Income Taxes and Accounting for Uncertainty in Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes and Accounting for Uncertainty in Income Taxes

Income Taxes and Accounting for Uncertainty in Income Taxes

8.     Income Taxes and Accounting for Uncertainty in Income Taxes

Income Taxes

Our income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported on our Consolidated Balance Sheets, as well as probable operating loss, tax credit and other carryforwards.  Deferred tax assets are offset by valuation allowances when we believe it is more likely than not that net deferred tax assets will not be realized.  We periodically evaluate our need for a valuation allowance.  Determining necessary valuation allowances requires us to make assessments about historical financial information as well as the timing of future events, including the probability of expected future taxable income and available tax planning opportunities.

As of December 31, 2011, we had no net operating loss carryforwards (“NOLs”) for federal income tax purposes and less than $1 million of NOL benefit for state income tax purposes.  The state NOLs begin to expire in the year 2020.  In addition, there are $3 million of tax benefits related to credit carryforwards which are offset by a valuation allowance.  The credit carryforwards begin to expire in the year 2022.

DDBS and its domestic subsidiaries join with DISH Network in filing U.S. consolidated federal income tax returns and, in some states, combined or consolidated returns.  The federal and state income tax provisions or benefits recorded by DDBS are generally those that would have been recorded if DDBS and its domestic subsidiaries had filed returns as a consolidated group independent of DISH Network.  Cash is due and paid to DISH Network based on amounts that would be payable based on DDBS consolidated or combined group filings.  Amounts are receivable from DISH Network on a basis similar to when they would be receivable from the IRS or other state taxing authorities.  The amounts paid to DISH Network during the years ended December 31, 2011, 2010 and 2009 were $384 million, $429 million and $400 million, respectively.

The components of the (provision for) benefit from income taxes are as follows:

	For the Years Ended December 31,
	2011			2010			2009
	(In thousands)
Current (provision) benefit:
Federal	$	(277,920	)	$	(286,491	)	$	(360,974	)
State	(36,408		)	(68,962		)	(44,399		)
Foreign	—			—			(78		)
	(314,328		)	(355,453		)	(405,451		)
Deferred (provision) benefit:
Federal	(553,393		)	(195,869		)	38,828
State	(35,887		)	18,711			789
Decrease (increase) in valuation allowance	6,761			(5,701		)	(7,104		)
	(582,519		)	(182,859		)	32,513
Total benefit (provision)	$	(896,847	)	$	(538,312	)	$	(372,938	)

The actual tax provisions for 2011, 2010 and 2009 reconcile to the amounts computed by applying the statutory Federal tax rate to income before taxes as follows:

	For the Years Ended December 31,
	2011		2010		2009
	% of pre-tax (income)/loss
Statutory rate	(35.0	)	(35.0	)	(35.0	)
State income taxes, net of Federal benefit	(2.0	)	(2.5	)	(3.4	)
Stock option compensation	—		0.3		(0.2	)
Other	(0.3	)	1.0		1.1
Decrease (increase) in valuation allowance	0.3		—		(0.7	)
Total benefit (provision) for income taxes	(37.0	)	(36.2	)	(38.2	)

The temporary differences, which give rise to deferred tax assets and liabilities as of December 31, 2011 and 2010, are as follows:

	As of December 31,
	2011			2010
	(In thousands)
Deferred tax assets:
NOL, credit and other carryforwards	$	3,500		$	—
Unrealized losses on investments	4,442			9,595
Accrued expenses	63,188			255,273
Stock-based compensation	23,000			17,683
Deferred revenue	45,556			56,324
State taxes net of federal effect	—			17,941
Total deferred tax assets	139,686			356,816
Valuation allowance	(11,114		)	(15,784		)
Deferred tax asset after valuation allowance	128,572			341,032
Deferred tax liabilities:
Depreciation and amortization	(1,020,045		)	(681,018		)
State taxes net of federal effect	(6,070		)	—
Other long-term liabilities	(26,944		)	—
Total deferred tax liabilities	(1,053,059		)	(681,018		)
Net deferred tax asset (liability)	$	(924,487	)	$	(339,986	)
Current portion of net deferred tax asset	$	78,532		$	281,957
Current portion of net deferred tax liability	(14,648		)	—
Noncurrent portion of net deferred tax asset (liability)	(988,371		)	(621,943		)
Total net deferred tax asset (liability)	$	(924,487	)	$	(339,986	)

Accounting for Uncertainty in Income Taxes

In addition to filing federal income tax returns, we and one or more of our subsidiaries file income tax returns in all states that impose an income tax and a small number of foreign jurisdictions where we have immaterial operations.  We are subject to U.S. federal, state and local income tax examinations by tax authorities for the years beginning in 1996 due to the carryover of previously incurred net operating losses.  As of December 31, 2011, we are currently under a federal income tax examination for fiscal year 2008.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	For the Years Ended December 31,
Unrecognized tax benefit	2011			2010			2009
	(In thousands)
Balance as of beginning period	$	170,226		$	199,172		$	201,271
Additions based on tax positions related to the current year	9,836			7,382			7,952
Reductions based on tax positions related to current years	(1,170		)	—			—
Additions based on tax positions related to prior years	16,610			11,507			4,072
Reductions based on tax positions related to prior years	—			(43,141		)	(6,042		)
Reductions based on tax positions related to settlements with taxing authorities	(1,185		)	(493		)	(5,899		)
Reductions based on tax positions related to the lapse of the statute of limitations	(3,382		)	(4,201		)	(2,182		)
Balance as of end of period	$	190,935		$	170,226		$	199,172

We have $180 million in unrecognized tax benefits that, if recognized, could favorably affect our effective tax rate.  We do not expect any portion of this amount to be paid or settled within the next twelve months.

Accrued interest and penalties on uncertain tax positions are recorded as a component of “Other, net” on our Consolidated Statements of Operations and Comprehensive Income (Loss).  During the year ended December 31, 2011 and 2010, we recorded $1 million and $4 million in interest and penalty benefit to earnings, respectively.  During the year ended December 31, 2009, we recorded $8 million in interest and penalty expense to earnings.  Accrued interest and penalties were $9 million and $11 million at December 31, 2011 and 2010, respectively.  The above table excludes these amounts.