FairPoint Communications 2011 Annual Report Download - page 114

Table of Contents
At December 31, 2011, the Company had gross federal NOL carryforwards of $199.0 million after taking into consideration the estimated NOL tax
attribute reduction of $562.6 million resulting from the Company’s discharge of indebtedness upon emergence from bankruptcy in 2011. The Company’s
remaining federal NOL carryforwards will expire from 2021 to 2031. At December 31, 2011, the Company had a net, after attribute reduction, state NOL
deferred tax asset of $11.4 million. At December 31, 2011, the Company had no alternative minimum tax credits. Telecom Group 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 and the Company’s emergence from the Chapter 11 Cases also
resulted in ownership changes. As a result of these ownership changes, there are specific 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 24 days ended January 24, 2011 the Company excluded from taxable income $1,045.4 million of income from the discharge of indebtedness
as defined under Internal Revenue Code (“IRC”) Section 108. There was no additional income from the discharge of indebtedness for the 341 days ended
December 31, 2011, however the Company did recognize additional tax benefits due to a change in the amount of its deferred tax liability related to a tax
attribute reduction front the discharge of indebtedness. 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. We have not finalized our assessment of the tax effects of the bankruptcy emergence and this estimate, as well as the
Plan’s effect on all tax attributes, is subject to revision, which could be significant.
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 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.
At December 31, 2011 and 2010, the Company established a valuation allowance of $172.9 million and $105.6 million, respectively, against its
deferred tax assets which consist of a $144.9 million and $85.1 million Federal allowance, respectively, and a $28.0 million and $20.5 million state
allowance, respectively. During 2011, approximately $54.3 million of the increase in the Company’s valuation allowance was allocated to accumulated other
comprehensive loss in the consolidated balance sheet.
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,  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. The total unrecognized tax benefits that, if
recognized, would affect the effective tax rate are $2.9 million. The Company does not expect a significant increase or decrease in its unrecognized tax benefits
during the next twelve months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
 $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 —
 $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 —
 $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 1,907
Reductions for tax positions of prior years (4,389)
Reductions as a result of audit settlements —
Reductions due to lapse of statute of limitations —
 $2,893
108