INCOME TAXES
Details of the Company's tax provision (benefit) are as follows:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income from continuing operations, before income taxes, equity method income (loss) and investments held at fair value: | | | | | |
Domestic | $ | 34,971 |
| | $ | 19,778 |
| | $ | 22,107 |
|
Foreign | 5,452 |
| | 2,660 |
| | 1,262 |
|
Total | $ | 40,423 |
| | $ | 22,438 |
| | $ | 23,369 |
|
| | | | | |
Income taxes: | | | |
| | |
|
Current: | | | |
| | |
|
Federal | $ | 4,263 |
| | $ | 1,798 |
| | $ | 20,220 |
|
State | 4,872 |
| | 6,459 |
| | 5,841 |
|
Foreign | 2,953 |
| | 3,148 |
| | 995 |
|
Total income taxes, current | 12,088 |
| | 11,405 |
| | 27,056 |
|
Deferred: | | | |
| | |
|
Federal | 44,592 |
| | 13,625 |
| | (105,928 | ) |
State | (4,093 | ) | | (598 | ) | | 1,530 |
|
Foreign | (1,288 | ) | | (480 | ) | | (1,377 | ) |
Total income taxes, deferred | 39,211 |
| | 12,547 |
| | (105,775 | ) |
Income tax provision (benefit) | $ | 51,299 |
| | $ | 23,952 |
| | $ | (78,719 | ) |
The following is a reconciliation of the income tax provision (benefit) computed at the federal statutory rate to the provision for income taxes:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income from continuing operations, before income taxes, equity method income (loss) and investments held at fair value: | $ | 40,423 |
| | $ | 22,438 |
| | $ | 23,369 |
|
Federal income tax provision at statutory rate | $ | 14,147 |
| | $ | 7,853 |
| | $ | 8,179 |
|
Loss passed through to common unitholders (a) | 10,385 |
| | 2,122 |
| | 7,177 |
|
| 24,532 |
| | 9,975 |
| | 15,356 |
|
State income taxes, net of federal effect | 5,344 |
| | 4,128 |
| | 4,277 |
|
Change in valuation allowance | (48,598 | ) | | (1,327 | ) | | (91,052 | ) |
Foreign tax rate differences | (1,202 | ) | | 43 |
| | (235 | ) |
Uncertain tax positions | 124 |
| | (465 | ) | | (440 | ) |
Repatriation tax | 2,165 |
| | — |
| | — |
|
Deferred tax rate change due to newly-enacted U.S. tax law | 69,992 |
| | — |
| | — |
|
Permanent differences and other (b) | (1,058 | ) | | 11,598 |
| | (6,625 | ) |
Income tax provision (benefit) | $ | 51,299 |
| | $ | 23,952 |
| | $ | (78,719 | ) |
| |
(a) | Represents taxes at statutory rate on losses for which no tax benefit is recognizable by SPLP and certain of its subsidiaries which are taxed as pass-through entities. Such losses are allocable directly to SPLP's unitholders and taxed when realized. |
| |
(b) | Amounts in 2016 and 2015 include the tax effect of the non-deductible portion of the goodwill impairments recorded in the fourth quarters of 2016 and 2015 (see Note 7 - "Goodwill and Other Intangible Assets, Net"). |
The Tax Cuts and Jobs Act ("the Act") was enacted on December 22, 2017. The income tax effects of changes in tax laws are recognized in the period when enacted. The Act provides for numerous significant tax law changes and modifications with varying effective dates, which include reducing the U.S. federal corporate income tax rate from 35% to 21%, creating a territorial tax system (with a one-time mandatory repatriation tax on previously deferred foreign earnings), broadening the tax base, and allowing for immediate capital expensing of certain qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.
In response to the enactment of the Act in late 2017, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address situations where the accounting is incomplete for certain income tax effects of the Act upon issuance of an entity's financial statements for the reporting period in which the Act was enacted. Under SAB 118, a company may record provisional amounts during a measurement period for specific income tax effects of the Act for which the accounting is incomplete but a reasonable estimate can be determined, and when unable to determine a reasonable estimate for any income tax effects, report provisional amounts in the first reporting period in which a reasonable estimate can be determined. The Company has recorded the impact of the tax effects of the Act, relying on reasonable estimates where the accounting is incomplete as of December 31, 2017. As guidance and technical corrections are issued in the upcoming quarters, the Company will record updates to its original provisional estimates.
The Company remeasured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of deferred tax balances was a net tax expense of $56,552.
