NOTE 12 – INCOME TAXES
We account for income taxes under the asset and liability method pursuant to prevailing accounting literature. Under such literature, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and credit carryforwards. 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 be recovered or settled. The effect of any tax rate change on deferred taxes is recognized in the period that includes the enactment date of the tax rate change. Realization of deferred tax assets is assessed and, if not more likely than not, a valuation allowance is recorded to write down the deferred tax assets to their net realizable value.
We recognize the financial statement benefit of a tax position after determining that the relevant tax authority would more likely than not sustain the position following an audit under guidance contained in FASB ASC 740. For tax positions meeting a more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Our policy is to reflect interest and penalties related to uncertain tax positions as part of the income tax expense, when and if they become applicable. We have applied this methodology to all tax positions for which the statute of limitations remains open, and there are no additions, reductions or settlements in unrecognized tax benefits during the Successor period from September 1, 2016 to December 31, 2016. We have no material uncertain tax positions as of December 31, 2016.
We have evaluated the full impact of the restructuring pursuant to the pre-packaged plan of reorganization and believe the reorganization will be treated as a taxable exchange under the Internal Revenue Code. Accordingly, we will have an initial tax basis in the assets acquired equal to their respective fair market values immediately after the reorganization and no tax attributes will carryover to us as a result of the reorganization. In addition, as part of the reorganization, we have elected to be treated as a corporation for U.S. Federal and state income tax purposes.
As of December 31, 2016, we have a federal net operating loss carryforward of $23.1 million that will expire during 2036, and a state net operating loss carryforward of $17.8 million that will expire beginning in 2031 and ending in 2036, if unused. We had deferred taxes assets of $8.9 million for the net operating loss carryforwards. In addition, we had general business credits related to the enhanced oil recovery credit of $1.3 million, which is available to reduce future federal regular income taxes, if any, through 2036. We have determined uncertainties exist as to the future utilization of the operating loss and credit carryforwards, therefore, has recorded a full valuation allowance against our net deferred tax asset.
We are subject to income taxes in the U.S. federal jurisdiction and various states. Tax regulations within each jurisdiction are subject to the interpretations of the related tax laws and regulations and require significant judgment to apply. We are no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for the years before 2013.
Reconciliation of the United States federal statutory income tax rate and our effective income tax rate from continuing operations on net income (loss) attributable to member interests are as follows for the Successor period from September 1, 2016 through December 31, 2016:
|
|
|
Successor |
|
|
|
Period from September 1, 2016 through December 31, 2016 |
|
|
|
|
|
Statutory tax rate |
|
35% |
|
IRC Section 43 credits |
|
3 |
|
State income taxes, net of federal tax benefit |
|
2 |
|
|
|
40 |
|
Valuation allowance on deferred tax assets |
|
(40) |
|
|
|
- |
The components of the net deferred tax asset (liability) are as follows for the Successor period from September 1, 2016 through December 31, 2016:
|
|
|
Successor |
|
|
|
Period from September 1, 2016 through December 31, 2016 |
|
|
|
|
|
Deferred tax assets related to: |
|
|
|
Unrealized hedge loss |
|
$ 16,287 |
|
Accrued expenses |
|
931 |
|
Capital loss carryforwards |
|
1,800 |
|
Net operating loss carryforwards - Federal |
|
8,078 |
|
Net operating loss carryforwards - State |
|
858 |
|
IRC Section 43 credits |
|
1,334 |
|
Total deferred tax assets |
|
29,288 |
|
Valuation allowance on deferred tax assets |
|
(12,657) |
|
|
|
16,631 |
|
|
|
|
|
Deferred tax liabilities related to: |
|
|
|
Properties and equipment |
|
(16,515) |
|
Incentive compensation |
|
(116) |
|
Total deferred tax liabilities |
|
(16,631) |
|
Net deferred tax asset (liability) |
|
$ - |
Our Predecessor was not subject to U.S. federal and most state income taxes. The partners of our Predecessor were liable for income tax in regard to their distributive share of our Predecessor’s taxable income. Such taxable income may vary substantially from net income reported in the consolidated financial statements. Certain corporate subsidiaries of our Predecessor were subject to federal and state income tax. The federal and state income taxes related to our Predecessor and these corporate subsidiaries were immaterial to the consolidated financial statements and were recorded in pre-tax income on a current basis only. Accordingly, no federal or state deferred income tax has been provided for in the consolidated financial statements during the Predecessor period from January 1, 2016 through August 31, 2016 and for the years ended December 31, 2015 and 2014.
Our Predecessor evaluated tax positions taken or expected to be taken in the course of preparing our Predecessor’s tax returns and disallows the recognition of tax positions not deemed to meet a “more-likely-than-not” threshold of being sustained by the applicable tax authority. Our Predecessor does not believe it has any tax positions taken within the consolidated financial statements that would not meet this threshold. Our Predecessor’s policy was to reflect interest and penalties related to uncertain tax positions, when and if they become applicable. Our Predecessor has not recognized any potential interest or penalties in the consolidated financial statements for the Predecessor period from January 1, 2016 through August 31, 2016 and for the years ended December 31, 2015 and 2014.
Our Predecessor files Partnership Returns of Income in the U.S. and various state jurisdictions. With few exceptions, our Predecessor is no longer subject to income tax examinations by major tax authorities for years prior to 2013. Our Predecessor is not currently being examined by any jurisdiction and is not aware of any potential examinations as of December 31, 2016.