HollyFrontier Corp

Income Taxes

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances, the one-time transition tax and related matters. For the items for which a reasonable estimate has been made, we recognized a provisional tax benefit amount of $307.1 million, which is included as a component of the income tax provision in 2017.

Provisional Amounts

Deferred Tax Assets and Liabilities: We remeasured certain deferred tax assets and liabilities based upon the rates at which they are expected to reverse in the future, which is generally 25%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded that related to remeasurement of our deferred tax balance was a tax benefit of $315.0 million. Included within our net deferred liability are deferred state income tax balances, which are recorded net of federal tax expense. While many states have not publicly commented on the changes in the Act, we have estimated the value of our state deferred tax balances based upon existing law and related guidance.

Foreign Tax Effects: The one-time transition tax is based on our foreign subsidiaries’ earnings and profits (“E&P”) arising primarily from our acquisition of PCLI in 2017. This E&P was previously deferred from U.S. income taxes at 35% plus the effect of U.S. state income tax, or together generally 38%. We previously provided deferred U.S. taxes for the repatriation of these deferred amounts. At December 31, 2017, we recorded a provisional amount for our one-time transition tax liability of $6.5 million for our foreign subsidiaries at 15.5% plus the effect of state income tax, or together generally 20%. We have not yet completed our calculation of the total foreign E&P for these foreign subsidiaries. This amount may change when we finalize the calculation of foreign E&P previously deferred from U.S. federal taxation. Additional income taxes have been provided for the remaining outside basis difference inherent in these entities at 21% plus the effect of U.S. state income tax, or together generally 25% as these amounts are not considered to be indefinitely reinvested in foreign operations for which we have provided deferred taxes of $1.4 million.

Our accounting for these provisional amounts related to foreign tax effects is incomplete pending the completion of our analysis of E&P, the related US foreign tax credits and outside basis differences.

The provision for income taxes is comprised of the following:



	Years Ended December 31,
	2017			2016			2015
	(In thousands)
Current
Federal	$	102,786		$	(71,878	)	$	480,446
State	2,760			(7,304		)	71,750
Foreign	19,597			—			—
Deferred
Federal	(156,767		)	100,208			(127,714		)
State	28,527			(1,615		)	(18,422		)
Foreign	(9,282		)	—			—
	$	(12,379	)	$	19,411		$	406,060

The statutory federal income tax rate applied to pre-tax book income reconciles to income tax expense (benefit) as follows:



	Years Ended December 31,
	2017			2016			2015
	(In thousands)
Tax computed at statutory rate	$	304,102		$	(60,037	)	$	422,999
Effect of the Act	(307,101		)	—			—
State income taxes, net of federal tax benefit	21,343			(14,056		)	40,385
Domestic production activities deduction	(9,937		)	4,170			(35,200		)
Noncontrolling interest in net income	(29,357		)	(26,903		)	(24,155		)
Goodwill	—			119,722			—
Other	8,571			(3,485		)	2,031
	$	(12,379	)	$	19,411		$	406,060

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our deferred income tax assets and liabilities as of December 31, 2017 and 2016 are as follows:



	December 31, 2017
	Assets		Liabilities			Total
	(In thousands)
Deferred income taxes
Properties, plants and equipment (due primarily to tax in excess of book depreciation)	$	—	$	(560,957	)	$	(560,957	)
Accrued employee benefits	14,685		—			14,685
Accrued post-retirement benefits	10,358		—			10,358
Accrued environmental costs	28,657		—			28,657
Hedging instruments	16		—			16
Inventory differences	—		(35,501		)	(35,501		)
Deferred turnaround costs	—		(58,645		)	(58,645		)
Net operating loss and tax credit carryforwards	21,682		—			21,682
Investment in HEP	—		(62,321		)	(62,321		)
Other	—		(5,759		)	(5,759		)
Total	$	75,398	$	(723,183	)	$	(647,785	)



	December 31, 2016
	Assets		Liabilities			Total
	(In thousands)
Deferred income taxes
Properties, plants and equipment (due primarily to tax in excess of book depreciation)	$	—	$	(618,053	)	$	(618,053	)
Accrued employee benefits	21,355		—			21,355
Accrued post-retirement benefits	10,024		—			10,024
Accrued environmental costs	41,152		—			41,152
Hedging instruments	7,396		—			7,396
Inventory differences	—		(8,341		)	(8,341		)
Deferred turnaround costs	—		(83,993		)	(83,993		)
Net operating loss and tax credit carryforwards	23,203		—			23,203
Investment in HEP	—		(27,276		)	(27,276		)
Other	14,119		—			14,119
Total	$	117,249	$	(737,663	)	$	(620,414	)

We have Oklahoma income tax credits of $9.7 million that can be carried forward indefinitely, and Kansas income tax credits of $16.8 million that can be carried forward for 16 tax years.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Years Ended December 31,
	2017		2016		2015
			(In thousands)
Balance at January 1	$	22,137	$	—	$	—
Additions based on tax positions related to the current year	31,615		22,137		—
Balance at December 31	$	53,752	$	22,137	$	—

At December 31, 2017 and 2016, there were $53.8 million and $22.1 million, respectively, of unrecognized tax benefits that, if recognized, would affect our effective tax rate. We had no unrecognized benefits at December 31, 2015. Unrecognized tax benefits are adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded.

The 2016 and 2017 additions to unrecognized tax benefits relates to claims filed with the IRS on the federal income tax treatment of refundable biodiesel/ethanol blending tax credits for certain prior years. The issues related to the claims are complex and uncertain, and we cannot conclude that it is more likely than not that we will sustain the claims. Therefore, no tax benefit has been recognized for the filed claims. We believe it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within 12 months of the reporting date based on additional filings.

We recognize interest and penalties relating to liabilities for unrecognized tax benefits as an element of tax expense. We have not recorded any penalties related to our uncertain tax positions as we believe that it is more likely than not that there will not be any assessment of penalties.

We are subject to U.S. and Canadian federal income tax, Oklahoma, Kansas, New Mexico, Iowa, Arizona, Utah, Colorado and Nebraska income tax and to income tax of multiple other state jurisdictions. We have substantially concluded all state and local income tax matters for tax years through 2012. Other than the federal claim noted above, we have materially concluded all U.S. federal income tax matters for tax years through December 31, 2013.