Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.1.9
Income Taxes
 12 Months Ended
Dec. 31, 2014
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 was included in Old LMC’s consolidated federal and state income tax returns prior to the LMC Spin-Off.

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 Starz’s/Old LMC’s consolidated federal and state income tax returns based on Starz’s/Old LMC’s ownership interest (i.e. 75%).

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

 
Years ended December 31,
 
2014
 
2013
 
2012
Current:
 
 
 
 
 
Federal
$
110.6

 
$
119.2

 
$
141.5

State and local
7.6

 
9.3

 
4.6

Foreign
3.3

 
2.5

 
1.7

 
121.5

 
131.0

 
147.8

Deferred:
 
 
 
 
 
Federal
14.9

 
0.5

 
(21.8
)
State and local
4.4

 
7.9

 
4.4

 
19.3

 
8.4

 
(17.4
)
Income tax expense
$
140.8

 
$
139.4

 
$
130.4



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 millions):

 
Years ended December 31,
 
2014
 
2013
 
2012
Computed expected tax expense
$
143.4

 
$
136.2

 
$
133.9

State and local income taxes, net of federal income taxes
8.0

 
11.5

 
10.2

Foreign taxes, net of foreign tax credit
(0.7
)
 
0.9

 
0.8

Change in valuation allowance affecting tax expense
1.2

 
3.0

 
76.9

Deduction for qualified production activity
(10.4
)
 
(12.6
)
 
—

Taxable liquidation of subsidiary
—

 
—

 
(101.3
)
Change in subsidiary tax status
—

 
0.8

 
9.0

Other, net
(0.7
)
 
(0.4
)
 
0.9

Income tax expense
$
140.8

 
$
139.4

 
$
130.4


    
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% of the net income from such activities (subject to certain limitations).  Starz completed an analysis of its programming packages, and based on this analysis concluded that its 2014 and 2013 programming packages met the qualified production activity criteria of Section 199.  As a result, Starz recorded a tax benefit of $10.4 million and $12.6 million for the years ended December 31, 2014 and 2013, respectively.

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, 2014 and 2013 are presented below (in millions):

 
December 31,
 
2014
 
2013
Deferred tax assets:
 
 
 
Tax loss and credit carryforwards
$
7.1

 
$
7.1

Accrued stock compensation
16.8

 
12.6

Investments
32.3

 
34.2

Other future deductible amounts
1.1

 
0.1

Deferred tax assets
57.3

 
54.0

Valuation allowance
(2.6
)
 
(1.5
)
Deferred tax assets, net
54.7

 
52.5

 
 
 
 
Deferred tax liabilities:
 
 
 
Property and equipment
(15.0
)
 
(16.0
)
Investment in films and television programs
(32.6
)
 
(9.3
)
Program rights
(7.3
)
 
(7.0
)
Other future taxable amounts
—

 
(1.2
)
Deferred tax liabilities
(54.9
)
 
(33.5
)
 
 
 
 
Net deferred tax assets (liabilities)
$
(0.2
)
 
$
19.0



In connection with the LMC Spin-Off, Starz and Liberty Media entered into a Tax Sharing Agreement, dated as of January 11, 2013, which governs the allocation of taxes, tax benefits (including stock awards), tax items and tax-related losses between Starz and Liberty Media. 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.