Income Taxes
Total income tax (benefit) expense from continuing operations was allocated as follows:
|
| | | | | | | | | | | |
(in thousands) | Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current taxes: | | | | | |
Federal taxes | $ | (10,444 | ) | | $ | (7,296 | ) | | $ | (144 | ) |
State taxes | — |
| | — |
| | — |
|
Foreign taxes | — |
| | — |
| | — |
|
Current taxes | $ | (10,444 | ) | | $ | (7,296 | ) | | $ | (144 | ) |
Deferred taxes: | | | | | |
Federal taxes | $ | (1,045 | ) | | $ | — |
| | $ | — |
|
State taxes | — |
| | — |
| | — |
|
Foreign taxes | — |
| | — |
| | — |
|
Deferred taxes | $ | (1,045 | ) | | $ | — |
| | $ | — |
|
Income tax (benefit) expense | $ | (11,489 | ) | | $ | (7,296 | ) | | $ | (144 | ) |
Actua Corporation, GovDelivery (beginning in 2010 through October 18, 2016, the date of the GovDelivery Sale), VelocityEHS (beginning March 30, 2012, the date of acquisition, through December 12, 2017, the date of the Velocity Sale), and FolioDynamix (beginning November 3, 2014, the date of acquisition, through December 31, 2017, the date FolioDynamix was deconsolidated in preparation for the FolioDynamix Sale) file a consolidated federal income tax return (the "Consolidated Group").
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized; (iii) creating a new limitation on deductible interest expense; and (iv) changing rules related to uses and limitations of net operating carryforwards created in tax years beginning after December 31, 2017. The most significant impact on Actua's consolidated financial statements is a reduction of approximately $20.4 million in deferred tax assets which is offset by changes to Actua’s valuation allowance.
In connection with the Velocity/Bolt Sale, Actua expects to pay federal AMT of approximately $1.4 million. Under the Tax Act, federal AMT has been repealed effective January 1, 2018. All carryforward AMT credits are refundable between 2018 and 2022. Actua expects to complete its dissolution prior to 2022 and therefore has recorded a receivable for $1.1 million of AMT credits that are expected to be recovered prior to dissolution. The remaining net AMT of $0.3 million is included in consolidated current income tax expense in continuing operations for the year ended December 31, 2017. The current federal income tax benefit of $11.8 million and $7.3 million recognized during the years ended December 31, 2017 and 2016, respectively, are offset by $11.8 million and $7.3 million of income tax expense in discontinued operations since there was a net loss recognized from continuing operations and net income recognized from discontinued operations in that same year. Additionally, GovDelivery recognized $3.4 million of current state income tax expense during the year ended December 31, 2016 related to the GovDelivery Sale which is included in "Income (loss) from discontinued operations, including gain on sale, net of tax" in Actua’s Consolidated Statement of Operations and Comprehensive Income (Loss).
After evaluating all the positive and negative evidence, both historical and prospective, and determining that it is not more likely than not that they will be realized, the Company maintained a full valuation allowance against its net deferred tax assets.
As a result of a change in ownership under Section 382 that occurred in 2004, Actua’s net operating loss ("NOL") carryforwards and capital loss carryforwards that existed at the time of the ownership change, as well as any built-in losses recognized during the five-year period immediately following the ownership change, are subject to an annual limitation. The annual limitation on the utilization of these carryforwards is approximately $12.4 million. This annual limitation can be carried forward if it is not used. The amount available for 2014 through 2017 was used in connection with the Velocity/Bolt Sale. The total limitation amount available in future years for these carryforwards at December 31, 2017 was $74.5 million. These losses expire in varying amounts between 2018 and 2023.
As of December 31, 2017, the Consolidated Group had $89.6 million of NOL carryforwards that are not subject to the Section 382 annual limitation. These net operating losses expire between 2018 and 2036.
GovDelivery joined in filing a consolidated federal income tax return with Actua beginning in 2010. At the time of the acquisition, GovDelivery had approximately $2.8 million of NOL carryforwards. Actua's acquisition of GovDelivery constituted a change in ownership under Section 382. As a result, those NOL carryforwards are limited to approximately $1.0 million per year, plus any recognized built-in gains. As of December 31, 2017, all of these NOLs are available and included in the $89.6 million of NOLs that are not subject to the Section 382 limitations noted above.
