Income Taxes (Notes)

12 Months Ended

Dec. 31, 2019

Substantially all of the Company’s operations are held through Charter Holdings and its direct and indirect subsidiaries. Charter Holdings and the majority of its subsidiaries are generally limited liability companies that are not subject to income tax. However, certain of these limited liability companies are subject to state income tax. In addition, the subsidiaries that are corporations are subject to income tax. Generally, the taxable income, gains, losses, deductions and credits of Charter Holdings are passed through to its members, Charter and A/N. Charter is responsible for its share of taxable income or loss of Charter Holdings allocated to it in accordance with the Charter Holdings Limited Liability Company Agreement ("LLC Agreement") and partnership tax rules and regulations. As a result, Charter's primary deferred tax component recorded in the consolidated balance sheets relates to its excess financial reporting outside basis, excluding amounts attributable to nondeductible goodwill, over Charter's tax basis in the investment in Charter Holdings.

Charter Holdings, the indirect owner of the Company’s cable systems, generally allocates its taxable income, gains, losses, deductions and credits proportionately according to the members’ respective ownership interests, except for special allocations required under Section 704(c) of the Internal Revenue Code and the Treasury Regulations (“Section 704(c)”). Pursuant to Section 704(c) and the LLC Agreement, each item of income, gain, loss and deduction with respect to any property contributed to the capital of the partnership shall, solely for tax purposes, be allocated among the members so as to take into account any variation between the adjusted basis of such property to the partnership for U.S. federal income tax purposes and its initial gross asset value using the “traditional method” as described in the Treasury Regulations.

Income Tax Benefit (Expense)

For the years ended December 31, 2019, 2018, and 2017, the Company recorded deferred income tax benefit (expense) as shown below. The tax provision in future periods will vary based on current and future temporary differences, as well as future operating results.



	Year Ended December 31,
	2019			2018			2017
Current expense:
Federal income taxes	$	(6	)	$	(23	)	$	(4	)
State income taxes	(113		)	(47		)	(25		)
Current income tax expense	(119		)	(70		)	(29		)

Deferred benefit (expense):
Federal income taxes	(358		)	(204		)	9,082
State income taxes	38			94			34
Deferred income tax benefit (expense)	(320		)	(110		)	9,116
Income tax benefit (expense)	$	(439	)	$	(180	)	$	9,087

Income tax benefit for the year ended December 31, 2017 was recognized primarily as a result of the enactment of Tax Reform in December 2017. Among other things, the primary provisions of Tax Reform impacting the Company are the reductions to the U.S. corporate income tax rate from 35% to 21% and temporary 100% bonus depreciation for certain assets. The change in tax law required the Company to remeasure existing net deferred tax liabilities using the lower rate in the period of enactment resulting in an income tax benefit of approximately $9.3 billion to reflect these changes in the year ended December 31, 2017.

The Company’s effective tax rate differs from that derived by applying the applicable federal income tax rate of 21% for the years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017, respectively, as follows:



	Year Ended December 31,
	2019			2018			2017
Statutory federal income taxes	$	(510	)	$	(354	)	$	(360	)
Statutory state income taxes, net	(57		)	(54		)	(34		)
Change in uncertain tax positions	(64		)	(24		)	3
Nondeductible expenses	(24		)	(25		)	(21		)
Net income attributable to noncontrolling interest	80			68			84
Excess stock compensation	63			34			88
Federal tax credits	46			77			21
Tax rate changes	15			107			9,293
Other	12			(9		)	13
Income tax benefit (expense)	$	(439	)	$	(180	)	$	9,087

Deferred Tax Assets (Liabilities)

The tax effects of these temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are presented below.



	December 31,
	2019			2018
Deferred tax assets:
Loss carryforwards	$	1,839		$	2,453
Accrued and other	664			578
Total gross deferred tax assets	2,503			3,031
Less: valuation allowance	(46		)	(89		)
Deferred tax assets	$	2,457		$	2,942

Deferred tax liabilities:
Investment in partnership	$	(20,159	)	$	(20,319	)
Accrued and other	(9		)	(12		)
Deferred tax liabilities	(20,168		)	(20,331		)
Net deferred tax liabilities	$	(17,711	)	$	(17,389	)

The deferred tax liabilities on the investment in partnership above includes approximately $55 million net deferred tax liabilities and $3 million net deferred tax assets relating to certain indirect subsidiaries that file separate state income tax returns at December 31, 2019 and 2018, respectively.

Valuation Allowance

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 be realized. In evaluating the need for a valuation allowance, management takes into account various factors, including the expected level of future taxable income, available tax planning strategies and reversals of existing taxable temporary differences. As of December 31, 2019, approximately $9 million of the valuation allowance is associated with federal capital loss carryforwards and $37 million is associated with state tax loss carryforwards and other miscellaneous deferred tax assets. As of December 31, 2018, approximately $39 million of the valuation allowance is associated with federal tax net operating loss carryforwards acquired in acquisitions and approximately $50 million is associated with state tax loss carryforwards and tax credits.

Net Operating Loss Carryforwards

As of December 31, 2019, Charter had approximately $7.5 billion of federal tax net operating loss carryforwards resulting in a gross deferred tax asset of approximately $1.6 billion. Federal tax net operating loss carryforwards expire in the years 2020 through 2035. These losses resulted from the operations of Charter Communications Holdings Company, LLC ("Charter Holdco") and its subsidiaries. In addition, as of December 31, 2019, Charter had state tax net operating loss carryforwards, resulting in a gross deferred tax asset (net of federal tax benefit) of approximately $257 million. State tax net operating loss carryforwards generally expire in the years 2020 through 2039.

