Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
 12 Months Ended
Dec. 31, 2012
Income Taxes [Abstract]  
Income Tax Disclosure [Text Block]
Income Taxes

Income tax benefit (expense) consists of:

 
Years ended December 31,
 
2012
 
2011
 
2010
 
amounts in millions
Current:
 
 
 
 
 
Federal
$
(214
)
 
(156
)
 
(85
)
State and local
(27
)
 
(32
)
 
6

Foreign
(140
)
 
(120
)
 
(111
)
 
$
(381
)
 
(308
)
 
(190
)
Deferred:
 
 
 
 
 
Federal
$
(31
)
 
(42
)
 
27

State and local
11

 
(6
)
 
21

Foreign
7

 
4

 
14

 
(13
)
 
(44
)
 
62

Income tax benefit (expense)
$
(394
)
 
(352
)
 
(128
)


Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:

 
Years ended December 31,
 
2012
 
2011
 
2010
 
amounts in millions
Computed expected tax benefit (expense)
$
(695
)
 
(329
)
 
(339
)
Nontaxable exchange of investments for subsidiary
—

 
—

 
112

Consolidation of previously held equity method affiliate
294

 
—

 
—

State and local income taxes, net of federal income taxes
(11
)
 
(22
)
 
18

Foreign taxes, net of foreign tax credits
5

 
(3
)
 
48

Impairment of intangibles not deductible for tax purposes
(29
)
 
—

 
—

Dividends received deductions
13

 
5

 
5

Alternative energy tax credits
48

 
3

 
—

Change in valuation allowance affecting tax expense
(8
)
 
(15
)
 
—

Nontaxable gains (losses) related to the Company's common stock
1

 
8

 
27

Other, net
(12
)
 
1

 
1

Income tax benefit (expense)
$
(394
)
 
(352
)
 
(128
)

The tax benefit from the consolidation of a previously held equity method affiliate for the year ended December 31, 2012 is the result of the acquisition of a controlling interest in TripAdvisor in the fourth quarter of 2012. The Company recorded an $800 million dollar gain on the transaction, due to the application of purchase accounting, which was excluded from taxable income. In addition, the difference between the book basis and tax basis of TripAdvisor, as previously accounted for under the equity method, was relieved as a result of the transaction.

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below:

 
December 31,
 
2012
 
2011
 
amounts in millions
Deferred tax assets:
 
 
 
Net operating and capital loss carryforwards
$
110

 
70

Foreign tax credit carryforwards
87

 
30

Accrued stock compensation
32

 
44

Other accrued liabilities
80

 
69

Deferred revenue
4

 
5

Other future deductible amounts
116

 
114

Deferred tax assets
429

 
332

Valuation allowance
(52
)
 
(16
)
Net deferred tax assets
377

 
316

 
 
 
 
Deferred tax liabilities:
 
 
 
Investments
492

 
190

Intangible assets
2,751

 
1,661

Discount on exchangeable debentures
890

 
978

Deferred gain on debt retirements
321

 
321

Other
44

 
63

Deferred tax liabilities
4,498

 
3,213

Net deferred tax liabilities
$
4,121

 
2,897


The Company's deferred tax assets and liabilities are reported in the accompanying consolidated balance sheets as follows:

 
December 31,
 
2012
 
2011
 
amounts in millions
Current deferred tax liabilities
$
912

 
851

Long-term deferred tax liabilities
3,209

 
2,046

Net deferred tax liabilities
$
4,121

 
2,897



The Company's valuation allowance increased $36 million in 2012. Of the change in valuation allowance, $8 million affected tax expense, and the remainder of the change was due to purchase accounting for certain acquisitions made during the year ended December 31, 2012.

At December 31, 2012, Liberty had net operating losses (on a tax effected basis) and foreign tax credit carryforwards for income tax purposes aggregating approximately $110 million and $87 million, respectively, which, if not utilized to reduce domestic, state or foreign income tax liabilities in future periods, will expire as follows: $7 million in 2013; $30 million in 2015; $2 million in 2016; $7 million in 2017; and $151 million beyond 2020. These net operating losses and foreign tax credit carryforwards are expected to be utilized prior to expiration, except for $45 million and $7 million, respectively, which based on current projections of domestic, state and foreign income may expire unused.
    
A reconciliation of unrecognized tax benefits is as follows:

 
Years ended December 31,
 
2012
 
2011
 
amounts in millions
Balance at beginning of year
$
123

 
123

Additions based on tax positions related to the current year
12

 
13

Additions for tax positions of prior years
2

 
3

Reductions for tax positions of prior years
(4
)
 
(5
)
Acquisition of TripAdvisor
24

 
—

Lapse of statute and settlements
(11
)
 
(11
)
Balance at end of year
$
146

 
123



As of December 31, 2012, the Company had recorded tax reserves of $146 million related to unrecognized tax benefits for uncertain tax positions. If such tax benefits were to be recognized for financial statement purposes, $93 million would be reflected in the Company's tax expense and affect its effective tax rate. Liberty's estimate of its unrecognized tax benefits related to uncertain tax positions requires a high degree of judgment.

As of December 31, 2012, the Company's 2001 through 2008 tax years are closed for federal income tax purposes, and the IRS has completed its examination of the Company's 2009 through 2010 tax years. The Company's tax loss carryforwards from its 2008 through 2010 tax years are still subject to adjustment. The Company's 2011 and 2012 tax years are being examined currently as part of the IRS's Compliance Assurance Process ("CAP") program.  Various states are currently examining the Company's prior years state income tax returns. QVC is currently under audit in the UK, Germany and Japan. It is reasonably possible that the amount of the Company's gross unrecognized tax benefits may increase within the next twelve months by up to $6 million.

As of December 31, 2012, the Company had recorded $23 million of accrued interest and penalties related to uncertain tax positions.