11. Income Taxes
The Company’s income tax benefit (expense) for the years ended December 31, 2017, 2016 and 2015 consists of the following (in thousands):
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States—current |
|
$ |
2,182 |
|
|
$ |
— |
|
|
$ |
— |
|
|
United States—deferred |
|
|
— |
|
|
|
— |
|
|
|
1,497 |
|
|
Foreign—current |
|
|
(72 |
) |
|
|
— |
|
|
|
(4,128 |
) |
|
Income tax benefit (expense) |
|
$ |
2,110 |
|
|
$ |
— |
|
|
$ |
(2,631 |
) |
For the year ended December 31, 2017, the Company recorded an income tax benefit of $2.1 million primarily related to a state income tax refund of prior year taxes approved by tax authorities in late 2017. For the year ended December 31, 2016, the Company did not record a provision for U.S. federal income tax due to available tax loss carryforwards. During the year ended December 31, 2015, as a result of the impairment of certain indefinite-lived intangible assets, the deferred tax liability associated with these intangible assets decreased, resulting in a federal tax benefit of $1.5 million.
For the years ended December 31, 2017 and 2015, the Company recorded tax provisions of $0.1 million and $4.1 million, respectively, related to foreign taxes withheld on revenue generated from license agreements executed with third party licensees domiciled in foreign jurisdictions. The Company had no foreign taxes withheld during the year ended December 31, 2016. In general, foreign taxes withheld may be claimed as a deduction on future U.S. corporate income tax returns, or as a credit against future U.S. federal income tax liabilities, subject to certain limitations. However, due to uncertainty regarding the Company’s ability to utilize the deduction or credit resulting from the foreign withholding, the Company established a full valuation allowance against the related deferred tax asset.
The Company’s accounting for the various elements of the Tax Cuts and Jobs Act (“TCJA”), enacted on December 22, 2017, is complete and the impact is reflected in the 2017 financial statements, including the reduction in the maximum U.S. federal corporate tax rate from 35% to 21% beginning in 2018. As a result of the TCJA, the Company recorded a $323.2 million reduction in its net deferred tax assets to reflect the new statutory tax rate. This adjustment to deferred tax assets was fully offset by a corresponding decrease in the Company’s valuation allowance, resulting in no impact to the Company’s effective tax rate.
A reconciliation of the 2017, 2016 and 2015 federal statutory income tax rate of 34% to the Company’s effective income tax rate is as follows:
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Statutory tax rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
Change in valuation allowance |
|
|
(1,862.16 |
) |
|
|
(59.30 |
) |
|
|
(22.59 |
) |
|
Impact of change in tax law |
|
|
1,821.35 |
|
|
|
— |
|
|
|
— |
|
|
State income taxes |
|
|
(8.01 |
) |
|
|
— |
|
|
|
— |
|
|
Foreign withholding taxes |
|
|
0.26 |
|
|
|
— |
|
|
|
(2.37 |
) |
|
Goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
(6.07 |
) |
|
Stock-based compensation |
|
|
1.42 |
|
|
|
10.24 |
|
|
|
(3.23 |
) |
|
Loss on sale of subsidiary |
|
|
— |
|
|
|
13.70 |
|
|
|
— |
|
|
Other |
|
|
1.24 |
|
|
|
1.36 |
|
|
|
(2.03 |
) |
|
Effective tax rate |
|
|
(11.90 |
)% |
|
|
0 |
% |
|
|
(2.29 |
)% |
The significant components of the Company’s net deferred tax assets are as follows (in thousands):
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
|||
|
Net deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
Net operating losses |
|
$ |
624,984 |
|
|
$ |
941,163 |
|
|
|
Basis difference in Liquidating Trust |
|
|
10,380 |
|
|
|
16,955 |
|
|
|
Accrued expenses and other |
|
|
5,083 |
|
|
|
12,336 |
|
|
|
Total deferred tax assets |
|
|
640,447 |
|
|
|
970,454 |
|
|
|
Valuation allowance |
|
|
(640,447 |
) |
|
|
(970,454 |
) |
|
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|||||||||
As of December 31, 2017, the Company had federal tax net operating loss carryforwards in the United States (“NOLs”) of approximately $2.5 billion. A significant portion of the NOLs were generated when the Company disposed of its satellite business and transferred the MEO-related international subsidiaries to a liquidating trust. In 2017, the Company adopted ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. As a result, the deferred tax asset related to the Company’s NOLs increased by $0.3 million due to the inclusion of additional NOLs related to excess tax benefits. The increase in the deferred tax asset was fully offset by a valuation allowance, resulting in no change to the Company’s recognized net deferred tax assets.
