Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
 12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
INCOME TAXES
 
Income tax provision included in our reported net loss consisted of the following (in thousands): 
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
Current:
 
 
 
 
 
 
Federal
 
$
—

 
$
—

 
$
—

State
 
—

 
—

 
—

Foreign
 
145

 
277

 
—

Total current
 
145

 
277

 
—

 
 
 
 
 
 
 
Deferred:
 
 
 
 
 
 
Federal
 
—

 
—

 
—

State
 
—

 
—

 
—

Foreign
 
(141
)
 
(117
)
 
—

Total deferred
 
(141
)
 
(117
)
 
—

Total income tax provision
 
$
4

 
$
160

 
$
—


 
The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows: 
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010 (1)
U.S. statutory tax rate
 
(35.0
)%
 
(35.0
)%
 
(35.0
)%
State tax benefit (net of federal benefits)
 
(2.7
)%
 
(6.2
)%
 
(9.2
)%
Foreign income tax provision
 
—
 %
 
—
 %
 
—
 %
Deferred tax asset valuation reserve
 
33.2
 %
 
42.1
 %
 
26.0
 %
Loss on early extinguishment of debt
 
—
 %
 
—
 %
 
17.8
 %
Other
 
4.5
 %
 
(0.9
)%
 
0.4
 %
Effective tax rate as reported
 
—
 %
 
—
 %
 
—
 %

 
(1)
We have made certain changes in the classification and presentation of certain items. These changes do not affect the disclosed effective tax rate.

Significant components of our deferred tax assets and liabilities at December 31, 2012 and 2011 are as follows (in thousands): 
 
 
Year Ended December 31,
 
 
2012
 
2011
Deferred tax assets
 
 
 
 
Net operating loss carryforwards (1)
 
 
 
 
Federal
 
$
476,228

 
$
365,811

State
 
83,242

 
49,847

Capital gains
 
81,388

 
81,388

Share-based compensation expense
 
5,679

 
4,165

United Kingdom deferred tax assets
 
258

 
117

Other
 
17,606

 
19,565

Total deferred tax assets
 
$
664,401

 
$
520,893

 
 
 
 
 
Deferred tax liabilities
 
 

 
 

Investment in limited partnership
 
$
(94,434
)
 
$
(79,281
)
Other
 
(307
)
 
(4,856
)
Total deferred tax liabilities
 
$
(94,741
)
 
$
(84,137
)
 
 
 
 
 
Net deferred tax assets
 
569,660

 
436,756

Less: net deferred tax asset valuation allowance (2)
 
(569,402
)
 
(436,639
)
Total net deferred tax asset
 
$
258

 
$
117

 
(1)
The federal net operating loss ("NOL") carryforward expires between 2017 and 2031. The state NOL carryforward expires between 2020 and 2027.
 (2)     A valuation allowance equal to our U.S. and state net deferred tax asset balance has been established due to the uncertainty of realizing the tax benefits related to our U.S. and state net deferred tax assets. The change in the U.S. and state deferred tax asset valuation allowance was $132.7 million for the year ended December 31, 2012, of which $114.5 million relates to continuing operations and $9.2 million relates to other comprehensive income. Additionally, $9 million relates to an additional deferred tax asset and related valuation reserve due to previously unrecorded net deferred federal and state tax assets. The change in the U.S. and state deferred tax asset valuation was $83.5 million for the year ended December 31, 2011.

Changes in the balance of unrecognized tax benefits are as follows (in thousands): 
 
Year Ended December 31,
 
2012
 
2011
Balance at beginning of the year
$
135,349

 
$
20,969

Additions based on tax positions related to current year
—

 
115,073

Additions for tax positions of prior years
—

 
—

Reductions for tax positions of prior years
(115,576
)
 
(693
)
Settlements
—

 
—

Balance at end of the year
$
19,773

 
$
135,349

 
Our effective tax rate will not be affected if the unrecognized federal income tax benefits provided above were recognized. Currently, we do not recognize any accrued liabilities, interest and penalties associated with the unrecognized tax benefits provided above in the Consolidated Statements of Operations or the Consolidated Balance Sheets. We record interest and penalties related to unrecognized tax benefits to our income tax provision.

During the third quarter of 2012, largely due to the increased level of trading activity in our shares, we experienced an ownership change within the provisions of Internal Revenue Code Section 382 ("Section 382") that will subject approximately $1.5 billion of our existing federal NOL carryforwards to an annual NOL utilization limitation.  The applicable Section 382 limitation may affect our ability to fully utilize approximately $1.5 billion of our existing federal NOL carryforward. Our ability to fully utilize our existing federal NOL carryforward is dependent on increasing the recognition of built-in gains in the five-year period following the above-referenced ownership change. We will continue to monitor trading activity in our shares which may cause an additional ownership change which may ultimately affect our ability to fully utilize our existing federal NOL carryforwards.

We currently file tax returns in the U.S. federal jurisdiction, the United Kingdom and various state and local jurisdictions. We are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for tax years prior to 2008. The Internal Revenue Service is currently examining Cheniere Marketing's 2009 and 2010 income tax returns. The Louisiana Department of Revenue is currently examining Cheniere LNG Terminals, Inc.'s 2008 - 2010 income tax returns.

Accounting for share-based compensation provides that when settlement of a share based award contributes to an NOL carryforward, neither the associated excess tax benefit nor the credit to additional paid-in capital ("APIC") should be recorded until the share-based award deduction reduces income tax payable. Upon utilization of the loss in future periods, a benefit of $22.5 million will be reflected in APIC.