FairPoint Communications 2010 Annual Report Download - page 111

Table of Contents
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, 2010 and
2009 are presented below (in thousands):
 
Deferred tax assets:
Federal and state tax loss carryforwards $ 230,398 $165,982
Employee benefits 179,904 136,242
Allowance for doubtful accounts 16,288 26,539
Investment tax credits 1,729 1,925
Alternative minimum tax and other state credits 7,315 6,095
Basis in interest rate swaps 7,087 33,181
Bond issuance costs 10,980 13,154
Service quality rebate reserve 8,333 11,044
Other, net 15,008 9,009
Total gross deferred tax assets 477,042 403,171
Deferred tax liabilities:
Property, plant, and equipment 319,244 321,856
Goodwill and other intangible assets 81,165 88,011
Other, net 7,060 6,119
Total gross deferred tax liabilities 407,469 415,986
Net deferred tax assets (liabilities) before valuation allowance 69,573 (12,815)
Valuation allowance (105,554) (27,214)
Net deferred tax liabilities $ (35,981) $ (40,029)
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 determines its estimates of future taxable income based upon the scheduled reversal of deferred tax
liabilities, projected future taxable income exclusive of reversing temporary differences, and tax planning strategies. The Company establishes valuation
allowances for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized.
Based upon the level of projections for future taxable income at December 31, 2008, management believed it was more likely than not the Company would
realize the full benefits of these deductible differences. However, as a result of the change in facts and circumstances during 2009 in which the Company filed
for Chapter 11 reorganization, the Company reassessed the likelihood that its deferred tax assets will be realized as of December 31, 2009. Based upon the
change in circumstances, management believes it can support the realizability of its deferred tax asset only by the scheduled reversal of its deferred tax
liabilities and can no longer rely upon the projection of future taxable income. At December 31, 2010 and 2009, the Company established a valuation allowance
of $105.6 million and $27.2 million, respectively, against its deferred tax assets which consists of a $85.1 million and $21.7 million Federal allowance,
respectively, and a $20.5 million and $5.5 million state allowance, respectively.
In addition to the impact of the change in valuation allowance, the effective tax rate for the years ended December 31, 2010 and 2009 is impacted by post-
petition interest on debts that is not expected to be paid and, therefore, not expected to result in a future tax deduction, as well as non-deductible costs incurred
related to the Chapter 11 Cases.
At December 31, 2010, the Company had federal and state NOL carryforwards of $597.5 million that will expire from 2019 to 2030. At December 31,
2010, the Company has alternative minimum tax credits of $3.8 million that may be carried forward indefinitely. Legacy FairPoint completed an initial public
offering on February 8, 2005, which resulted in an “ownership change” within the meaning of the U.S. Federal income tax laws addressing NOL
carryforwards, alternative minimum tax credits, and other similar tax attributes. The Merger also resulted in an ownership change. As a result of these
ownership changes, there are specific
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