Note 15.—Income Taxes

The Company is subject to federal income taxes as a regular (Subchapter C) corporation and files a consolidated U.S. federal income tax return.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act).  The Tax Act makes broad and complex changes to the U.S. tax code by, among other things, reducing the federal corporate income tax rate and business deductions and eliminates federal alternative minimum tax (AMT). 

 

The Tax Act reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. Under FASB ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted.  As a result of the reduction in the U.S. corporate income tax rate, the Company re-measured the net deferred tax assets at December 31, 2017 at the rate at which they are expected to reverse in the future and recognized a tax expense of $89.5 million, which was offset by a $66.4 million change in the valuation allowance and other items resulting in income tax expense of $20.1 million in 2017. The Company is still analyzing certain aspects of the Tax Act, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

 

In accordance with SAB 118, the Company has recognized the provisional tax impacts related to the remeasurement of deferred tax assets and liabilities and included these amounts in the consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, 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 Act.

 

Income taxes for the years ended December 31, 2017,  2016 and 2015 were as follows:

 

The Company recorded income tax expense (benefit) of $20.1 million, $1.1 million and $(21.9) million for the years ended December 31, 2017,  2016 and 2015, respectively. The income tax expense of $20.1 million for the year ended December 31, 2017 is primarily the result of income tax expense due to a reduction in the Company’s deferred tax asset as a result of a reduction in future utilization, changes in tax rates due to the Tax Act re-measurement of deferred tax assets and liabilities, amortization of the deferred charge and state income taxes from states where the Company does not have net operating loss carryforwards or state minimum taxes, including AMT. The income tax expense of $1.1 million for the year ended December 31, 2016 is primarily the result of the amortization of the deferred charge, federal AMT and state income taxes from states where the Company does not have net operating loss carryforwards or state minimum taxes, including AMT. For the year ended December 31, 2015, the Company recorded a deferred income tax benefit of $24.4 million primarily the result of a reversal of valuation allowance partially offset by federal AMT, amortization of the deferred charge and state income taxes from states where the Company does not have net operating loss carryforwards or state minimum taxes, including AMT. The deferred charge represents the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH prior to 2008. The deferred charge is amortized and/or impaired, which does not result in any tax liability to be paid. The deferred charge is included in other assets in the accompanying consolidated balance sheets and is amortized as a component of income tax expense in the accompanying consolidated statement of operations. Deferred tax assets are recognized subject to management's judgment that realization is "more likely than not". A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. As of each reporting date, the Company considers new evidence, both positive and negative, that could impact management's view with regard to future realization of deferred tax assets. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The Company's evaluation is based on current tax laws as well as management's expectation of future performance.

The Company's deferred tax assets are primarily the result of net operating losses and other fair value write downs of financial assets and liabilities. The Company’s net deferred tax assets declined to $4.3 million at December 31, 2017, as a result of the reduction in projected future utilization, changes in tax rates due to the Tax Act re-measurement of deferred tax assets and liabilities and an increase in deferred tax liabilities as a result of the amortization of goodwill.  The Company has recorded a valuation allowance against its remaining net deferred tax assets at December 31, 2017 as it is more likely than not that not all of the deferred tax assets will be realized. The valuation allowance is based on the management's assessment that it is more likely than not that certain deferred tax assets, primarily net operating loss carryforwards, may not be realized in the foreseeable future due to objective negative evidence that the Company may not generate sufficient taxable income to realize the deferred tax assets.

Deferred tax assets are comprised of the following temporary differences between the financial statement carrying value and the tax basis of assets:

 

(1)Includes fair value adjustments to long-term debt and fair value and accretion adjustments for the contingent consideration.

 

The following is a reconciliation of income taxes to the expected statutory federal corporate income tax rates for the years ended December 31, 2017,  2016 and 2015:

 

As of December 31, 2017, the Company had estimated federal net operating loss (NOL) carryforwards of approximately $619.9 million. Federal net operating loss carryforwards begin to expire in 2027.  As of December 31, 2017, the Company had estimated California NOL carryforwards of approximately $431.0 million, which begin to expire in 2028.  The Company may not be able to realize the maximum benefit due to the nature and tax entities that holds the NOL. On July 19, 2016, the Company’s stockholders approved an amendment to the NOL rights plan, which is designed to mitigate the risk of losing net operating loss carry‑forwards and certain other tax attributes from being limited in reducing future income taxes. For a description of the NOL rights plan, see Note 20.—Tax Benefits Preservation Rights Plan.  

 

The Company files numerous tax returns in various jurisdictions. While the Company is subject to examination by various taxing authorities, the Company believes there are no unresolved issues or claims likely to be material to its financial position. The Company classifies interest and penalties on taxes as provision for income taxes. As of December 31, 2017 and 2016, the Company has no material uncertain tax positions.  With the enactment of the Tax Act in the fourth quarter of 2017, federal AMT was eliminated and $474 thousand in federal AMT credits were reclassed to receivables as of December 31, 2017.  The Company has state AMT credits in the amount of $113 thousand as of December 31, 2017.  

 

The Company recognizes tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized upon an employee’s disposition of a share‑based award exceeds the deferred tax asset, if any, associated with the award. At December 2016, deferred tax assets did not include $5.1 million of excess tax benefits from stock‑based compensation.  With the adoption of ASU 2016-09 in the first quarter of 2017, the Company had a $5.1 million cumulative effect adjustment to opening retained earnings related to the excess tax benefit from stock‑based compensation which had no impact as the Company had a full valuation allowance against it.