7. Income Taxes



The following summarizes our income tax (provision) benefit (in thousands):





Our current tax benefit includes a decrease to our liability for UTPs for (in thousands):







The deferred tax (provision) benefit for each period included the impact of equity in net income (loss) of affiliates from our consolidated statement of operations.





For each period presented, the statute of limitations for the assessment of additional tax expired with regard to several of our federal and state UTPs and certain other UTPs were settled. As a result, the reduction to our liability for UTPs provided a current tax benefit including the reversal of previously recognized interest and penalties, partially offset by an additional provision for the potential payment of interest on our remaining UTPs.



The Tax Cuts and Jobs Act made broad and complex changes to the U.S tax code, such as the imposition of a one-time transition tax in 2017 on certain unrepatriated earnings of controlled foreign corporations, including Telesat, and numerous changes first effective in 2018 including, but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) eliminating U.S federal income taxes on dividends from certain foreign investments, such as Telesat; (3) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations, including Telesat; (4) limiting the use of foreign tax credits (“FTC”) to reduce U.S. federal tax liability; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating a new limit on deductible interest expense; and (8) changing the rules related to the use of net operating loss (“NOL”) carryforwards created in tax years beginning after December 31, 2017. We recognized the income tax effects of the Tax Cuts and Jobs Act in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implication of the Tax Cuts and Job Act (SAB 118), in our consolidated financial statements for the year ended December 31, 2017. SAB 118 provides guidance for the application of income tax accounting standards related to the Tax Cuts and Jobs Act. Based upon our analysis, as of December 31, 2017, we reduced deferred tax assets by $33.2 million related to the tax rate reduction with a corresponding increase to our deferred income tax provision and increased non-current income taxes receivable by $1.6 million related to refundable AMT credits with a corresponding reduction to deferred tax assets. The preliminary effect recorded may change in the future due to revisions in the interpretation of the Tax Cuts and Jobs Act or legislative action to clarify interpretation of the Tax Cuts and Jobs Act. The Company expects to finalize the effect of the Tax Cuts and Jobs Act with the filing of its 2017 tax return and record in the fourth quarter of 2018 any difference between the final effect and the provisional effect recorded.

The current tax provision for the year ended December 31, 2017 included our anticipated income tax liability related to the cash distribution received from Telesat after use of AMT credits and NOL carryforwards and FTCs from Telesat. Upon receiving the cash distribution from Telesat in the first quarter of 2017, we recorded a current tax liability of $53.0 million. During 2017, we made tax payments of $12.5 million, primarily with respect to the distribution, and commenced a tax study to determine the allowable amount of FTCs that could be utilized to minimize our cash tax liability. After completing our analysis in the fourth quarter of 2017, we reduced our current tax liability to approximately $2.0 million and established a deferred tax asset of $104.9 million for the carryforward of unused FTCs. Since, at the current time, sufficient positive evidence does not exist to support full recovery of the FTC carryforward, we recorded a full valuation allowance against this deferred tax asset during the year ended December 31, 2017. As of December 31, 2017, we had no income taxes payable and a current income tax receivable of $11.1 million, primarily related to recovery of tax payments previously made on the cash distribution.



In addition to the income tax (provision) benefit presented above, we also recorded the following items (in thousands):





Until December 31, 2016, the Company used the with-and-without approach of determining how and when excess tax benefits from stock-based compensation had been realized and recorded to paid-in-capital. Effective January 1, 2017, the Company adopted ASU No. 2016-09, and upon adoption, previously unrecognized excess tax benefits of $4.7 million were recognized as a cumulative-effect adjustment to decrease accumulated deficit and increase deferred tax assets (see Note 2).



The (provision) benefit for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rate on the loss from continuing operations before income taxes and equity in net income (loss) of affiliates because of the effect of the following items (in thousands):





The following table summarizes the activity related to our unrecognized tax benefits (in thousands):







With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years prior to 2012. Earlier years related to certain foreign jurisdictions remain subject to examination. To the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward. While we intend to contest any future tax assessments for uncertain tax positions, no assurance can be provided that we would ultimately prevail. During the next twelve months, the statute of limitations for assessment of additional tax will expire with regard to certain UTPs related to our federal income tax return filed for 2012, potentially resulting in a $27.3 million reduction to our unrecognized tax benefits. Pursuant to the Purchase Agreement for the Sale, we are obligated to indemnify SSL for taxes related to periods prior to the closing of the transaction.



Our liability for UTPs decreased from $68.7 million at December 31, 2016 to $61.2 million at December 31, 2017 and is included in long-term liabilities in the consolidated balance sheets. At December 31, 2017, we have accrued $7.2 million for the potential payment of tax-related interest. If our positions are sustained by the taxing authorities, approximately $45.3 million of the tax benefits will reduce the Company’s income tax provision from continuing operations. Other than as described above, there were no significant changes to our unrecognized tax benefits during the year ended December 31, 2017, and we do not anticipate any other significant increases or decreases to our unrecognized tax benefits during the next twelve months.



In connection with the acquisition of our ownership interest in Telesat, Loral indemnified Telesat for Loral Skynet tax liabilities relating to periods preceding 2007 and retained the benefit of tax recoveries related to the transferred assets. The unrecognized tax benefits related to the Loral Skynet subsidiaries were transferred to Telesat subject to the Telesat Indemnification. At December 31, 2017, Loral’s asset or liability for the Telesat Indemnification based upon the probable outcome of these matters is not expected to be material (see Notes 5 and 14).



At December 31, 2017, we had federal FTC carryforwards of $104.9 million, federal NOL carryforwards of $139.7 million, New York NOL carryforwards of $1.6 million and federal research credits of $0.4 million which expire from 2022 to 2034, as well as state AMT and state research credit carryforwards of approximately $1.3 million that may be carried forward indefinitely.



The reorganization of the Company on the Effective Date constituted an ownership change under section 382 of the Internal Revenue Code. Accordingly, use of our tax attributes, such as NOLs and tax credits generated prior to the ownership change, are subject to an annual limitation of approximately $32.6 million, subject to increase or decrease based on certain factors.



We assess the recoverability of our FTCs, NOLs and other deferred tax assets and based upon this analysis, record a valuation allowance to the extent recoverability does not satisfy the “more likely than not” recognition criteria. We continue to maintain our valuation allowance until sufficient positive evidence exists to support full or partial reversal. As of December 31, 2017, we had a valuation allowance totaling $124.0 million against our deferred tax assets for certain tax credits, primarily FTC carryovers from 2017, and loss carryovers due to the limited carryforward periods. During 2017, the valuation allowance increased by $120.4 million, which was recorded as a provision to continuing operations in our statement of operations. Subsequent to the Sale, to the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment, which currently has a nominal tax basis, in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets. 

During 2016, the valuation allowance decreased by $4.6 million, which was recorded as a benefit to continuing operations in our statement of operations after a significant portion of our California NOL carryforward expired unutilized.



During 2015, the valuation allowance increased by $0.3 million, which was recorded as a provision to continuing operations in our statement of operations.



The significant components of the net deferred income tax assets are (in thousands):