XO Communications 2010 Annual Report Download - page 76

XO Holdings, Inc.
Notes to Consolidated Financial Statements
14. INCOME TAXES − (continued)
There were no accrued income tax penalties reported in the Company’s Consolidated Balance Sheets as
of December 31, 2010 or December 31, 2009. No income tax penalties were recorded in the Company’s
Statements of operations for 2010, 2009 or 2008.
Changes in Unrecognized Tax Benefits
For tax years 2003 and 2004, the Company accrued state income taxes for jurisdictions which may
disallow certain intercompany deductions and basis adjustments arising out of the Company’s January 2003
emergence from bankruptcy. The statute of limitations (for those states with a three year statute) for 2003 and
the 2004 short tax years ended January 16, 2004 and December 31, 2004 closed during 2008. The statute of
limitations for those states having a statute greater than three years expired in 2010. The expiration of the
remaining state statute of limitations resulted in a decrease in the accrued liability of $1.2 million.
Open Tax Years
The statutes of limitation for the Company’s U.S. federal income tax return and certain state income tax
returns including California, New Jersey, Texas, and Virginia remain open for the tax years 2007 through
2010. The IRS audit of the Company’s 2003 and short tax year ended January 16, 2004 federal income tax
returns were completed in 2008.
Tax Allocation Agreement
In connection with the Stock Purchase Agreement previously described in Note 10, the Company entered
into a Tax Allocation Agreement, dated July 25, 2008 (the ‘‘Tax Allocation Agreement’’), with Starfire, an
affiliate of the Chairman. The Tax Allocation Agreement generally governs Starfire’s and the Company’s rights
and obligations with respect to consolidated and combined federal and state income tax returns filed by
Starfire and its subsidiaries, should the election by Starfire be made to file such consolidated and combined
returns. The Tax Allocation Agreement replaces the previous tax allocation agreement by and between Starfire
and XOC dated January 16, 2003. Under the Tax Allocation Agreement, to the extent that Starfire and the
Company file consolidated or combined income tax returns, Starfire will make (i) current payments to the
Company equal to 30.0% of Starfire’s income tax savings from using the Company’s income tax benefits (up
to an aggregate of $900 million of benefits) and (ii) deferred payments to the Company equal to 100.0% of
Starfire’s income tax savings from using the Company’s benefits in excess of $900 million (other than benefits
which reduce the Company’s payment obligations as set forth below) at the time the Company would
otherwise have been able to use the benefits (and the Company no longer files income tax returns on a
consolidated or combined basis with Starfire). In addition, the Company’s obligation to make income tax
payments to Starfire as the common parent of a consolidated or combined income tax group may be reduced
by the Company’s available tax benefits. The Company’s rights to reimbursement from Starfire under the
previous tax allocation agreement are preserved under the Tax Allocation Agreement.
There were no cash settlements due to or from the Company as a result of the tax allocation agreement
for the year ended December 31, 2009.
The Company does not anticipate that Starfire will, for its 2010 taxable year, utilize the Company’s
current year net operating loss or its net operating loss carryforwards. Accordingly, the Company has not
reflected a receivable due for reimbursement for such utilization under the tax allocation agreement.
Reconsolidation
Effective January 17, 2009, XO Holdings, Inc. and subsidiaries rejoined the affiliated group which files a
consolidated federal income tax return with Starfire and, if any, combined groups which file state income tax
returns.
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