Income Taxes

Current income tax (provision) benefit represents estimated taxes payable or refundable for the current year based on enacted tax laws and rates. Deferred income tax assets and liabilities are determined based on the estimated future tax effects of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities, as measured by tax rates at which temporary differences are expected to reverse. Deferred income tax (provision) benefit is the result of changes in deferred income tax assets and liabilities. A valuation allowance is recognized to reduce gross deferred tax assets to the amount that will more likely than not be realized.

Components of (Provision) Benefit for Income Taxes



	Successor Company						Predecessor Company
	Year Ended December 31, 2011			Eleven Months Ended December 31, 2010			One Month Ended January 31, 2010			Year Ended December 31, 2009
Current (provision) benefit
Federal	$	18,955		$	(1,263	)	$	(600	)	$	2,875
State and local	(2,905		)	3,772			(20		)	11,773
Total current (provision) benefit	16,050			2,509			(620		)	14,648

Deferred (provision) benefit
Federal	73,981			568,938			(792,162		)	780,678
State and local	34,727			48,668			(124,759		)	133,194
Total deferred (provision) benefit	108,708			617,606			(916,921		)	913,872
(Provision) benefit for income taxes	$	124,758		$	620,115		$	(917,541	)	$	928,520

Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate



	Successor Company						Predecessor Company
	Year Ended December 31, 2011			Eleven Months Ended December 31, 2010			One Month Ended January 31, 2010			Year Ended December 31, 2009
Income (loss) before income taxes	$	(643,722	)	$	(1,543,707	)	$	7,837,550		$	(7,381,813	)
Statutory federal tax rate	35.0		%	35.0		%	35.0		%	35.0		%
State and local taxes, net of federal tax benefit	3.6			3.6			2.6			3.3
Non-taxable fresh start adjustments	—			—			(28.0		)	—
Non-deductible impairment expenses	(27.5		)	(19.5		)	—			—
Other nondeductible expenses	—			—			—			(0.2		)
Section 382 limitation	—			22.9			1.1			(4.5		)
Section 108 tax attribution reduction	—			—			21.4			—
Section 1245 recapture	12.6			—			—			—
Change in valuation allowance	(8.0		)	(2.3		)	(19.5		)	(20.7		)
Change in gross unrecognized tax benefits	2.9			—			—			—
Other, net	0.8			0.5			(0.9		)	(0.3		)
Effective tax rate	19.4		%	40.2		%	11.7		%	12.6		%

Components of Deferred Tax Assets and Liabilities



	December 31,
	2011			2010
Deferred tax assets:
Allowance for doubtful accounts	$	23,259		$	20,234
Accounts receivable	—			4,009
Deferred and other compensation	6,413			8,205
Capital investments	6,255			6,201
Debt and other interest	1,008			2,274
Pension and other retirement benefits	29,001			27,093
Restructuring reserves	2,475			6,895
Net operating loss and credit carryforwards	500,481			212,793
Other, net	9,102			15,590
Total deferred tax assets	577,994			303,294
Valuation allowance	(157,171		)	(97,642		)
Net deferred tax assets	$	420,823		$	205,652
Deferred tax liabilities:
Fixed assets and capitalized software	$	44,875		$	56,136
Goodwill and intangible assets	375,017			156,140
Deferred directory revenue and costs	—			19,596
Investment in subsidiaries	8,484			89,481
Other, net	146			5,962
Total deferred tax liabilities	$	428,522		$	327,315
Net deferred tax liability	$	(7,699	)	$	(121,663	)

Reconciliation of Gross Unrecognized Tax Benefits



	Successor Company						Predecessor Company
	Year Ended December 31, 2011			Eleven Months Ended December 31, 2010			One Month Ended January 31, 2010			Year Ended December 31, 2009
Balance at beginning of period	$	20,954		$	390,872		$	298,001		$	32,637
Gross additions for tax positions related to the current year	7,029			693			95,555			277,740
Gross reductions for tax positions related to the current year	—			(370,611		)	(2,684		)	(9,929		)
Gross reductions for tax positions related to the lapse of applicable statute of limitations	(20,261		)	—			—			—
Settlements	(1,780		)	—			—			(2,447		)
Balance at end of period	$	5,942		$	20,954		$	390,872		$	298,001

