Annual report pursuant to Section 13 and 15(d)

Income Taxes (Note)

v2.4.0.6
Income Taxes (Note)
 12 Months Ended
Dec. 31, 2012
Income Tax Expense (Benefit) [Abstract]  
Income Taxes
INCOME TAXES
The components of the provision for income taxes are as follows (in thousands):

 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
Current income tax provision:
 
 
 
 
 
 
Federal
 
$
(76,992
)
 
$
(68,593
)
 
$
(61,264
)
State
 
(8,904
)
 
(9,217
)
 
(7,650
)
Current income tax provision
 
(85,896
)
 
(77,810
)
 
(68,914
)
Deferred income tax benefit (provision):
 
 
 
 
 
 
Federal
 
1,814

 
(1,900
)
 
5,082

State
 
709

 
(396
)
 
(2,345
)
Deferred income tax (provision) benefit
 
2,523

 
(2,296
)
 
2,737

Income tax provision
 
$
(83,373
)
 
$
(80,106
)
 
$
(66,177
)


Current income taxes payable has been reduced by $22.7 million, $14.1 million, and $7.2 million for the years ended December 31, 2012, 2011 and 2010, respectively, for tax deductions attributable to stock-based compensation. The related income tax benefits of this stock-based compensation were recorded as amounts charged or credited to the income tax provision and additional paid-in capital.
The tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are presented below (in thousands). The valuation allowance is related to items for which it is more likely than not that the tax benefit will not be realized.

 
 
December 31,
 
 
2012
 
2011
Deferred tax assets:
 
 
 
 
Provision for accrued expenses
 
$
38,548

 
$
39,346

Inventories
 
11,927

 
11,964

Foreign investment
 
—

 
6,467

Stock-based compensation
 
16,036

 
13,618

Net operating losses
 
1,369

 
3,857

Other
 
2,024

 
2,294

Total deferred tax assets
 
69,904

 
77,546

Less valuation allowance
 
(5,293
)
 
(14,274
)
Net deferred tax assets
 
64,611

 
63,272

Deferred tax liabilities:
 
 
 
 
Intangible and other assets
 
(91,783
)
 
(92,746
)
Prepaid expenses
 
(11,692
)
 
(12,022
)
Property and equipment
 
(12,535
)
 
(12,333
)
Total deferred tax liabilities
 
(116,010
)
 
(117,101
)
Net deferred tax liability
 
$
(51,399
)
 
$
(53,829
)

At December 31, 2012, HSNi had $4.7 million of net operating loss carryforwards which begin expiring in 2014. As of December 31, 2012 and 2011, HSNi had a valuation allowance of approximately $5.3 million and $14.3 million, respectively. Valuation allowances are recorded for certain deferred tax assets related to foreign net operating losses and deferred tax assets associated with pre-Spin-off uncertain tax positions for which it is more likely than not that the benefit will be unrealized.
A reconciliation of the income tax provision to the amounts computed by applying the statutory federal income tax rate to earnings before income taxes is shown as follows (in thousands):

 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
Income tax provision at the federal statutory rate of 35%
 
$
(76,955
)
 
$
(72,715
)
 
$
(58,316
)
State income taxes, net of effect of federal tax benefit
 
(5,327
)
 
(6,386
)
 
(6,474
)
Other, net
 
(1,091
)
 
(1,005
)
 
(1,387
)
Income tax provision
 
$
(83,373
)
 
$
(80,106
)
 
$
(66,177
)

 
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest, is as follows (in thousands):

 
 
2012
 
2011
 
2010
Balance at beginning of year
 
$
664

 
$
630

 
$
514

Additions based on tax positions related to the current year
 
—

 
225

 
191

Additions for tax positions of prior years
 
18

 
—

 
135

Reductions for tax positions of prior years
 
—

 
(191
)
 
(210
)
Balance at end of year
 
$
682

 
$
664

 
$
630


As of December 31, 2012 and 2011, the unrecognized tax benefits, including interest, were $0.9 million and $0.7 million, respectively. Included in unrecognized tax benefits at December 31, 2012 and 2011 is approximately $0.2 million for tax positions which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, the disallowance of the shorter deductibility period would not affect the annual effective tax rate, other than the interest and penalties, but would accelerate the payment of cash to the taxing authorities to an earlier period.
HSNi recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There is no material interest on unrecognized tax benefits included in income tax expense for the years ended December 31, 2012, 2011 and 2010. At December 31, 2012 and 2011, HSNi has no material accrual for the payment of interest or penalties.
HSNi believes that it is reasonably possible that its unrecognized tax benefits could decrease by an immaterial amount within twelve months of the current reporting date due to settlement with the taxing authority. An estimate of other changes in unrecognized tax benefits cannot be made but are not expected to be significant.
HSNi is routinely under audit by federal, state, local and foreign tax authorities. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by HSNi are recorded in the period they become known.
The IRS has concluded its examination of HSNi's consolidated federal income tax return for the year ended December 31, 2010 and its limited scope examination of HSNi's consolidated federal income tax return for the year ended December 31, 2011. No material adjustments resulted from these IRS examinations. In addition, various state income tax examinations are in process. We do not anticipate any material adjustments to our tax liabilities resulting from any of these examinations.
In connection with the Spin-off, HSNi entered into a Tax Sharing Agreement with IAC pursuant to which, among other things, each of the Spincos has indemnified IAC and the other Spincos for any taxes resulting from the Spin-off of such Spinco (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related shareholder litigation or controversies) to the extent such amounts result from (i) any act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) any acquisition of equity securities or assets of such Spinco or a member of its group, and (iii) any breach by such Spinco or any member of its group of any representation or covenant contained in the separation documents or in the documents relating to the Internal Revenue Service (“IRS”) private letter ruling and/or tax opinions. In the event an adjustment with respect to a pre-Spin-off period for which IAC is responsible results in a tax benefit to HSNi in a post-Spin-off period, HSNi will be required to pay such tax benefit to IAC. In general, IAC controls all audits and administrative matters and other tax proceedings relating to the consolidated federal income tax return of the IAC group and any other tax returns for which the IAC group is responsible. The provisions set forth in the Tax Sharing Agreement could subject HSNi to future tax contingencies.

The IRS has substantially completed its review of the IAC consolidated tax returns for the years ended December 31, 2001 through 2006, which includes the operations of HSNi. The settlement for these years has not yet been submitted to the Joint Committee on Taxation for approval. The IRS began its review of the IAC consolidated tax returns for the years ended December 31, 2007 through 2009 in July 2011. The statute of limitations for the years 2001 through 2008 has been extended to December 31, 2013. Various IAC consolidated tax returns filed with state, local and foreign jurisdictions are currently under examination, the most significant of which are California, New York and New York City, for various tax years beginning with 2005. By virtue of the Tax Sharing Agreement with IAC, HSNi is indemnified with respect to additional tax liabilities for consolidated or combined federal and state tax returns prepared and filed by IAC prior to the Spin-off, but is liable for any additional tax liabilities for HSNi separately filed state income tax returns.