The Act includes a transition tax on the deemed distribution of previously untaxed accumulated and current earnings and profits ("E&P") of certain foreign subsidiaries. The Company recorded a provisional amount for the one-time mandatory repatriation tax liability of $2,165. The Company has not yet finalized its calculation of the total post-1986 E&P and non-U.S. income taxes paid on such earnings for these foreign subsidiaries. Further, the transition tax is based on the amount of those earnings that are held in cash and other specified illiquid assets. This amount may change when the calculation of post-1986 net accumulated foreign E&P previously deferred from U.S. federal taxation and the amounts held in cash or other specified illiquid assets are finalized, and is subject to further refinement if further guidance is issued by federal and state taxing authorities.
It is likely that additional guidance will be issued providing further clarification on the application of the Act. It is also reasonable to expect that global taxing authorities will be reviewing their current legislation for potential modifications in reaction to the implementation of the Act. This additional guidance, along with the potential for additional global tax legislation changes, may affect deductions and income inclusions for the Company.
Deferred income taxes result from temporary differences in the financial basis and tax basis of assets and liabilities. The amounts shown on the following table represent the tax effect of temporary differences between the consolidated tax return basis of assets and liabilities and the corresponding basis for financial reporting, as well as tax credit and operating loss carryforwards.
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| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred Tax Assets: | | | |
Operating loss carryforwards (a) | $ | 118,594 |
| | $ | 187,880 |
|
Postretirement and postemployment employee benefits | 70,151 |
| | 108,571 |
|
Tax credit carryforwards | 13,412 |
| | 46,517 |
|
Accrued costs | 4,151 |
| | 9,600 |
|
Investment impairments and unrealized losses | 7,325 |
| | 19,244 |
|
Inventories | 2,468 |
| | 4,109 |
|
Environmental costs | 2,297 |
| | 3,042 |
|
Impairment of long-lived assets | 2,122 |
| | 3,245 |
|
Capital loss | 7,968 |
| | 8,543 |
|
Other | 5,109 |
| | 11,995 |
|
Gross deferred tax assets(c) | 233,597 |
| | 402,746 |
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| | | |
Deferred Tax Liabilities: | | | |
Intangible assets | (33,376 | ) | | (52,149 | ) |
Fixed assets | (28,468 | ) | | (39,898 | ) |
Unremitted foreign earnings | — |
| | (181 | ) |
Unrealized gain on investment | (22,403 | ) | | — |
|
Other | (2,208 | ) | | (5,479 | ) |
Gross deferred tax liabilities(c) | (86,455 | ) | | (97,707 | ) |
Valuation allowance (b) (c) | (41,138 | ) | | (126,163 | ) |
Net deferred tax assets | $ | 106,004 |
| | $ | 178,876 |
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| | | |
Classified on the Company's consolidated balance sheets as follows: | | | |
Deferred tax assets | $ | 109,011 |
| | $ | 182,605 |
|
Deferred tax liabilities | 3,007 |
| | 3,729 |
|
| $ | 106,004 |
| | $ | 178,876 |
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(a) | The ability for certain subsidiaries to utilize net operating losses and other credit carryforwards may be subject to limitation upon changes in control. |
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(b) | Certain subsidiaries of the Company establish valuation allowances when they determine, based on their assessment, that it is more likely than not that certain deferred tax assets will not be fully realized. This assessment is based on, but not limited to, historical operating results, uncertainty in projections of taxable income, and other uncertainties that may be specific to a particular business. |
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(c) | The Tax Cuts and Jobs Act of 2017 was enacted in December of 2017 and reduced the U.S. Federal income tax rate significantly. The Company's 2017 deferred tax balances have been reduced to reflect the lower tax rate enacted by the Act, which affects the comparability of the 2017 and 2016 columns. |
During 2017, 2016 and 2015, the Company changed its judgment about the realizability of its deferred tax assets at certain subsidiaries. In accordance with U.S. GAAP, the effect of a change in the beginning-of-the-year balance of a valuation allowance that results from a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset in future years should be included in income from continuing operations in the period of the change. In 2017, 2016 and 2015, the Company recorded tax benefits in continuing operations of approximately $44,681, $1,327 and $111,881 associated with the reversal of its deferred tax valuation allowances at certain subsidiaries.
