NOTE 9 –  INCOME TAXES

 

Current income tax expense represents the amounts expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.

 

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections for future taxable income.

 

On the basis of this evaluation, for the year ended December 31, 2017, a valuation allowance of $221.6 million was established domestically on the Company’s net deferred tax assets and considering indefinite-lived intangibles. The amount of deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income is reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as the Company’s projections for future taxable income.

 

On December 22, 2017, the President of the United States signed into law H.R. 1 (the “Tax Reform Act”). The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, limiting the amount of deductible interest expense, limiting executive compensations, implementing a territorial tax system, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

 

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax assets and related valuation allowance at December 31, 2017. As a result, the Company recognized a tax benefit of $121.8 million in the consolidated statement of operations for the year ended December 31, 2017. This tax benefit is comprised of $88.6 million of deferred tax expense associated with the revaluation of the Company’s net deferred tax assets, as reflected in the rate reconciliation, and $210.4 million of deferred tax benefit associated with the partial release of the Company’s valuation allowance as a result of the Tax Reform Act.

 

The Company has provisionally assessed the deemed mandatory repatriation provisions of the Tax Reform Act, and is projecting no impact to current year domestic taxable income as it relates to undistributed earnings of its foreign subsidiaries. The Company does not intend to distribute earnings in a taxable manner, and therefore intends to limit distributions to earnings previously taxed in the U.S., or earnings that would qualify for the 100 percent dividends received deduction provided for in the Tax Reform Act, and earnings that would not result in any significant foreign taxes. As a result, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries.

 

While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.

 

The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.

 

The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2017.

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impact of zero expense related to deemed repatriated earnings and approximately $13 million of tax benefit related to state taxes as included in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from this provisional amount, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018. The Company’s assertion regarding permanent reinvestment of earnings for foreign subsidiaries is also provisional at December 31, 2017. 

 

The Income tax provision reflected in the Consolidated Statements of Operations consists of the following components:

 

 

The Company expects to generate alternative minimum taxes for the year ended December 31, 2017, but will fully offset the taxes due to the utilization of tax credits. Under the Tax Reform Act, alternative minimum tax credit will be refundable in the future. The Company has reclassed the alternative minimum tax credits from deferred tax assets to a long-term tax receivable.

 

Pre-tax income (losses) consisted of the following:

 

 

The difference between the effective tax rate on earnings from continuing operations before income taxes and the U.S. federal income tax statutory rate is as follows:

 

 

The significant components of deferred income tax assets and liabilities as of December 31, 2017 and December 31, 2016 are as follows:

 

 

A rollforward of the Company’s valuation allowance for deferred tax assets is as follows:

 

 

The Company’s federal income tax loss carryforward of $443.9 million will begin to expire in 2018 and will completely expire in 2035 and will be limited annually due to certain change in ownership provisions of the Internal Revenue Code.  The Company’s foreign net operating losses of $638.6 million can be used indefinitely except for approximately $12.9 million, which will expire in varying amounts between 2018 and 2028. The Company also has state income tax loss carryforwards of $404.0 million, which may be used over various periods ranging from 1 to 20 years.

 

In 2015 and 2016, the Company identified a prudent and feasible tax planning strategy which involves the conversion of NCM units into NCM, Inc. common stock that, when executed, generates significant taxable income. The conversion is within the control of the Company and the Company executes the conversion when it becomes necessary to prevent its net operating loss and / or capital loss carryforwards from expiring unrealized.

 

On December 30, 2015, the Company converted 200,000 of its NCM units to NCM, Inc. shares and recognized approximately $4.6 million of capital gain pursuant to the tax planning strategy described above. See Note 5 – Investments for additional information.

 

A reconciliation of the change in the amount of unrecognized tax benefits was as follows:

 

 

The Company recognizes income tax-related interest expense and penalties as income tax expense and general and administrative expense, respectively. The amount of interest and penalty expense related to foreign uncertain tax positions recognized for the year ended December 31, 2017 was $0.1 million. No interest expense related to federal uncertain tax positions have been recognized for the year ended December 31, 2017 and December 31, 2016, respectively.

 

The Company analyzed and reviewed the remaining state uncertain tax positions to determine the necessity of accruing interest and penalties. The amount of interest related to state uncertain tax positions recognized for the year ended December 31, 2017 was $0.1 million. The total amount of accrued interest and penalties for state uncertain tax positions at December 31, 2017 and December 31, 2016 was $0.1 million and $0.1 million, respectively. The $0.1 million represents the total amount of interest and penalties accrued at December 31, 2017 for all uncertain tax positions.

 

During the year ended December 31, 2015, the Company received a favorable state ruling that resulted in a reduction of uncertain tax positions and, as a result, the Company recorded a net discrete tax benefit of approximately $2.9 million. The $2.9 million consisted of $2.1 million net discrete benefit for reduction of uncertain tax positions and $0.8 million related to establishing a receivable for amounts previously paid. During the year ended December 31, 2015, the Company received a notice of proposed adjustment from the Internal Revenue Service based upon its ongoing review of the Company’s tax return for the fiscal period ended March 29, 2012. As a result of this notification, the Company recorded a net discrete tax provision of $1.0 million for interest on the proposed adjustment ($0.6 million net of tax), reinstated approximately $9.2 million of deferred tax assets and recorded current interest and taxes payable of $10.2 million.

 

The total amount of net unrecognized tax benefits at December 31, 2017 and December 31, 2016 that would impact the effective tax rate, if recognized, would be $12.6 million and $9.3 million, respectively. There are currently, unrecognized tax benefits which the Company anticipates will be resolved in the next 12 months; however, the Company is unable at this time to estimate what the impact on its unrecognized tax benefits will be.

 

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. An IRS examination of the tax year March 29, 2012 is currently ongoing. Generally, tax years beginning after March 28, 2002 are still open to examination by various taxing authorities. Additionally, as discussed above, the Company has net operating loss (“NOL”) carryforwards for tax years ended December 31, 2000, through December 20, 2016, in the U.S. and various state jurisdictions which have carryforwards of varying lengths of time. These NOLs are subject to adjustment based on the statute of limitations applicable to the return in which they are utilized, not the year in which they are generated. Various state, local and foreign income tax returns are also under examination by taxing authorities. The Company does not believe that the outcome of any examination will have a material impact on its consolidated financial statements.