FairPoint Communications 2010 Annual Report Download - page 112

Table of Contents
limitations on the Company’s ability to use its NOL carryfowards and other tax attributes. It is the Company’s belief that it can use the NOLs even with these
restrictions in place.
During the year ended December 31, 2010, the Company excluded from taxable income $21.6 million of income from the discharge of indebtedness as
defined under Internal Revenue Code (“IRC”) Section 108. IRC Section 108 excludes from taxable income the amount of indebtedness discharged under a
Chapter 11 case. IRC Section 108 also requires a reduction of tax attributes equal to the amount of excluded taxable income to be made on the first day of the
tax year following the emergence from bankruptcy. These tax attributes will primarily consist of a reduction to the NOL carryforward and tax basis of other
assets, and accordingly, the Company has reduced its NOL carryforward by $21.6 million and its related deferred tax asset by $8.2 million.
The Income Taxes Topic of the ASC requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a
tax return and disclosures regarding uncertainties in income tax positions. The unrecognized tax benefits under the Income Taxes Topic of the ASC are similar
to the income tax reserves reflected prior to adoption under SFAS No. 5, Accounting for Contingencies, whereby reserves were established for probable loss
contingencies that could be reasonably estimated. The adoption of the uncertainties in income tax positions provisions of the Income Taxes Topic of the ASC
(formerly FIN 48) did not have a material impact on the Company’s financial position or results of operations. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows (in thousands):
Balance as of December 31, 2008 $ 8,594
Additions for tax positions related to the current year —
Additions for tax positions related to acquired companies —
Additions for tax positions of prior years —
Reductions for tax positions of prior years —
Reductions as a result of audit settlements (3,219)
Reductions due to lapse of statute of limitations —
Balance as of December 31, 2009 $ 5,375
Additions for tax positions related to the current year —
Additions for tax positions related to acquired companies —
Additions for tax positions of prior years —
Reductions for tax positions of prior years —
Reductions as a result of audit settlements —
Reductions due to lapse of statute of limitations —
Balance as of December 31, 2010 $ 5,375
As of the Effective Date, the Company expects that its unrecognized tax benefits will be reduced to approximately $1.0 million as a result of the termination
of the Tax Sharing Agreements with Verizon. Of the $5.4 million of unrecognized tax benefits at December 31, 2010, $2.0 million would impact the
Company’s effective tax rate, if recognized.
The Company recognizes any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended
December 31, 2010 and 2009, the Company did not make any payment of interest and penalties. During the year ended December 31, 2008, the Company
recognized $0.2 million (after-tax) for the payment of interest and penalties. The Company had $1.0 million and $0.8 million (after-tax) for the payment of
interest and penalties accrued in the consolidated balance sheet at December 31, 2010 and 2009, respectively.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and with various state and local governments. The
Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2004. During the
quarter ending June 30, 2009, Verizon received notification from the IRS that a tax position taken on their returns for the years 2000 through 2003 relating to
FairPoint’s acquired business was settled through acceptance of the filing position. During the quarter ending June 30, 2008, Verizon effectively settled the IRS
examination for fiscal years 2000 through 2003. Due to the executed Tax Sharing Agreement, the settlement of the IRS audit resulted in an amount due to
Verizon from FairPoint in the amount of $1.5 million relating to adjustments of temporary differences and $0.1 million of interest. As of December 31, 2010,
the Company does not have any significant additional jurisdictional tax audits.
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