Successor Company

Components of Benefit for Income Taxes

The income tax benefit of $124.8 million for the year ended December 31, 2011 is comprised of a federal tax benefit of $92.9 million and a state tax benefit of $31.8 million. The federal tax benefit of $92.9 million is comprised of a current tax benefit of $18.9 million, primarily related to decreases in the liability for unrecognized tax benefits, and a deferred tax benefit of $74.0 million, due to changes in temporary differences related to goodwill impairment, changes in deferred tax liabilities relating to the stock basis of subsidiaries (Internal Revenue Code ("IRC") Section 1245 recapture), and changes in recorded valuation allowances during the year ended December 31, 2011. The state tax benefit of $31.8 million is comprised of a current tax provision of $(2.9) million, primarily related to the suspension of net operating loss carryforwards in certain states, and a deferred tax benefit of $34.7 million, primarily due to changes in temporary differences related to goodwill impairment and changes in liabilities relating to the stock basis of subsidiaries (IRC Section 1245 recapture) during the year ended December 31, 2011.

The Company recorded a goodwill impairment charge of $801.1 million during the second quarter of 2011, of which $457.2 million related to non-deductible goodwill. Impairment of non‑deductible goodwill reduced the income tax benefit of the impairment by $177.2 million and decreased our effective tax rate by 27.5% for the year ended December 31, 2011.

The goodwill impairment charge recognized during the second quarter of 2011 gave rise to a deferred tax asset whose realization did not meet a more-likely-than-not threshold, therefore requiring a valuation allowance. In addition, changes in deferred tax assets and liabilities primarily related to the filing of our 2010 consolidated federal tax return resulted in increases to the valuation allowance during the year ended December 31, 2011. The resulting increase in income tax expense for the year ended December 31, 2011 was $51.2 million, which decreased our effective tax rate by 8.0% for the year ended December 31, 2011.

Upon emergence from bankruptcy, the Company recorded deferred tax liabilities related to the excess of the financial statement carrying amount over the tax basis of investments in certain subsidiaries (IRC Section 1245 recapture). The goodwill impairment charge reduced the financial statement carrying amount of investments in certain subsidiaries, which also caused a reduction in these deferred tax liabilities. The resulting reduction in income tax expense for the year ended December 31, 2011 related to the change in these deferred tax liabilities was $81.1 million, which increased our effective tax rate by 12.6% for the year ended December 31, 2011.

The discharge of our debt in conjunction with our emergence from Chapter 11 resulted in a tax gain of $5,016.6 million. Generally, the discharge of a debt obligation for an amount less than the adjusted issue price creates cancellation of debt income ("CODI"), which must be included in a taxpayer's taxable income. In accordance with IRC Section 108, in lieu of recognizing taxable income from bankruptcy-related CODI, the Company is required to reduce existing tax attributes. In conjunction with the filing of our consolidated federal tax return for the year ended December 31, 2010, the Company made an election under IRC Section 108(b)(5) to first apply this reduction to certain amortizable and depreciable property for certain subsidiaries. As a result of this election and other adjustments related to the filing of our federal consolidated tax return, the Company recognized an increase in deferred tax assets related to net operating losses of approximately $328.7 million. These increases were primarily offset by decreases in the basis of amortizable and depreciable property.

The income tax benefit of $620.1 million for the eleven months ended December 31, 2010 is comprised of a federal tax benefit of $567.7 million and a state tax benefit of $52.4 million. The federal tax benefit of $567.7 million is comprised of a current tax provision of $(1.3) million, primarily related to unrecognized tax benefits, and a deferred tax benefit of $ 569.0 million, primarily related to current year net operating loss, recognition of an unrecognized tax position and goodwill impairment charges during the eleven months ended December 31, 2010. The state tax benefit of $52.4 million is comprised of a current tax benefit of $3.8 million, primarily related to expected state tax refunds, and a deferred tax benefit of $48.6 million, primarily related to the recognition of an unrecognized tax position during the eleven months ended December 31, 2010.

Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate

Our effective tax rate benefit of 19.4% for the year ended December 31, 2011 differs from the federal statutory rate of 35.0% primarily due to state income taxes, non-deductible goodwill impairment, changes in deferred tax liabilities related to the stock basis of subsidiaries (IRC Section 1245 recapture), changes in recorded valuation allowances, decreases in the liability for unrecognized tax benefits and other adjustments related to the filing of our consolidated federal income tax return.

Our effective tax rate benefit of 40.2% for the eleven months ended December 31, 2010 is higher than the federal statutory tax rate of 35.0% primarily due to increases in income tax benefits from the recognition of an unrecognized tax position offset, in part, by an increase in income tax expense related to a non-deductible impairment charge.

Components of Deferred Tax Assets and Liabilities

Total deferred tax assets before valuation allowance are $578.0 million and total deferred tax liabilities are $428.5 million at December 31, 2011. Deferred tax assets of $500.5 million represent net operating loss and credit carryforwards. After assessing the amount of deferred tax assets that are more likely than not to be realized, we established a valuation allowance of $157.2 million, representing the extent to which deferred tax assets are not supported by future reversals of existing taxable temporary differences.

Total deferred tax assets before valuation allowance are $303.3 million and total deferred tax liabilities are $327.3 million at December 31, 2010. Deferred tax assets of $212.8 million represent net operating loss and credit carryforwards. After assessing the amount of deferred tax assets that are more likely than not to be realized, we established a valuation allowance of $97.6 million, representing the extent to which deferred tax assets are not supported by future reversals of existing taxable temporary differences.

Reconciliation of Gross Unrecognized Tax Benefits

On June 15, 2011, the federal statute of limitations closed for a tax year in which a prior uncertain tax position related to revenue recognition was established. As a result, the Company decreased its liability for unrecognized tax benefits associated with this federal and state uncertain tax position by $28.2 million and recorded a tax benefit of $24.0 million for the year ended December 31, 2011, which increased our effective tax rate by 3.7% for the year ended December 31, 2011.

During the year ended December 31, 2011, the Company increased its liability for unrecognized tax benefits by $5.2 million, primarily related to uncertainty in the realization of certain tax attributes available for reduction under IRC Section 108, which reduced our income tax benefit by $5.1 million and decreased our effective tax rate by 0.8% for the year ended December 31, 2011.

During the third quarter of 2011, the Company increased its liability for unrecognized tax benefits by $1.8 million related to the exclusion of non-business income in the state of Illinois. In the fourth quarter of 2011, the Company reached settlement with the state of Illinois and eliminated the related liability for unrecognized tax benefits.

Tax years 2008 through 2010 are subject to examination by the Internal Revenue Service (“IRS”). Certain state tax returns are under examination by various regulatory authorities. Our state tax return years are open to examination for an average of three years. However, certain jurisdictions remain open to examination longer than three years due to the existence of net operating loss carryforwards and statutory waivers.

We continually review issues raised in connection with ongoing examinations and open tax years to evaluate the adequacy of our reserves. We believe that our accrued tax liabilities under FASB ASC 740 are adequate to cover uncertain tax positions related to federal and state income taxes.

Included in the balance of unrecognized tax benefits at December 31, 2011 and 2010 are $5.7 million and $24.6 million, respectively, of tax benefits that, if recognized, would favorably affect the effective tax rate. The Company does not believe that it is reasonably possible that any of its unrecognized tax benefits as of December 31, 2011 could decrease within the next twelve months.

Our policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2011 and eleven months ended December 31, 2010, the Company recognized $(4.8) million and $0.5 million, respectively, in interest and penalties due to unrecognized tax benefits. As of December 31, 2011, we have not accrued any amount related to interest. As of December 31, 2010, we accrued $8.0 million related to interest. No amounts were accrued for tax penalties as of December 31, 2011 and 2010.

During the eleven months ended December 31, 2010, we decreased our liability for unrecognized tax benefits by $370.6 million primarily related to Internal Revenue Code Section 382 (“Section 382”) limitations. See “Other” below for additional information on the impact this decrease in our liability for unrecognized tax benefits had on our effective tax rate for the eleven months ended December 31, 2010.

