IPPs and Merchant Energy Co.s Message Board

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Strategies & Market Trends : IPPs and Merchant Energy Co.s

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To: Larry S. who wrote (1997)	5/1/2003 10:08:36 PM
From: aniela	Read Replies (1) of 3358

MIR: I have found the following on the Yahoo board (from updotcom). I wonder whether anyone here can comment (I am tooignorant about these things). It seems worrisome though, as if the company was not sure that they can generate any tax profits at all in the next five years. Am I wrong ??? Thanks. ______________________________ I have a comment for you re the "income tax refund" not booked per the 10K. It really was not a refund not booked that was at the heart of this issue. I believe it was a write off of a billion plus in future tax savings MIR expected to be realized when MIR started reporting taxable income to the IRS. Companies frequently show more book income than tax income (an example of one of the biggest reasons causing this is depreciation for tax return purposes is more often than not taken on tax returns as an expense at a faster rate than on financial statements as an expense). When these tax before book expenses occur, companies show book profit and calculate book income tax expense on that profit...but don't actually pay that tax to the IRS cause of the faster writeoffs taken on tax returns. In certain circumstances, the tax expense shown on the books can be eliminated by recognizing that those faster tax write offs will someday be used on a tax return to save taxes and therefore why not reduce the tax expense reported to shareholders to reflect that. When companies recognize the benefits of these unused tax deductions, they set up what is called a deferred tax asset on their books...it's sort of like a pseudo receivable representing an expected reduction in taxes in the future. Now as I understand this billion plus tax related write off MIR took, they are saying look, we can't guarantee we will use those unused tax deductions in the next five years...so we can't show the pseudo receiveable as an asset anymore. We have to write it off. However, if we do make tax profits in the future and actually do use those deductions to save taxes, then we will show the savings as an increase in our net income for the year when we will use them. To oversimplify the matter somewhat, I think it all boils down to meaning MIR will show a reduced income tax expense in the year the tax deductions are used with a corresponding increase in EPS but is going to show a big write off of the pseudo tax receivable right now. My point here is that what we have with MIR this year is a tax asset on the books that was written off...not a tax refund that was not booked. Probably the same diff to most...and at any rate the significance of it is that it is a non cash item and the book income effect of the write off may be recovered in the future when MIR does start showing taxable income to the IRS. Now you also mentioned that MIR's tax loss carryovers may be valuable to an acquirer. Not likely as a result of the "section 382" limitations on the use of loss carryovers by acquiring companies. It used to be different before the 1986 tax reform act came along...you may remember that act....it was the one we were supposed to get that 28% top rate in return for giving up most of our deductions and tax shelters...Of course as we know, all that is left of that is the lost deductions!

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