Income Taxes

3 Months Ended

Mar. 31, 2012

Income Taxes [Abstract]

Income Taxes

(6)    Income Taxes

The Company recorded an income tax benefit for the three months ended March 31, 2012 of $24.3 million, an income tax benefit for the 66 days ended March 31, 2011 of $15.4 million and an income tax expense for the 24 days ended January 24, 2011 of $279.9 million, respectively.

For the three months ended March 31, 2012, the effective tax rate on $71.0 million of pre-tax loss was 34.2%. The rate differs from the 35% federal statutory rate primarily due to an increase in the valuation allowance offset by state taxes.

For the 66 days ended March 31, 2011, the effective tax rate on $39.8 million of pre-tax loss was 38.6%. The rate differs from the 35% federal statutory rate primarily due to an increase in the valuation allowance and other miscellaneous reorganization adjustments.

For the 24 days ended January 24, 2011, the effective tax rate on $866.8 million of pre-tax income was 32.3%. The rate differs from the 35% federal statutory rate primarily due to the release of the valuation allowance and other miscellaneous reorganization adjustments.

At March 31, 2012, the Company had gross federal NOL carryforwards of $187.9 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 Chapter 11 protection in 2011. The Company’s remaining federal NOL carryforwards will expire from 2021 to 2031. At March 31, 2012, the Company had a net, after attribute reduction, state NOL deferred tax asset of $10.4 million. 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 Chapter 11 protection 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. The Company believes that it can use the NOLs even with these restrictions in place.

During the 24 days ended January 24, 2011, the Predecessor 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 66 days ended March 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 from 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. The Company has not finalized its assessment of the tax effects resulting from its emergence from Chapter 11 protection 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 March 31, 2012 and December 31, 2011, the Company established a valuation allowance against its deferred tax assets of $177.2 million and $172.9 million, respectively, which consist of a $149.3 million and $144.9 million Federal allowance, respectively, and a $27.9 million and $28.0 million state allowance, respectively. During the three months ended March 31, 2012, a decrease in the Company’s valuation allowance of approximately $0.5 million was allocated to accumulated other comprehensive loss in the consolidated balance sheet.

Unrecognized tax benefits under the Income Taxes Topic of the ASC are reserves established for probable loss contingencies that could be reasonably estimated. The Company’s unrecognized tax benefits totaled $2.9 million as of March 31, 2012 and $2.9 million as of December 31, 2011. 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.

The Company recognizes any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the three months ended March 31, 2012, the 66 days ended March 31, 2011 and the 24 days ended January 24, 2011, the Company did not make any payment of interest and penalties. There was nothing accrued in the condensed consolidated balance sheets for the payment of interest and penalties at March 31, 2012 and December 31, 2011 as the remaining unrecognized tax benefits would only serve to reduce the Company’s current federal and state NOL carryforwards, if ultimately recognized.

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 2005. As of March 31, 2012 and December 31, 2011, the Company does not have any significant additional jurisdictional tax audits.