In 2016, an election under Section 336(e) of the Internal Revenue Code was made with respect to the GovDelivery Sale to have the sale treated as a deemed asset sale for income tax purposes. Vista agreed to assume a certain amount of income taxes that arose as a result of making this election (the "336(e) Cap"). The $3.4 million of current state income taxes reflected in discontinued operations in 2016 was below the 336(e) Cap and therefore was paid by Vista directly to the respective taxing authorities. GovDelivery’s federal NOLs that remained after 2016 will remain with Actua after the sale pursuant to the mechanics of the Section 336(e) election.
VelocityEHS joined in Actua’s consolidated federal tax return beginning on March 30, 2012 (when it was acquired). VelocityEHS had NOLs totaling approximately $50.9 million when it was acquired. These NOLs stayed with VelocityEHS in connection with the Velocity/Bolt Sale.
FolioDynamix joined in Actua’s consolidated federal tax return beginning on November 3, 2014 (when it was acquired). FolioDynamix had NOLs totaling approximately $36.5 million when it was acquired. These NOLs expire in varying amounts between 2027 and 2033. Approximately $8.9 million of these NOLs are subject to Section 382 limitations from ownership changes FolioDynamix experienced prior to its acquisition by Actua. The acquisition of FolioDynamix constituted a change in ownership under Section 382. The annual limitation on the utilization of FolioDynamix’s NOLs equals approximately $6.4 million plus recognized built-in gains. Substantially all of these NOLs were available at December 31, 2017. Approximately $9.0 million of these NOLs were used in 2017. The remaining NOLs stayed with FolioDynamix after it was deconsolidated for tax return purposes as of December 31, 2017 in preparation for the FolioDynamix Sale.
The purchase price allocation for the acquisition of Textizen identified approximately $0.6 million of non-goodwill intangible assets. The associated deferred tax liability exceeded Textizen’s other net deferred tax assets by approximately $0.1 million, which resulted in an increase to goodwill. The Company released the valuation allowance on a portion of Actua’s consolidated federal and state NOLs that will be available to offset the future taxable income associated with this deferred tax liability. The $0.1 million deferred federal and state tax benefit was recorded in discontinued operations in Actua’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 31, 2015.
Actua’s net deferred tax assets (liabilities) consists of the following:
|
| | | | | | | |
(in thousands) | As of December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss and capital loss carryforward - 382 limited | $ | 18,824 |
| | $ | 43,916 |
|
Net operating loss carryforward - not 382 limited | 15,725 |
| | 31,576 |
|
Company basis difference | 12,808 |
| | 22,984 |
|
Reserves and accruals | 2,426 |
| | 189 |
|
Equity-based compensation expense | 542 |
| | 11,908 |
|
AMT and other credits | 349 |
| | — |
|
Other, net | 398 |
| | 1,568 |
|
Total deferred tax assets | 51,072 |
| | 112,141 |
|
Valuation allowance | (51,072 | ) | | (112,141 | ) |
Total deferred tax assets, net of valuation allowance | $ | — |
| | $ | — |
|
The effective tax rate for continuing operations differs from the federal statutory rate as follows:
|
| | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax expense (benefit) at statutory rate | (35.0 | )% | | (35.0 | )% | | (35.0 | )% |
Non-deductible expenses and other | (74.8 | )% | | 1.1 | % | | 3.8 | % |
Valuation allowance | 15.4 | % | | (1.1 | )% | | 30.8 | % |
Change in federal statutory tax rate | 60.4 | % | | — | % | | — | % |
Effective tax rate | (34.0 | )% | | (35.0 | )% | | (0.4 | )% |
Tax years 2014 and forward are subject to examination for federal tax purposes. Tax years 1998 through 2011 are subject to examination for federal tax purposes to the extent of net operating losses used.
Actua’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Actua had no accrual for interest or penalties on Actua’s Consolidated Balance Sheet at December 31, 2017.
As of December 31, 2016, Actua had $0.3 million of unrecognized tax benefits that, if recognized, would impact its effective tax rate. There were no uncertain tax positions for the year ended December 31, 2015. During 2016, Actua established a reserve of $0.3 million related to certain state taxes; the reserve, which related to VelocityEHS, includes interest and penalties of $0.1 million. The balance of the reserve is zero at December 31, 2017, as a result of the Velocity/Bolt Sale.
Actua did not have any unrecognized tax benefits during the year ended December 31, 2017.