Upon closing of the merger with TWC in 2016, Charter experienced a third “ownership change” as defined in Section 382 of the Internal Revenue Code; resulting in a third set of limitations on Charter’s use of its existing federal and state net operating losses, capital losses, and tax credit carryforwards. Both the first ownership change limitations that applied as a result of Charter’s emergence from bankruptcy in 2009 and second ownership change limitations that applied as a result of Liberty Media Corporation’s purchase in 2013 of a 27% beneficial interest in Charter will also continue to apply. After December 31, 2019, $905 million of Charter's federal tax loss carryforwards are subject to Section 382 and other restrictions. Pursuant to these restrictions, Charter estimates that approximately $226 million annually over each of the next four years of federal tax loss carryforwards should become unrestricted and available for Charter’s use. Since the limitation amounts accumulate for future use to the extent they are not utilized in any given year, Charter believes its loss carryforwards should become fully available to offset future taxable income.

Charter’s state loss carryforwards are subject to similar, but varying, limitations on their future use. If Charter was to experience another “ownership change” in the future, its ability to use its loss carryforwards could be subject to further limitations.

Tax Receivable Agreement

Under the LLC Agreement, A/N has rights to: (1) convert at any time some or all of its preferred units in Charter Holdings for common units in Charter Holdings, and (2) exchange at any time some or all of its common units in Charter Holdings for Charter’s Class A common stock or cash, at Charter’s option. Pursuant to a TRA between Charter and A/N, Charter must pay to A/N 50% of the tax benefit when realized by Charter from the step-up in tax basis resulting from any future exchange or sale of the preferred and common units. Charter did not record a liability for this obligation as of the acquisition date since the tax benefit is dependent on uncertain future events that are outside of Charter’s control, such as the timing of a conversion or exchange. A future exchange or sale is not based on a fixed and determinable date and the exchange or sale is not certain to occur. If all of A/N's partnership units were to be exchanged or sold in the future, the undiscounted value of the obligation is currently estimated to be in the range of zero to $3 billion depending on measurement of the tax step-up in the future and Charter’s ability to realize the tax benefit in the periods following the exchange or sale. Factors impacting these calculations include, but are not limited to, the fair value of the equity at the time of the exchange and the effective tax rates when the benefits are realized.

In connection with the Letter Agreement between Charter and A/N (see Note 20) whereby 1.3 million Charter Holdings common units held by A/N during the year ended December 31, 2017 were exchanged for shares of Charter Class A common stock for an aggregate purchase price of $400 million, an immediate step-up of $487 million in the tax basis of the assets of Charter Holdings occurred. As it relates to the exchange and tax step-up, a net deferred tax asset of approximately $85 million was recorded and a resulting TRA liability owed to A/N of $118 million which, as a transaction with a shareholder, was recorded directly to additional paid in capital, net of tax during the year ended December 31, 2017. The TRA liability is recorded on an iterative, undiscounted basis. During the year ended December 31, 2017, the TRA liability was remeasured as a result of the enactment of Tax Reform resulting in a $101 million benefit recorded to other operating expenses, net. See Note 15. Following such remeasurement, the TRA liability of $150 million and $151 million is reflected in other long-term liabilities on the consolidated balance sheets as of December 31, 2019 and 2018, respectively.

Uncertain Tax Positions

The net amount of the unrecognized tax benefits recorded as of December 31, 2019 that could impact the effective tax rate is $242 million. The Company has determined that it is reasonably possible that its existing reserve for uncertain tax positions as of December 31, 2019 could decrease by approximately $31 million during the year ended December 31, 2020 related to various ongoing audits, settlement discussions and expiration of statute of limitations with various state and local agencies; however, various events could cause the Company’s current expectations to change in the future. These uncertain tax positions, if ever recognized in the financial statements, would be recorded in the consolidated statements of operations as part of the income tax provision. A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of interest and penalties, included in other long-term liabilities on the accompanying consolidated balance sheets of the Company is as follows:



BALANCE, December 31, 2017	$	164
Additions on prior year tax positions	7
Additions on current year tax positions	25
Reductions on settlements and expirations with taxing authorities	(16		)
BALANCE, December 31, 2018	$	180
Additions on prior year tax positions	15
Additions on current year tax positions	44
Reductions on settlements and expirations with taxing authorities	(9		)
BALANCE, December 31, 2019	$	230

The Company recognizes interest and penalties accrued on uncertain income tax positions as part of the income tax provision. Interest and penalties included in other long-term liabilities on the accompanying consolidated balance sheets of the Company were $56 million and $45 million as of December 31, 2019 and 2018, respectively.

No tax years for Charter are currently under examination by the Internal Revenue Service ("IRS") for income tax purposes. Charter's 2016 through 2019 tax years remain open for examination and assessment. Charter’s short period return dated May 17, 2016 (prior to the TWC and Bright House Networks, LLC transactions) remain subject to examination and assessment. Years prior to 2016 remain open solely for purposes of examination of Charter’s loss and credit carryforwards. The IRS is currently examining Charter Holdings’ income tax return for 2016. Charter Holdings’ 2017 through 2019 tax years remain open for examination and assessment. The IRS is currently examining TWC’s income tax returns for 2011 through 2014. TWC’s tax year 2015 remains subject to examination and assessment. Prior to TWC’s separation from Time Warner Inc. (“Time Warner”) in March 2009, TWC was included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The IRS has examined Time Warner’s 2008 through 2010 income tax returns and the results are under appeal. The Company does not anticipate that these examinations will have a material impact on the Company’s consolidated financial position or results of operations. In addition, the Company is also subject to ongoing examinations of the Company’s tax returns by state and local tax authorities for various periods. Activity related to these state and local examinations did not have a material impact on the Company’s consolidated financial position or results of operations during the year ended December 31, 2019, nor does the Company anticipate a material impact in the future.