The Company believes the NOLs can be carried forward to offset certain future taxable income that may be generated during the carryforward period, which begins to expire in 2025 with a significant portion expiring in 2032. The use of the NOLs will be significantly limited if the Company undergoes a Tax Ownership Change under Section 382 of the Internal Revenue Code (“Tax Ownership Change”). Broadly, the Company will have a Tax Ownership Change if, over a three-year testing period, the portion of all stock of the Company, by value, owned by one or more 5% shareholder increases by more than 50 percentage points. For purposes of this test, shareholders that own less than 5% of the stock of the Company are aggregated into one or more separate “public groups”, each of which is treated as a 5% shareholder. In general, shares traded within a public group are not included in the Tax Ownership Change test. As discussed below, the Board of Directors adopted a Tax Benefits Preservation Plan designed to preserve shareholder value and the value of certain tax assets primarily associated with NOLs. As of December 31, 2017, the Company also had tax loss carryforwards in the state of California of approximately $1.3 billion, which will begin to expire in 2028. A significant portion of the California loss carryforward was generated when the Company disposed of its satellite business and will expire in 2032. The impacts of a Tax Ownership Change, discussed above, apply to the California tax losses as well.
For all years presented, the Company has considered all available evidence, including the history of tax losses and the uncertainty around future taxable income. Based on the weight of the evidence available at December 31, 2017, a valuation allowance has been recorded to reduce the value of the Company’s deferred tax assets, including the deferred tax assets associated with the NOLs, to an amount that is more likely than not to be realized.
At the beginning of the year ended December 31, 2017, the Company had unrecognized tax benefits of $15.3 million related to income tax refund claims filed in various jurisdictions. In late 2017, the Company settled a claim for the partial refund of state income taxes previously paid, resulting in a refund of $2.2 million, which is expected to be received in early 2018, and a reduction to the Company’s unrecognized tax benefits of $3.0 million. Due to the uncertain nature of the Company’s remaining refund claims, the remaining uncertain tax positions have not yet been recorded as an income tax benefit.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Beginning of period |
|
$ |
15,323 |
|
|
$ |
15,594 |
|
|
$ |
5,132 |
|
|
Additions for tax positions taken during the current period |
|
|
— |
|
|
|
— |
|
|
|
10,462 |
|
|
Reductions for tax positions taken during prior periods |
|
|
(2,950 |
) |
|
|
— |
|
|
|
— |
|
|
Settlements with tax authorities |
|
|
(2,182 |
) |
|
|
— |
|
|
|
— |
|
|
Exchange rate fluctuations |
|
|
1,352 |
|
|
|
(271 |
) |
|
|
— |
|
|
End of period |
|
$ |
11,543 |
|
|
$ |
15,323 |
|
|
$ |
15,594 |
|
All of the unrecognized tax benefits at December 31, 2017, if fully recognized, would affect the Company’s effective tax rate. The Company estimates that a reduction in its unrecognized tax benefits of approximately $11.5 million may occur within the next twelve months upon resolution of determinations by taxing authorities.
The Company and its subsidiaries file U.S. federal income tax returns and tax returns in various state and foreign jurisdictions. The Company is open to examination for the years ended 2005 and forward with respect to NOLs generated and carried forward from those years. The Company is open to examination by foreign jurisdictions for tax years 2013 forward.
