Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.8
Income Taxes
 12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes    

Starz is a holding company with no assets, liabilities or operations other than those of Starz, LLC. Starz, LLC is a single-member limited liability company (“LLC”), which is treated as a disregarded entity for U.S. federal income tax purposes and is included in Old LMC’s consolidated federal and state income tax returns prior to the LMC Spin-Off. Subsequent to the LMC Spin-Off, Starz will file its own U.S. federal and state income tax returns.

Effective April, 1 2012, Starz Media filed an election to convert itself from a LLC treated as a corporation to a partnership for federal and state income tax purposes. As such, it is treated as a flow-through entity for U.S. federal income tax purposes and is included in Old LMC’s/Starz’s consolidated federal and state income tax returns based on Old LMC’s/Starz’s ownership interest (i.e. 75%).

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

 
Years ended December 31,
 
2013
 
2012
 
2011
Current:
 
 
 
 
 
Federal
$
119,220

 
$
141,537

 
$
122,505

State and local
9,253

 
4,580

 
10,018

Foreign
2,549

 
1,758

 
2,643

 
131,022

 
147,875

 
135,166

Deferred:
 
 
 
 
 
Federal
530

 
(21,782
)
 
34,423

State and local
7,828

 
4,372

 
2,600

 
8,358

 
(17,410
)
 
37,023

Income tax expense
$
139,380

 
$
130,465

 
$
172,189



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):

 
Years ended December 31,
 
2013
 
2012
 
2011
Computed expected tax expense
$
136,213

 
$
133,959

 
$
145,630

State and local income taxes, net of federal income taxes
11,512

 
10,162

 
8,000

Foreign taxes, net of foreign tax credit
854

 
832

 
1,024

Noncontrolling interest - partnership investment
(871
)
 
1,297

 
—

Change in valuation allowance affecting tax expense
3,061

 
76,933

 
(223,992
)
Deduction for qualified production activity
(12,602
)
 
—

 
—

Taxable liquidation of subsidiary
—

 
(101,299
)
 
—

Change in subsidiary tax status
791

 
9,018

 
—

Expiration of capital loss
—

 
—

 
241,934

Other, net
422

 
(437
)
 
(407
)
Income tax expense
$
139,380

 
$
130,465

 
$
172,189


    
Internal Revenue Code Section 199 ("Section 199") allows U.S. taxpayers a deduction for qualified domestic production activities.  Generally, the deduction is equal to 9 percent of the net income from such activities (subject to certain limitations).  During 2013, Starz completed an analysis of its programming packages, and based on this analysis concluded that its 2013 programming packages met the qualified production activity criteria of Section 199.  As a result, Starz recorded a tax benefit of $12.6 million for the year ended December 31, 2013.

As a result of the Starz Media conversion during 2012, Starz, LLC recognized a capital loss on the deemed liquidation of Starz Media. Based on the relevant accounting literature, Starz, LLC 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. Starz, LLC 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 $16.1 million and the reversal of a valuation allowance offsetting these deferred tax assets of $16.1 million. Also, a deferred tax asset of $7.1 million was recorded for the difference between the book basis and the tax basis of Starz, LLC's investment in Starz Media as of April 1, 2012.

The tax effects of 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):

 
December 31,
 
2013
 
2012
Deferred tax assets:
 
 
 
Tax loss and credit carryforwards
$
7,133

 
$
155,861

Accrued stock compensation
12,566

 
5,575

Investments
34,227

 
25,516

Intangible assets
—

 
1,163

Other future deductible amounts
102

 
7,767

Deferred tax assets
54,028

 
195,882

Valuation allowance
(1,480
)
 
(155,861
)
Deferred tax assets, net
52,548

 
40,021

 
 
 
 
Deferred tax liabilities:
 
 
 
Property and equipment
(15,989
)
 
(18,807
)
Intangible assets
(9,287
)
 
—

Program rights
(7,038
)
 
(7,282
)
Other future taxable amounts
(1,198
)
 
(720
)
Deferred tax liabilities
(33,512
)
 
(26,809
)
 
 
 
 
Net deferred tax assets
$
19,036

 
$
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 $11.5 million were allocated to Starz.

In April 2013, the Internal Revenue Service (“IRS”) completed its review of the LMC Spin-Off and notified Starz that it agreed with the nontaxable characterization of the transaction. In February 2014, the IRS and Starz entered into a closing agreement, which provides that the LMC Spin-off has qualified for tax-free treatment to Starz and Liberty Media.