Quarterly report pursuant to Section 13 or 15(d)

Income Taxes

v2.4.0.8
Income Taxes
 9 Months Ended
Sep. 30, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes

Prior to the LMC Spin-Off, Starz, LLC was included in the consolidated federal and state income tax returns of Old LMC. The income tax accounts and provisions included in these condensed consolidated financial statements prior to the LMC Spin-Off have been prepared as if Starz, LLC was a stand-alone federal and state taxpayer. Subsequent to the LMC Spin-Off, Starz will file its own consolidated tax return.

Income tax expense consists of the following (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Current:
 
 
 
 
 
 
 
Federal
$
42,508

 
$
35,464

 
$
99,540

 
$
101,762

State and local
2,865

 
3,232

 
5,383

 
1,006

Foreign
725

 
140

 
1,654

 
1,069

 
46,098

 
38,836

 
106,577

 
103,837

Deferred:
 
 
 
 
 
 
 
Federal
(9,995
)
 
(4,517
)
 
(1,861
)
 
(18,070
)
State and local
107

 
(55
)
 
4,660

 
14,805

 
(9,888
)
 
(4,572
)
 
2,799

 
(3,265
)
Income tax expense
$
36,210

 
$
34,264

 
$
109,376

 
$
100,572



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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Computed expected tax expense
$
31,254

 
$
31,761

 
$
100,345

 
$
106,791

State and local income taxes, net of federal income taxes
2,138

 
1,868

 
6,613

 
8,607

Foreign taxes, net of foreign tax credit
8

 
(475
)
 
908

 
(395
)
Change in valuation allowance affecting tax expense
3,417

 
2,018

 
2,287

 
77,471

Taxable liquidation of subsidiary
—

 
(1,420
)
 
—

 
(101,299
)
Change in subsidiary tax status
—

 
983

 
791

 
9,792

Other, net
(607
)
 
(471
)
 
(1,568
)
 
(395
)
Income tax expense
$
36,210

 
$
34,264

 
$
109,376

 
$
100,572



Effective April 1, 2012, Starz Media filed an election to convert itself from a limited liability company (“LLC”) treated as a corporation to a partnership for U.S. federal and state income tax purposes. As a result of the conversion, the Company recognized a capital loss on the deemed liquidation of Starz Media. Based on the relevant accounting literature, the Company had not previously recorded a benefit for the tax basis in the stock of Starz Media. The capital loss of $101.3 million (as tax effected) was carried forward and was recorded as a long term deferred tax asset. The Company did not believe that it was more likely than not that it would be able to generate any capital gains to utilize any of this capital loss carryforward as a stand-alone taxpayer and as such, recorded a full valuation allowance against this capital loss.

In addition, under current U.S. federal and state tax law, LLCs treated as partnerships are not subject to income tax at the entity level. As such, the election to convert Starz Media to be treated as a partnership for income tax purposes resulted in the reversal of deferred tax assets related to Starz Media's deductible temporary differences of $16.9 million and the reversal of a valuation allowance offsetting these deferred tax assets of $16.9 million. Also, a deferred tax asset of $7.1 million was recorded for the difference between the book basis and the tax basis of the Company's investment in Starz Media as of April 1, 2012.

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at September 30, 2013 and December 31, 2012 are presented below (in thousands):
 
September 30,
2013
 
December 31,
2012
Deferred tax assets:
 
 
 
Tax loss and credit carryforwards
$
6,604

 
$
155,861

Accrued stock compensation
11,945

 
5,575

Investments
33,502

 
25,516

Investment in films and television programs
—

 
1,163

Other future deductible amounts
—

 
219

Deferred tax assets
52,051

 
188,334

Valuation allowance
(706
)
 
(155,861
)
Deferred tax assets, net
51,345

 
32,473

 
 
 
 
Deferred tax liabilities:
 
 
 
Property and equipment
(11,733
)
 
(18,807
)
Investment in films and television programs
(15,628
)
 
—

Other future taxable amounts
(1,288
)
 
(454
)
Deferred tax liabilities
(28,649
)
 
(19,261
)
 
 
 
 
Net deferred tax assets
$
22,696

 
$
13,212



In connection with the LMC Spin-Off, deferred tax assets of $157.4 million related to capital loss and foreign tax credit carryforwards were allocated to Liberty Media along with their corresponding valuation allowances of $157.4 million. In addition, state net operating losses, foreign tax credit carryforwards and other attributes of $11.3 million were allocated to Starz.

In April 2013, the Internal Revenue Service completed its review of the LMC Spin-Off and notified Starz that it agreed with the nontaxable characterization of the transaction.