Income Taxes

The following table summarizes the income tax benefit (provision) attributable to loss from continuing operations before income taxes for each of the three years ended December 31, 2012, 2011 and 2010:



	2012			2011			2010
	(dollars in millions)
Current:
United States federal	$	—		$	—		$	—
State	(2		)	—			(1		)
Foreign	(36		)	(8		)	—
	(38		)	(8		)	(1		)
Deferred, net of changes in valuation allowances:
United States federal	(3		)	(30		)	—
State	—			(1		)	—
Foreign	(7		)	(2		)	92
Income tax benefit (provision)	$	(48	)	$	(41	)	$	91

The United States and foreign components of income (loss) from continuing operations before income taxes for each of the three years ended December 31, 2012, 2011 and 2010 are as follows:



	2012			2011			2010
	(dollars in millions)
United States	$	(434	)	$	(692	)	$	(542	)
Foreign	60			(94		)	(170		)
	$	(374	)	$	(786	)	$	(712	)

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 three years ended December 31, 2012, 2011 and 2010 is shown in the following table:



	2012			2011			2010
	(dollars in millions)
Computed tax benefit at statutory rate	$	131		$	275		$	250
Effect of earnings in jurisdictions outside of US	25			(13		)	(13		)
Change in valuation allowance	(145		)	(213		)	(130		)
Permanent items	(48		)	(44		)	(16		)
Indefinite-lived assets	(3		)	(26		)	—
Other, net	(8		)	(20		)	—
Income tax benefit (provision)	$	(48	)	$	(41	)	$	91

The components of the net deferred tax assets (liabilities) as of December 31, 2012 and 2011 are as follows:



	2012			2011
	(dollars in millions)
Deferred Tax Assets:
Accrued payroll and related benefits	$	119		$	101
Deferred revenue	271			276
Unutilized tax net operating loss carry forwards	4,611			3,996
Fixed assets and intangible assets	134			157
Intercompany loss	148			164
Other	162			193
Total Deferred Tax Assets	5,445			4,887
Deferred Tax Liabilities:
Fixed assets and intangible assets	(702		)	(542		)
Deferred revenue	(87		)	(93		)
Other	(45		)	(51		)
Foreign branch income	(37		)	(40		)
Total Deferred Tax Liabilities	(871		)	(726		)
Net Deferred Tax Assets before valuation allowance	4,574			4,161
Valuation Allowance	(4,697		)	(4,252		)
Net Deferred Tax (Liability) after Valuation Allowance	$	(123	)	$	(91	)
Balance sheet classification of deferred taxes:
Net current deferred income tax asset	$	9		$	12
Net current deferred income tax liability	(3		)	(3		)
Net non-current deferred income tax asset	219			246
Net non-current deferred income tax liability	(348		)	(346		)
Net Deferred Tax (Liability) after Valuation Allowance	$	(123	)	$	(91	)

During the twelve months ended December 31, 2012, the Company completed an extensive analysis of the Company's Internal Revenue Code ("IRC") Section 382 limitation that resulted in an increase of the amount of net operating loss carry forwards as of December 31, 2011 by approximately $1.0 billion on a pre-tax basis. There was no financial impact in the consolidated statement of operations associated with this increase as a full valuation allowance has been recorded against the additional deferred tax asset. Under the rules prescribed by U.S. IRC Section 382 and applicable regulations, if certain transactions occur with respect to an entity's capital stock that result in a cumulative ownership shift of more than 50 percentage points by 5% stockholders over a testing period, annual limitations are imposed with respect to the entity's ability to utilize its net operating loss carry forwards and certain current deductions against any taxable income the entity achieves in future periods.

As of December 31, 2012, the Company had net operating loss carry forwards of approximately $8.5 billion (net of IRC Section 382 limitation) for U.S. federal income tax purposes. These loss carry forwards expire in future years through 2032 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
2023	$	254
2024	1,302
2025	1,186
2026	1,029
2027	1,501
2028	445
2029	700
2030	703
2031	711
2032	$	695
	$	8,526

As of December 31, 2012 the Company had state net operating loss carry forwards of approximately $7.3 billion which are subject to limitations on their utilization and have various expiration periods through 2032. The Company had approximately $6.4 billion of foreign jurisdiction net operating loss carry forwards which are subject to limitations on their utilization. The majority of these foreign jurisdiction tax loss carry forwards have no expiration period.

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. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance has been recorded against U.S. and certain 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.

The valuation allowance for deferred tax assets was approximately $4.7 billion as of December 31, 2012 and $4.3 billion as of December 31, 2011. The change in the valuation allowance from December 31, 2011 to December 31, 2012 is primarily due to the increase in the U.S. federal and state net operating loss carry forwards associated with a revision to the Company's prior IRC Section 382 limitation calculation, an increase to the U.S. federal and state tax NOL resulting from continued operational tax losses, offset by additional U.S. deferred tax liabilities from U.S. fixed assets and intangibles and the sale of net operating loss carry forward attributes in Sweden.

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 $18 million at December 31, 2012 and $15 million at December 31, 2011. If the remaining balance of $18 million of unrecognized tax benefits as of December 31, 2012 ($15 million as of December 31, 2011) were realized in a future period, it would result in a tax benefit of $18 million ($15 million as of December 31, 2011) and a reduction in the effective tax rate. The Company expects that the liability for uncertain tax positions will decrease by approximately $5 million (plus $4 million of associated interest and penalty) during the twelve months ended December 31, 2013. A reconciliation of the beginning and ending balance of unrecognized tax benefits follows (dollars in millions):



	Amount
Balance as of January 1, 2010	$	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
Gross increases - tax positions of prior years	4
Gross increases - tax positions during 2012	1
Gross decreases - lapse of statute of limitations	(1		)
Gross decreases - settlement with taxing authorities	(1		)
Balance as of December 31, 2012	$	18

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 $22 million, $20 million and $12 million as of December 31, 2012, 2011 and 2010, 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 $3 million, zero and $2 million for the years ended December 31, 2012, 2011 and 2010, respectively.