Annual report pursuant to Section 13 and 15(d)

Income Taxes (Note)

v2.4.0.8
Income Taxes (Note)
 12 Months Ended
Dec. 31, 2013
Income Tax Expense (Benefit), Continuing Operations [Abstract]  
Income Taxes
INCOME TAXES
The components of the provision for income taxes are as follows (in thousands):

 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
Current income tax provision:
 
 
 
 
 
 
Federal
 
$
(81,521
)
 
$
(76,992
)
 
$
(68,593
)
State
 
(9,990
)
 
(8,904
)
 
(9,217
)
Current income tax provision
 
(91,511
)
 
(85,896
)
 
(77,810
)
Deferred income tax (provision) benefit:
 
 
 
 
 
 
Federal
 
(6,489
)
 
1,814

 
(1,900
)
State
 
308

 
709

 
(396
)
Deferred income tax (provision) benefit
 
(6,181
)
 
2,523

 
(2,296
)
Income tax provision
 
$
(97,692
)
 
$
(83,373
)
 
$
(80,106
)


Current income taxes payable has been reduced by $19.8 million, $22.7 million, and $14.1 million for the years ended December 31, 2013, 2012 and 2011, 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, 2013 and 2012 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,
 
 
2013
 
2012
Deferred tax assets:
 
 
 
 
Provision for accrued expenses
 
$
33,647

 
$
38,548

Inventories
 
13,125

 
11,927

Stock-based compensation
 
10,888

 
16,036

Net operating losses
 
1,531

 
1,369

Other
 
4,078

 
2,024

Total deferred tax assets
 
63,269

 
69,904

Less valuation allowance
 
(1,495
)
 
(5,293
)
Net deferred tax assets
 
61,774

 
64,611

Deferred tax liabilities:
 
 
 
 
Intangible and other assets
 
(91,018
)
 
(91,783
)
Prepaid expenses
 
(13,574
)
 
(11,692
)
Property and equipment
 
(15,455
)
 
(12,535
)
Total deferred tax liabilities
 
(120,047
)
 
(116,010
)
Net deferred tax liability
 
$
(58,273
)
 
$
(51,399
)

At December 31, 2013, HSNi had $4.8 million of net operating loss carryforwards which begin expiring in 2014. As of December 31, 2013 and 2012, HSNi had a valuation allowance of approximately $1.5 million and $5.3 million, respectively. Valuation allowances are recorded for certain deferred tax assets related to foreign and separate state net operating losses.
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,
 
 
2013
 
2012
 
2011
Income tax provision at the federal statutory rate of 35%
 
$
(96,649
)
 
$
(76,955
)
 
$
(72,715
)
State income taxes, net of effect of federal tax benefit
 
(6,293
)
 
(5,327
)
 
(6,386
)
Other, net
 
5,250

 
(1,091
)
 
(1,005
)
Income tax provision
 
$
(97,692
)
 
$
(83,373
)
 
$
(80,106
)

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

 
 
2013
 
2012
 
2011
Balance at beginning of year
 
$
682

 
$
664

 
$
630

Additions based on tax positions related to the current year
 
417

 
—

 
225

Additions for tax positions of prior years
 
—

 
18

 
—

Reductions for tax positions of prior years
 
(189
)
 
—

 
(191
)
Balance at end of year
 
$
910

 
$
682

 
$
664


As of December 31, 2013 and 2012, the unrecognized tax benefits, including interest, were $1.1 million and $0.9 million, respectively. At December 31, 2013 and 2012, there are approximately $0.9 million and $0.5 million of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.
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, 2013, 2012 and 2011. At December 31, 2013 and 2012, 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.
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 Internal Revenue Service ("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. HSNi does not anticipate any material adjustments to our tax liabilities resulting from any of these examinations.
HSNi and several companies previously owned by IAC, were spun-off from IAC on August 20, 2008. 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 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 completed its review of the IAC consolidated tax returns for the years ended December 31, 2001 through 2009, which includes the operations of HSNi. The settlement for these years has been submitted to and approved by the Joint Committee on Taxation. The statute of limitations for the years 2001 through 2009 is extended through June 30, 2014. 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 2006. 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.