fair market value of swaps 3,301
Basis in investments 6,443 6,159
Total gross deferred tax liabilities 39,623 31,182
Net deferred tax assets $76,350 $ —
The valuation allowance for deferred tax assets as of December 31, 2004 was $66.0 million. 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,
as well as all positive and negative evidence that would affect the recoverability of deferred tax assets. As a result of the offering, the Company has reduced its
aggregate long term debt and expects a significant reduction in its annual interest expense. When considered together with the Company’s history of producing
positive operating results and other evidence affecting the recoverability of deferred tax assets, the Company expects that future taxable income will more likely
than not be sufficient to recover net deferred tax assets. Therefore, the valuation allowance was reversed in the first quarter of 2005, subsequent to the offering.
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
$219.2 million prior to the expiration of the net operating loss carryforwards in 2025. Taxable losses for the years ended December 31, 2005 and 2004 were
$(41.0) million and $(10.9) 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 based on facts and
circumstances known as of December 31, 2005.
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