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Income Taxes
 12 Months Ended
Dec. 31, 2012
Disclosure Text Block  
Income Taxes

NOTE 4 INCOME TAXES

 

U.S. Cellular's income taxes balances at December 31, 2012 and 2011 were as follows:

December 31,2012 2011
(Dollars in thousands)     
Federal income taxes receivable (payable)$ (1,614) $ 73,525
State income taxes receivable  1,612   1,266

Income tax expense (benefit) is summarized as follows:
          
Year Ended December 31, 2012 2011 2010
(Dollars in thousands)        
Current        
 Federal$ 10,547 $ (90,235) $ 19,290
 State  4,186   1,049   (11,059)
Deferred        
 Federal  54,490   187,581   57,759
 State  (5,246)   15,683   15,968
  $ 63,977 $ 114,078 $ 81,958

A reconciliation of U.S. Cellular's income tax expense computed at the statutory rate to the reported income tax expense, and the statutory federal income tax expense rate to U.S. Cellular's effective income tax expense rate is as follows:

 

Year Ended December 31,2012  2011  2010 
  Amount Rate  Amount Rate  Amount Rate 
(Dollars in millions)                 
Statutory federal income tax expense and rate$ 71.8  35.0% $ 109.5  35.0% $ 84.4  35.0%
State income taxes, net of federal benefit (1)  3.7  1.8    4.5  1.4    5.0  2.1 
Effect of noncontrolling interests  (6.3)  (3.1)    (4.9)  (1.6)    (4.6)  (1.9) 
Correction of deferred taxes (2)  (5.3)  (2.6)    6.1  2.0    -   -  
Other differences, net  0.1  0.1    (1.1)  (0.3)    (2.8)  (1.2) 
Total income tax expense and rate$ 64.0  31.2% $ 114.1  36.5% $ 82.0  34.0%
                   
(1)Net state income taxes include changes in the valuation allowance. The 2011 benefit primarily relates to the ability to utilize net operating losses as a result of state income tax law changes. In addition, state tax benefits related to the settlement of state tax audits and the expiration of statutes of limitations are included in 2012, 2011 and 2010.
                   
(2)U.S. Cellular recorded immaterial adjustments to correct deferred tax balances in 2012 and 2011 related to tax basis adjustments and law changes that related to periods prior to 2012 and 2011, respectively.

U.S. Cellular's current Net deferred income tax asset totaled $35.4 million and $31.9 million at December 31, 2012 and 2011, respectively, and primarily represents the deferred tax effects of accrued liabilities and the allowance for doubtful accounts on customer receivables.

U.S. Cellular’s noncurrent deferred income tax assets and liabilities at December 31, 2012 and 2011 and the temporary differences that gave rise to them were as follows:
       
December 31, 2012 2011
(Dollars in thousands)     
Noncurrent deferred tax assets     
 Net operating loss (“NOL”) carryforwards $ 63,240 $ 48,565
 Stock-based compensation  22,411   19,079
 Compensation and benefits - other  13,673   2,985
 Deferred rent  15,822   12,656
 Other  25,432   20,554
    140,578   103,839
 Less valuation allowance  (40,208)   (29,262)
 Total noncurrent deferred tax assets  100,370   74,577
Noncurrent deferred tax liabilities     
 Property, plant and equipment  527,547   482,433
 Licenses/intangibles  294,738   267,344
 Partnership investments  124,221   120,941
 Other  3,682   3,049
 Total noncurrent deferred tax liabilities  950,188   873,767
Net noncurrent deferred income tax liability$ 849,818 $ 799,190

At December 31, 2012, U.S. Cellular and certain subsidiaries had $1,152.0 million of state NOL carryforwards (generating a $54.4 million deferred tax asset) available to offset future taxable income. The state NOL carryforwards expire between 2013 and 2032. Certain subsidiaries had federal NOL carryforwards (generating a $8.8 million deferred tax asset) available to offset their future taxable income. The federal NOL carryforwards expire between 2013 and 2032. A valuation allowance was established for certain state NOL carryforwards and federal NOL carryforwards since it is more likely than not that a portion of such carryforwards will expire before they can be utilized.

A summary of U.S. Cellular’s deferred tax asset valuation allowance is as follows:
          
  2012 2011 2010
(Dollars in thousands)        
Balance at January 1,$ 30,261 $ 29,891 $ 19,234
 Charged to income tax expense  3,033   (1,450)   (832)
 Charged to other accounts  8,001   1,820   11,489
Balance at December 31,$ 41,295 $ 30,261 $ 29,891
          
As of December 31, 2012, the valuation allowance reduced current deferred tax assets by $1.1 million and noncurrent deferred tax assets by $40.2 million.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
          
  2012 2011 2010
(Dollars in thousands)        
Unrecognized tax benefits balance at January 1,$ 28,745 $ 32,547 $ 34,442
 Additions for tax positions of current year  6,656   4,487   5,119
 Additions for tax positions of prior years  854   332   550
 Reductions for tax positions of prior years  (115)   (1,104)   (1,560)
 Reductions for settlements of tax positions  -   (244)   (5,938)
 Reductions for lapses in statutes of limitations  (9,680)   (7,273)   (66)
Unrecognized tax benefits balance at December 31, $ 26,460 $ 28,745 $ 32,547

Unrecognized tax benefits are included in Accrued taxes and Other deferred liabilities and credits in the Consolidated Balance Sheet. If these benefits were recognized, they would have reduced income tax expense in 2012, 2011 and 2010 by $17.2 million, $18.7 million and $21.1 million, respectively, net of the federal benefit from state income taxes.

 

As of December 31, 2012, U.S. Cellular believes it is reasonably possible that unrecognized tax benefits could decrease by approximately $4.9 million in the next twelve months. The nature of the uncertainty primarily relates to state income tax positions and their resolution or the expiration of statutes of limitation.

 

U.S. Cellular recognizes accrued interest and penalties related to unrecognized tax benefits in Income tax expense. The amounts charged to Income tax expense related to interest and penalties resulted in a benefit in 2012 of $2.2 million, a benefit of $2.6 million in 2011 and expense of $3.0 million in 2010, respectively. Net accrued interest and penalties were $12.8 million and $15.6 million at December 31, 2012 and 2011, respectively.

 

U.S. Cellular is included in TDS' consolidated federal income tax return. U.S. Cellular also files various state and local income tax returns. The TDS consolidated group remains subject to federal income tax audits for the tax years after 2009. With only a few exceptions, TDS is no longer subject to state income tax audits for years prior to 2008.