Income Taxes

An analysis of the income tax benefit (provision) attributable to loss from continuing operations before income taxes for each of the years in the three year period ended December 31, 2011 follows:



	2011			2010			2009
	(dollars in millions)
Current:
United States federal	$	—		$	—		$	—
State	—			(1		)	—
Foreign	(8		)	—			—
	(8		)	(1		)	—
Deferred, net of changes in valuation allowances:
United States federal	(30		)	—			—
State	(1		)	—			(1		)
Foreign	(2		)	92			—
Income tax benefit (provision)	$	(41	)	$	91		$	(1	)

The United States and foreign components of loss from continuing operations before income taxes are as follows:



	2011			2010			2009
	(dollars in millions)
United States	$	(692	)	$	(542	)	$	(519	)
Foreign	(94		)	(170		)	(104		)
	$	(786	)	$	(712	)	$	(623	)

A reconciliation of the actual income tax benefit (provision) and the tax computed by applying the U.S. federal rate (35%) to the loss before income taxes for each of the years in the three-year period ended December 31, 2011 follows:



	2011			2010			2009
	(dollars in millions)
Computed tax benefit at statutory rate	$	275		$	250		$	218
Effect of earnings in jurisdictions outside of US	(13		)	(13		)	—
Foreign branch tax benefit	17			21			—
State income tax benefit	24			24			20
Change in valuation allowance	(198		)	(175		)	(255		)
Permanent items	(44		)	(16		)	(4		)
Non-cash compensation excess deductions	(18		)	—			—
Indefinite-lived assets	(26		)	—			—
NOL expiration	(38		)	—			—
Other, net	(20		)	—			20
Income tax benefit (provision)	$	(41	)	$	91		$	(1	)

The components of the net deferred tax assets (liabilities) as of December 31, 2011 and 2010 were as follows:



	2011			2010
	(dollars in millions)
Deferred Tax Assets:
Accrued payroll and related benefits	$	101		$	77
Deferred revenue	276			285
Unutilized tax net operating loss carry forwards	3,996			2,713
Fixed assets and intangible assets	157			38
Intercompany loss	164			—
Other	193			100
Total Deferred Tax Assets	4,887			3,213
Deferred Tax Liabilities:
Fixed assets and intangible assets	(542		)	(79		)
Deferred revenue	(93		)	—
Other	(51		)	(29		)
Foreign branch income	(40		)	(40		)
Total Deferred Tax Liabilities	(726		)	(148		)
Net Deferred Tax Assets before valuation allowance	4,161			3,065
Valuation Allowance	(4,252		)	(2,978		)
Net Deferred Tax (Liability) Asset after Valuation Allowance	$	(91	)	$	87
Balance sheet classification of deferred taxes:
Net current deferred income tax asset	$	12		$	—
Net current deferred income tax liability	(3		)	—
Net non-current deferred income tax asset	246			87
Net non-current deferred income tax liability	(346		)	—
Net Deferred Tax (Liability) Asset after Valuation Allowance	$	(91	)	$	87

For the year ended December 31, 2011, the Company recorded certain immaterial corrections of errors in prior year presentation that resulted in income tax expense of approximately $26 million during the first quarter of 2011 for taxable temporary differences associated with deferred taxes on certain indefinite-lived intangible assets. See Note 1 - Organization and Summary of Significant Accounting Policies, Correction of an Immaterial Error in Prior Consolidated Financial Statements.

As a result of the Global Crossing Amalgamation, the Company recorded net deferred tax assets of $1.5 billion and deferred tax liabilities of $560 million before valuation allowance. $1.1 billion of the deferred tax asset balance is comprised of carry forward net operating losses. The deferred tax liability balance is comprised primarily of $419 million related to temporary differences created by the additional financial reporting basis of identifiable intangibles and fixed assets. Simultaneously, the Company evaluated the valuation allowance position of the combined entity. The valuation allowance determination involves weighing positive and negative evidence concerning the realizability of the Company's deferred tax assets in each tax jurisdiction. After considering such evidence as the quality and consistency of positive financial results, projections of future taxable income, country-specific economic and political considerations, expiration or limitations of carry forwards, and sources of future taxable income, management concluded that valuation allowances for deferred tax assets of many Global Crossing South American entities and certain Global Crossing European entities are not required. A valuation allowance was retained against U.S. and other foreign jurisdiction deferred tax assets that the Company has concluded under relevant accounting standards that it is not more likely than not that the deferred tax assets are realizable.

