Sirius XM Holdings Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2013

Holdings

There is no current U.S. federal income tax provision, as all federal taxable income was offset by utilizing U.S. federal net operating loss carryforwards. The current state income tax provision is primarily related to taxable income in certain states that have suspended the ability to use net operating loss carryforwards. The current foreign income tax provision is primarily related to a reimbursement of foreign withholding taxes on royalty income between us and our Canadian affiliate.

Holdings files a consolidated federal income tax return with its wholly-owned subsidiaries. Income tax expense (benefit) attributable to Holdings consisted of the following:



	For the Years Ended December 31,
	2013			2012			2011
Current taxes:
Federal	$	—		$	—		$	—
State	5,359			1,319			3,229
Foreign	(5,269		)	2,265			2,741
Total current taxes	90			3,584			5,970
Deferred taxes:
Federal	211,044			(2,729,823		)	3,991
State	48,743			(271,995		)	4,273
Total deferred taxes	259,787			(3,001,818		)	8,264
Total income tax expense (benefit)	$	259,877		$	(2,998,234	)	$	14,234

The following table indicates the significant elements contributing to the difference between the federal tax expense (benefit) at the statutory rate and at our effective rate:



	For the Years Ended December 31,
	2013			2012			2011
Federal tax expense, at statutory rate	$	222,982		$	166,064		$	154,418
State income tax expense, net of federal benefit	19,031			16,606			15,751
State income rate changes	8,666			2,251			3,851
Non-deductible expenses	9,545			477			457
Change in valuation allowance	(4,228		)	(3,195,651		)	(166,452		)
Other, net	3,881			12,019			6,209
Income tax expense (benefit)	$	259,877		$	(2,998,234	)	$	14,234

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:



	For the Years Ended December 31,
	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	2,207,583		$	2,493,239
GM payments and liabilities	1,984			80,742
Deferred revenue	606,430			511,700
Severance accrual	388			46
Accrued bonus	25,830			23,798
Expensed costs capitalized for tax	22,679			26,569
Loan financing costs	664			428
Investments	45,078			39,915
Stock based compensation	71,794			64,636
Other	31,735			34,705
Total deferred tax assets	3,014,165			3,275,778
Deferred tax liabilities:
Depreciation of property and equipment	(188,675		)	(185,007		)
FCC license	(778,152		)	(772,550		)
Other intangible assets	(233,983		)	(165,227		)
Total deferred tax liabilities	(1,200,810		)	(1,122,784		)
Net deferred tax assets before valuation allowance	1,813,355			2,152,994
Valuation allowance	(7,831		)	(9,835		)
Total net deferred tax asset	$	1,805,524		$	2,143,159

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences can be carried forward under tax law. Management's evaluation of the realizability of deferred tax assets considers both positive and negative evidence, including historical financial performance, scheduled reversal of deferred tax assets and liabilities, projected taxable income and tax planning strategies in making this assessment. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. The net deferred tax assets are primarily related to gross net operating loss carryforwards of approximately $5,828,461. In addition to the gross book net operating loss carryforwards, we have $702,187 of excess share-based compensation deductions that will not be realized until we utilize the $5,828,461 of net operating losses, resulting in an approximate gross operating loss carryforward on our tax return of $6,530,648.

For the year ended December 31, 2012, our deferred tax asset valuation allowance decreased by $3,350,905 in response to cumulative positive evidence in 2012 which outweighed the historical negative evidence from our emergence from cumulative losses in recent years and updated assessments regarding that it was more likely than not that our deferred tax assets will be realized. As of December 31, 2013, the deferred tax asset valuation allowance of $7,831 relates to deferred tax assets that are not likely to be realized due to certain state net operating loss limitations and acquired net operating losses that we are not more likely than not going to utilize. These net operating loss carryforwards expire on various dates beginning in 2017 and ending in 2028.

As a result of the acquisition of the connected vehicle business of Agero, we established net current deferred tax assets of $767 and net non-current deferred tax liabilities of $78,127. The net non-current deferred tax liabilities are primarily due to intangible assets and the acquired separate return limitation year net operating losses of $4,340; of which $2,224 remain fully valued.

As of December 31, 2013 and 2012, the gross liability for income taxes associated with uncertain state tax positions was $1,432. If recognized, $1,432 of unrecognized tax benefits would affect the effective tax rate. This liability is recorded in Other long-term liabilities. No penalties have been accrued for. We do not currently anticipate that our existing reserves related to uncertain tax positions as of December 31, 2013 will significantly increase or decrease during the twelve-month period ending December 31, 2014; however, various events could cause our current expectations to change in the future. Should our position with respect to the majority of these uncertain tax positions be upheld, the effect would be recorded in our consolidated statements of comprehensive income as part of the income tax provision. Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense. We have recorded interest expense of $40 and $55 for the years ended December 31, 2013 and 2012, respectively, related to our unrecognized tax benefits presented below.

Changes in our uncertain income tax positions, from January 1 through December 31 are presented below:



	2013		2012
Balance, beginning of year	$	1,432	$	1,432
Additions for tax positions from prior years	—		—
Balance, end of year	$	1,432	$	1,432

We have federal and certain state income tax audits pending. We do not expect the ultimate disposition of these audits to have a material adverse affect on our financial position or results of operations.

The increased ownership in us by Liberty Media to over 50% of our outstanding common stock did not create a change of control under Section 382 of the Internal Revenue Code.

Sirius XM

Sirius XM and its wholly-owned subsidiaries are included in the consolidated federal income tax returns of Holdings. However, due to the differences in the Income before income taxes balances between Holdings and Sirius XM in our consolidated statements of comprehensive income, the following table shows the significant elements contributing to the difference between the federal tax expense (benefit) at the statutory rate and at Sirius XM's effective rate:



	For the Years Ended December 31,
	2013			2012			2011
Federal tax expense, at statutory rate	$	67,684		$	166,064		$	154,418
State income tax expense, net of federal benefit	4,467			16,606			15,751
State income rate changes	8,666			2,251			3,851
Non-deductible expenses	699			477			457
Change in valuation allowance	(4,228		)	(3,195,651		)	(166,452		)
Fair value of debt instrument	178,704			—			—
Other, net	3,885			12,019			6,209
Income tax expense (benefit)	$	259,877		$	(2,998,234	)	$	14,234

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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