Certain Taxes Payable Irrespective of NOLs—Under the Internal Revenue Code and related Treasury Regulations, the Company may “carry forward” its NOLs in certain circumstances to offset current and future income and thus reduce its federal income tax liability, subject to certain restrictions. To the extent that the NOLs do not otherwise become limited, the Company believes that it will be able to carry forward a significant amount of NOLs. However, these NOLs will not impact all taxes to which the Company may be subject. For instance, state or foreign income taxes and/or revenue based taxes may be payable if the Company’s income or revenue is attributed to jurisdictions that impose such taxes, and the NOLs will not offset any federal personal holding company tax liability that Pendrell or one or more of its corporate subsidiaries may incur. This is not an exhaustive list, but merely illustrative of the types of taxes to which the Company’s NOLs are not applicable.
Personal Holding Company Determination—The Internal Revenue Code imposes an additional tax on the undistributed income of a Personal Holding Company (“PHC”). In general, a corporation will be classified as a PHC if 50% or more of its outstanding shares, measured by value, are owned directly or indirectly by five or fewer individual shareholders at any time during the second half of the year (“Concentrated Ownership”) and at least 60% of its adjusted ordinary gross income is Personal Holding Company Income (“PHCI”). Broadly, PHCI includes items such as dividends, interest, rents and royalties, among others. For a corporate subsidiary, Concentrated Ownership is determined by reference to ownership of the parent corporation, and the subsidiary’s income is subject to additional tests to determine whether its income renders the subsidiary a PHC. If a corporation is a PHC, generates positive net PHCI and does not distribute to its shareholders a proportionate dividend in the full amount of the net PHCI, then the undistributed net PHCI is taxed (at 20% under current law).
Due to the significant number of shares held by the Company’s largest shareholders and the type of income that the Company generates, the Company must continually assess share ownership of Pendrell and its consolidated subsidiary ContentGuard to determine whether or not there is Concentrated Ownership of either corporation. For 2017, the Company determined that Pendrell, the parent company, met the Concentrated Ownership test, but that ContentGuard has not yet met the Concentrated Ownership test due to the interest held by its minority shareholders. The Company does not expect to have a PHC liability for 2017 because Pendrell did not have undistributed net PHCI as a result of the $3.0 million dividend payment made to shareholders on December 27, 2017. If either Pendrell or ContentGuard is a PHC in a future tax year, generates net PHCI, and does not distribute to its shareholders a proportionate dividend in the full amount of the net PHCI, then the undistributed net PHCI will be taxed.
Tax Benefits Preservation Plan—Effective January 29, 2010, the Board of Directors adopted the Tax Benefits Preservation Plan (“Tax Benefits Plan”) to help the Company preserve its ability to utilize fully its NOLs and to help preserve potential future NOLs. As discussed above, if the Company experiences a “Tax Ownership Change,” as defined in Section 382 of the Internal Revenue Code, the Company’s ability to use the NOLs could be significantly limited.
The Tax Benefits Plan is intended to act as a deterrent to any person or group acquiring, without the approval of the Company’s Board of Directors, beneficial ownership of 4.9% or more of the Company’s securities, defined to include: (i) shares of its Class A common stock and Class B common stock, (ii) shares of its preferred stock, (iii) warrants, rights, or options to purchase its securities, and (iv) any interest that would be treated as “stock” of the Company for purposes of Section 382 or pursuant to Treasury Regulation § 1.382-2T(f)(18).
Holders of 4.9% or more of the Company’s securities outstanding as of the close of business on January 29, 2010 will not trigger the Tax Benefits Plan so long as they do not (i) acquire additional securities constituting one-half of one percent (0.5%) or more of the Company’s securities outstanding as of the date of the Tax Benefits Plan (as adjusted to reflect any stock splits, subdivisions and the like), or (ii) fall under 4.9% ownership of the Company’s securities and then re-acquire securities that increase their ownership to 4.9% or more of the Company’s securities. The Board of Directors may exempt certain persons whose acquisition of securities is determined by the Board of Directors not to jeopardize the Company’s tax benefits or to otherwise be in the best interest of the Company and its shareholders. The Board of Directors may also exempt certain transactions.