Other

At December 31, 2011, the Company had federal and state net operating loss carryforwards of approximately $1,147.1 million and $2,085.9 million, respectively, which will begin to expire in 2029 and 2012, respectively.

During 2009, the Predecessor Company accrued an unrecognized tax benefit for the uncertainty surrounding a potential ownership change under Section 382 that occurred prior to the date on which it made a “check-the-box” election for two of its subsidiaries. The date of the change in ownership was in question since as of the December 31, 2009 balance sheet date, the Predecessor Company was unable to confirm the actual date of the ownership change until all SEC Forms 13-G were filed. However, based upon the closing of the SEC filing period for Schedules 13-G and review of these schedules filed through February 15, 2010, the Company determined that it was more likely than not that certain “check-the-box” elections were effective prior to the date of the 2009 ownership change under Section 382. As a result, the Company recorded a tax benefit for the reversal of a liability for unrecognized tax benefit of $352.3 million in the Company’s statement of operations for the eleven months ended December 31, 2010, which significantly impacted our effective tax rate for the period.

As a result of the goodwill and non-goodwill intangible asset impairment charges during the eleven months ended December 31, 2010, we recognized a non-deductible adjustment to our effective tax rate of 19.5%, or $299.9 million, respectively.

Our certificate of incorporation contains provisions generally prohibiting (i) the acquisition of 4.9% or more of our common stock by any one person or group of persons whose shares would be aggregated pursuant to Section 382 and (ii) the acquisition of additional common stock by persons already owning 4.9% or more of our common stock, in each case until February 2, 2011, or such shorter period as may be determined by our board of directors. Without these restrictions, it is possible that certain changes in the ownership of our common stock could result in the imposition of limitations on the ability of the Company and its subsidiaries to fully utilize the net operating losses and other tax attributes currently available to them for U.S. federal and state income tax purposes.

In connection with the Company’s adoption of fresh start accounting, we evaluated all temporary differences. The Company recorded significant deferred tax liabilities associated with intangible assets and deferred revenue, and reduced our deferred tax liabilities to zero related to interest costs and deferred tax assets to zero related to deferred financing costs, which were recognized though the cancellation of our debt. Due to this reduction in tax basis, an incremental deferred tax liability was created, which can be utilized in the Company's valuation allowance assessment. As a result, the Company reduced its valuation allowance and is in a net deferred tax liability position of $121.7 million at December 31, 2010.

Upon our emergence from bankruptcy, the Company adjusted certain deferred tax assets and liabilities to reflect estimated future reductions in certain tax attributes primarily net operating loss carryforwards, intangible asset basis, and subsidiary stock basis. In accordance with FASB ASC 852, the Company trued-up its previous attribute reduction estimates at January 31, 2010 to reflect actual attribute reduction at December 31, 2010, resulting in a $158.4 million decrease in deferred tax liabilities and goodwill.

Predecessor Company – One Month Ended January 31, 2010

Components of Provision for Income Taxes

The income tax provision of $(917.5) million for the one month ended January 31, 2010 is comprised of a federal tax provision of $(792.8) million and a state tax provision of $(124.8) million. The federal tax provision is comprised of a current tax provision of $(0.6) million, primarily related to an increase in the federal tax accrual related to unrecognized tax benefits, and a deferred tax provision of $(792.2) million, primarily related to the reduction of the Predecessor Company’s tax attributes in accordance with IRC Section 108. The state tax provision of $(124.8) million is comprised of a current tax provision of less than $(0.1) million and a deferred tax provision of $(124.7) million, primarily related to the reduction of the Predecessor Company’s tax attributes in accordance with IRC Section 108.

Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate

Our effective tax rate provision of 11.7% was lower than the statutory federal tax rate of 35.0% primarily due to decreases in income tax expense for non-taxable fresh start adjustments and the release of our valuation allowance offset, in part, by increases in income tax expense for the estimated loss of tax attributes due to cancellation of debt income at emergence, and the impact of state taxes.

