Home Shopping Network 2008 Annual Report Download - page 66

HSN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
63
2008
2007
2006
Income tax provision at the federal statutory rate of 35% $(1,091,388) $ 59,425 $ 74,460
State income taxes, net of effect of federal tax benefit
(41,846) 4,182 4,721
Nondeductible portion of goodwill and intangible asset impairment charges
404,034
- -
Other, net
(1,573) 947 29
Income tax (benefit) provision
$ (730,773)
$ 64,554
$ 79,210
Years Ended December 31,
HSNi adopted the provisions of FIN 48 effective January 1, 2007. FIN 48 clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The cumulative effect of the adoption resulted in a
decrease of $0.2 million to invested capital. A reconciliation of the beginning and ending amount of unrecognized
tax benefits, excluding interest, is as follows (in thousands):
Balance at beginning of year
$ 8,944
$ 4,316
Additions based on tax positions related to the current year
-
2,298
Additions for tax positions of prior years
289
2,330
Reductions for tax positions of prior years
(8,819)
-
Balance at end of year $ 414 $ 8,944
2008 2007
As of December 31, 2008 and 2007, the unrecognized tax benefits, including interest, were $0.5 million
and $11.7 million, respectively. Included within "Receivables from IAC and subsidiaries" in the accompanying
consolidated balance sheet at December 31, 2007 was approximately $11.6 million of unrecognized tax benefits and
related interest that remained with IAC after the spin-off. During 2008, unrecognized tax benefits decreased by $8.8
million for tax positions included in IAC’s consolidated tax return filings. Liabilities associated with these return
filings are the responsibility of IAC pursuant to the terms of the spin-off. Included in unrecognized tax benefits at
December 31, 2008 and 2007 is approximately $0.3 million and $8.8 million for tax positions which the ultimate
deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Other than
the interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective
tax rate but would accelerate the payment of cash to the taxing authorities to an earlier period.
HSNi recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax
expense. Included in income tax expense from continuing operations for the years ended December 31, 2008 and
2007 is $0.7 million of interest income and $1.2 million of interest expense, respectively, net of related deferred
taxes of $0.4 million and $0.7 million, respectively. As of December 31, 2008 and 2007, HSNi accrued $40,000 and
$2.8 million, respectively, for the payment of interest. There are no material accruals for penalties.
By virtue of previously filed separate company and consolidated tax returns with IAC, HSNi is routinely
under audit by federal, state, local and foreign tax authorities in the area of income tax. These audits include
questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions.
Income taxes payable include amounts considered sufficient to pay assessments that may result from examination of
prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided.
Differences between the reserves for tax contingencies and the amounts owed by HSNi are recorded in the period
they become known.
The Internal Revenue Service ("IRS") is currently examining the IAC consolidated tax returns for the years
ended December 31, 2001 through 2003, which includes the operations of HSNi. The statute of limitations for these
years has been extended to December 31, 2009. Various IAC consolidated tax returns filed with state, local and
foreign jurisdictions are currently under examination, the most significant of which are California, Florida, New
York and New York City, for various tax years after December 31, 2001. These examinations are expected to be
completed by late 2009. In early 2009, the IRS commenced an audit of IAC’s consolidated tax returns for the years