HNH
At December 31, 2017, HNH has U.S. federal NOLs of approximately $32,373 that expire between 2020 and 2031, and state NOLs of approximately $8,697 that expire generally between 2020 and 2031. HNH maintains nearly a full valuation allowance against the deferred tax assets related to the state NOLs. The federal NOLs were acquired by HNH as a result of the JPS acquisition in 2015. The utilization of the JPS NOLs is subject to certain annual limitations under the ownership change rules of Section 382 of the Internal Revenue Code. There are also federal and state tax credit carryforwards of $4,481, of which a $2,600 federal tax credit does not expire.
Steel Excel
At December 31, 2017, Steel Excel had federal NOLs of approximately $192,500 that expire in 2022 through 2037, and state NOLs of approximately $152,800 that will expire in 2018 through 2037. Steel Excel also has federal research and development credit carryforwards of approximately $30,300 that expire in 2018 through 2029, and state research and development credit carryforwards of approximately $17,700 that do not expire. Steel Excel has a valuation allowance to reserve its net deferred tax assets at December 31, 2017 and 2016. Upon the adoption of the provisions of ASU No. 2016-09 on January 1, 2017 (see Note 2 - "Summary of Significant Accounting Policies"), a tax benefit of $4,600 associated with the NOLs related to deductions for stock-based compensation was recognized as a deferred tax asset through a cumulative-effect adjustment to Partners' capital. Concurrent with the recognition of the deferred tax asset and in accordance with ASU No. 2016-09, a full valuation allowance for the deferred tax asset was recognized through a cumulative-effect adjustment to Partners' capital, resulting in no net impact to the Company's consolidated financial statements.
As of December 31, 2016, Steel Excel had previously established a valuation allowance to reserve its net deferred tax assets, based on its assessment that it is more likely than not that such benefit was not realizable. At December 31, 2017, a valuation allowance was released against substantially all of Steel Excel's federal deferred tax assets (except for certain federal NOLs of a subsidiary company subject to limitations and the realized capital losses) as Steel Excel concluded such assets were fully realizable. This assessment was primarily based on the restructuring of several business units that enabled operational efficiencies resulting in a more likely than not assertion to realize the majority of Steel Excel's federal deferred tax assets. The Company will continue to monitor the likelihood that Steel Excel will be able to recover the deferred tax assets in the future. This determination includes objectively verifiable positive evidence that outweighs potential negative evidence.
WFHC
As discussed in Note 14 - "Capital and Accumulated Other Comprehensive Loss" WFHC and Cosine entered into a series of transactions whereby CoSine was merged with and into WFH LLC, a newly formed wholly-owned subsidiary of WFHC, which is disregarded for income tax purposes. This merger was a tax-free transaction which was completed and declared effective on December 31, 2015. WFHC is also the parent company of WebBank. The transaction was characterized as a reverse acquisition for federal income tax purposes. As a result, WFHC elected to file a consolidated federal income tax return, which included WebBank and the newly merged CoSine business ("WFHC U.S. Consolidated Group"), with CoSine considered to be the parent of the consolidated federal group. Accordingly, the tax attributes acquired in the merger can be utilized against the taxable income of the affiliated group, generally without limitation.
At December 31, 2017, the WFHC U.S. Consolidated Group had federal NOLs of approximately of $251,810 that expire between 2021 and 2033, and state NOLs of approximately $51,366 that expire between 2021 and 2024, as well as various federal and state tax credit carryforwards of $7,563. As noted above, for the year ended December 31, 2015, the Company recorded tax benefits in continuing operations of approximately $111,881 associated with the reversal of its deferred tax valuation allowances. Such amount was attributable against the deferred tax asset related to the aforementioned federal NOLs. During the first quarter of 2016, the Company revised its calculation of the expected benefit to be derived from the realizability of federal deferred tax assets of the WFHC U.S. Consolidated Group and recorded an additional tax benefit in continuing operations of approximately $4,182. However, the Company continues to maintain a full valuation allowance (approximately $10,662) against the deferred tax assets related to the state NOLs and tax credit carryforwards given its judgment about the realizability of the associated deferred tax assets.
API
As of December 31, 2017, API had approximately $3,199 of non-U.S. NOLs that do not expire. A valuation allowance to reserve the associated deferred tax assets from the NOLs exists at December 31, 2017. In addition, U.S. subsidiaries of API had approximately $6,040 of federal NOLs that are scheduled to expire between 2022 and 2035 and are subject to certain annual limitations under the change of ownership rules of Internal Revenue Section 382. API has a valuation allowance to reserve the entire amount of the deferred tax assets associated with the federal NOLs at December 31, 2017.