Reconciliation of Gross Unrecognized Tax Benefits

Included in the balance of unrecognized tax benefits at January 31, 2010 are $377.0 million of tax benefits that, if recognized, would favorably affect the effective tax rate.

During the one month ended January 31, 2010, the Predecessor Company recognized $0.4 million in interest and penalties due to unrecognized tax benefits. As of January 31, 2010, the Predecessor Company accrued $8.3 million related to interest. No amounts were accrued for tax penalties as of January 31, 2010.

Predecessor Company – Year Ended December 31, 2009

Components of Benefit for Income Taxes

The 2009 income tax benefit of $928.5 million is comprised of a federal tax benefit of $783.5 million and a state tax benefit of $145.0 million. The 2009 federal tax benefit is comprised of a current tax benefit of $2.9 million, primarily related to a decrease in the federal tax accrual due to our amended return filings and a deferred tax benefit of $780.7 million, primarily related to intangible asset impairment charges during 2009, offset in part by a valuation allowance as discussed below. The 2009 state tax benefit of $145.0 million is comprised of a current tax benefit of $11.8 million, which relates to the favorable settlement of prior year state tax audits in 2009 and reversal of the associated state liabilities, and a deferred tax benefit of $133.2 million, primarily related to intangible asset impairment charges during 2009, offset, in part, by a valuation allowance as discussed below.

Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate

Our 2009 effective tax rate benefit of 12.6% was lower than the statutory federal tax rate of 35.0% primarily due to the recording of a valuation allowance against deferred tax assets and the IRC Section 382 limitation on loss carryforwards, offset, in part, by the impact of state taxes.

Components of Deferred Tax Assets and Liabilities

Total deferred tax assets before the valuation allowance are $1,989.0 million and total deferred tax liabilities are $165.4 million. Deferred tax assets of $1,246.1 million represent tax deductible IRC Section 197 intangible assets amortizing over a 15-year period, of which approximately 8 to 15 years remain. After assessing the amount of deferred tax assets that are more likely than not to be realized, we established a full valuation allowance of $1,531.9 million, representing the extent to which deferred tax assets are not supported by future reversals of existing taxable temporary differences, taxable income in net operating loss carryback years and unrecognized tax benefits.

Reconciliation of Gross Unrecognized Tax Benefits

Included in the balance of unrecognized tax benefits at December 31, 2009 are $288.9 million of tax benefits that, if recognized, would favorably affect the effective tax rate.

During year ended December 31, 2009, the Predecessor Company recognized $(3.3) million in interest and penalties due to unrecognized tax benefits. As of December 31, 2009, the Predecessor Company accrued $7.5 million related to interest. No amounts were accrued for tax penalties as of December 31, 2009.

In December 2009, the Predecessor Company effectively settled all issues under consideration with the Department of Finance for New York State for its audit of tax years 2000 through 2006 and the Department of Revenue for North Carolina for its audit of tax years 2003 through 2008. As a result of these settlements, the unrecognized tax benefit associated with the Predecessor Company’s uncertain state tax positions decreased by $7.6 million for New York State and by $9.7 million for North Carolina during the year ended December 31, 2009. The decrease in the unrecognized tax benefits has decreased the Predecessor Company’s effective tax rate for the year ended December 31, 2009. The unrecognized tax benefits impacted by the New York State and North Carolina audits primarily related to apportionment and allocation of income among the Predecessor Company’s legal entities.

During 2009, the Predecessor Company increased its liability for unrecognized tax benefits by $276.4 million reflecting the uncertainty as to whether the ownership change under Section 382 occurred prior to the date on which it elected to modify the tax classification for two of its subsidiaries. The date of the change in ownership was in question because as of the balance sheet date the Predecessor Company was not able to confirm the actual date of the ownership change until all SEC Forms 13-G were filed. Stockholders have until forty five days following the end of the calendar year to file these forms with the SEC. Based on this due date, the actual ownership change date was not confirmed until February 15, 2010. In addition, the Predecessor Company increased the liability for unrecognized tax benefits by $1.5 million relating to the uncertainty surrounding the deductibility of certain other accrued expenses.