As of December 31, 2011, the Company had net operating loss carry forwards of approximately $6.5 billion for U.S. federal income tax purposes without considering the net operating loss carry forwards associated with Global Crossing. While the Company believes the acquisition of Global Crossing did not trigger an ownership change event for the Company, additional transactions that the Company enters into, as well as transactions by existing 5% stockholders and transactions by holders that become new 5% stockholders that the Company does not participate in, could cause the Company to incur a greater than 50 percentage point ownership change by 5% stockholders and, if the Company triggers the above noted Code imposed limitations, such transactions would prevent the Company from fully utilizing NOL carry forwards and certain current deductions to reduce the Company's U.S. federal income taxes.

The valuation allowance for deferred tax assets was approximately $4.2 billion as of December 31, 2011 and $3.0 billion as of December 31, 2010. The net change in the valuation allowance for the year ended December 31, 2010 was approximately $1.3 billion. The change in the valuation allowance from December 31, 2010 to December 31, 2011 is primarily due to the inclusion of the Global Crossing deferred tax assets, additional U.S. federal and state tax NOL resulting from continued operational tax losses, offset by the establishment of fixed asset and intangible deferred tax liabilities related to the step-up in basis, the release of valuation allowance of certain Global Crossing entities in foreign jurisdictions, and the loss carryfoward limitation and forfeiture of Global Crossing tax losses in the U.S. and Germany respectively. The adjustments related to the acquisition of Global Crossing are based on information currently available. The final identification of deferred taxes and the final determination of the purchase price allocation may be significantly different from the preliminary amounts reflected above.

The U.S. federal tax loss carry forwards expire in future years through 2031 and are subject to examination by the tax authorities until three years after the carry forwards are utilized. The U.S. federal tax loss carry forwards expire as follows (dollars in millions):




Expiring December 31,	Amount
2024	$	533
2025	1,186
2026	1,029
2027	1,508
2028	445
2029	700
2030	703
2031	687

	$	6,791

The Company has approximately $4.3 billion of foreign jurisdiction tax loss carry forwards for controlled foreign corporations at December 31, 2011. In addition, the Company has $2.4 billion of foreign jurisdiction tax loss carry forwards associated with foreign corporations that it has elected to disregard for US tax purposes. The majority of these foreign jurisdiction tax loss carry forwards have no expiration period. Finally, the Company has approximately $5.4 billion of gross state tax loss carry forwards with various expiration periods through 2030.

Historically, the majority of the Company's foreign assets and operations are owned by entities that have elected to be treated for U.S. tax purposes as unincorporated branches of a U.S. holding company and, as a result, the taxable income or loss and other tax attributes of such entities are included in the Company's U.S. federal consolidated income tax return. However, all of the foreign assets and operations acquired as part of the Global Crossing Amalgamation are treated for U.S. tax purposes as controlled foreign corporations. With respect to such controlled foreign corporations, the Company provides for United States income taxes on the undistributed earnings and the other outside basis temporary differences of foreign corporations unless they are considered indefinitely reinvested outside the United States. The amount of temporary differences related to undistributed earnings and other outside basis temporary differences of investments in foreign subsidiaries upon which United States income taxes have not been provided was immaterial.

The Company's liability for uncertain tax positions totaled $15 million at December 31, 2011 and $6 million at December 31, 2010. The Company does not expect that the liability for uncertain tax positions will change significantly during the twelve months ended December 31, 2012; however, actual changes in the liability for uncertain tax positions could be different than currently expected. A reconciliation of the beginning and ending balance of unrecognized tax benefits follows:




(dollars in millions)	Amount
Balance as of December 31, 2008	$	7
Gross increases—tax positions prior to 2009	—
Gross decreases—settlements with taxing authorities	(2		)
Balance as of December 31, 2009	5
Gross increases—tax position prior to 2010	1
Balance as of December 31, 2010	6
Gross increases—Global Crossing tax positions of prior years	11
Gross decreases - tax positions of prior years	(1		)
Gross decreases - settlement with taxing authorities	(1		)
Balance as of December 31, 2011	$	15

The Company, or at least one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, 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 before 2003. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carry forwards are available.

The unrecognized tax benefits in the table above do not include accrued interest and penalties of $20 million, $12 million, and $10 million as of December 31, 2011, 2010 and 2009, respectively. The Company's policy is to record interest and penalties related to uncertain tax positions in income tax expense. The Company recognized accrued interest and penalties related to uncertain tax positions in income tax expense in its consolidated statements of operations of approximately zero, $2 million and $1 million for the years ended December 31, 2011, 2010 and 2009, respectively.