Unrecognized Tax Benefits
U.S. GAAP provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The change in the amount of unrecognized tax benefits for 2017 and 2016 was as follows:
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| | | |
Balance at December 31, 2015 | $ | 29,072 |
|
Additions for tax positions related to current year | 175 |
|
Additions for tax positions acquired | 1,114 |
|
Additions due to interest accrued | 148 |
|
Payments | — |
|
Reductions due to lapsed statute of limitations | (1,115 | ) |
Balance at December 31, 2016 | $ | 29,394 |
|
Additions for tax positions related to current year | 32,564 |
|
Additions for tax positions acquired | — |
|
Additions due to interest accrued | 120 |
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Payments | — |
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Reductions due to lapsed statute of limitations | (1,350 | ) |
Balance at December 31, 2017 | $ | 60,728 |
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The Company recognizes interest and penalties related to uncertain tax positions in its income tax expense.
HNH Unrecognized Tax Benefits
At December 31, 2017 and 2016, HNH had $3,394 and $2,581, respectively, of unrecognized tax benefits recorded, all of which, net of federal benefit for state taxes, would affect the Company's effective tax rate if recognized. Of this amount, HNH has offset approximately $648 and $300 against certain related deferred tax assets in the same jurisdiction as of December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, approximately $299 and $300 of interest related to uncertain tax positions was accrued. No penalties were accrued. It is reasonably possible that the total amount of unrecognized tax benefits will decrease by as much as $708 during the next year as a result of the lapse of the applicable statutes of limitations in certain taxing jurisdictions.
HNH is generally no longer subject to federal, state or local income tax examinations by tax authorities for any year prior to 2013, except as noted below. However, NOLs generated in prior years are subject to examination and potential adjustment by the Internal Revenue Service ("IRS") upon their utilization in future years' tax returns. HNH is currently under examination by the IRS for the years 2014 and 2015, which remains on-going. HNH has not been notified of any material adjustments to taxable income as a result of this examination. In addition, HNH is under examination for the pre-acquisition years 2015 and short-period 2016 for SLI, which is a subsidiary that HNH acquired on June 1, 2016. This examination began in early 2018 with only a preliminary meeting being held with the IRS. HNH is currently under examination by the State of New York for 2012 to 2013, which is on-going. HNH has not been notified of any material adjustments as a result of this examination. HNH underwent an examination by the State of New York for 2009 to 2011, which resulted in an assessment of $100 paid in January 2016.
Steel Excel Unrecognized Tax Benefits
Steel Excel's total gross unrecognized tax benefits were $55,326 and $26,813 at December 31, 2017 and 2016, respectively, of which $36,800, if recognized, would affect the provision for income taxes. The increase in unrecognized tax benefits in 2017 is primarily related to certain tax credits from prior years that may not be sustained on a more-likely-than- not basis. In 2017, Steel Excel reversed approximately $700 of reserves upon the expiration of the statutes of limitation with the applicable taxing authorities. As of December 31, 2017, it is reasonably possible that unrecognized tax benefits may decrease by $700 in the next 12 months due to the expiration of the statutes of limitation. Steel Excel recognizes interest and penalties related to uncertain tax positions in its income tax provision in its consolidated statements of operations. For 2017, 2016 and 2015, the amount of such interest and penalties recognized was immaterial.
Steel Excel is subject to U.S. federal income tax as well as income taxes in various domestic states and foreign jurisdictions in which they operate or formerly operated in. As of December 31, 2017, fiscal years 1999 onward remain open to examination by the U.S. taxing authorities. Steel Excel is currently under income tax examination by the State of New York for the tax years 2013 and 2014, and by the State of Montana for tax years 2013, 2014, and 2015. Steel Excel is not currently under tax examination in any foreign jurisdictions.
WFHC Unrecognized Tax Benefits
At December 31, 2017, WFHC had unrecognized tax benefits of $2,008 in connection with certain filing positions in states in which its WebBank subsidiary currently operates. WFHC is subject to U.S. income taxes, as well as various taxes in other state and local jurisdictions. With few exceptions, WFHC is no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by taxing authorities for years before December 31, 2013.
Other Subsidiaries
SPLP's other subsidiaries file federal tax returns and as applicable state, local and foreign tax returns in various jurisdictions. Federal tax returns for all other consolidated subsidiaries remain open and subject to examination by the IRS for all tax years after 2013. In addition, NOLs generated in prior years are subject to examination and potential adjustment by the IRS upon their utilization in future years' tax returns. State income tax returns for most jurisdictions remain open generally for all tax years after 2013.