(9) Income Taxes
The following is an analysis of the consolidated income tax provision (benefit):
|
|
|
For the Years Ended December 31, |
|
|||||||||||
|
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|||||
|
|
|
(In thousands)
|
|
|||||||||||
|
Current - Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(19,086 |
) |
||
|
- State |
|
|
804 |
|
|
|
64 |
|
|
|
136 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Deferred - Federal |
|
|
(149,171 |
) |
|
|
— |
|
|
|
— |
|
||
|
- State |
|
|
(6,078 |
) |
|
|
7,105 |
|
|
|
1,006 |
|
||
|
|
|
$ |
(154,445 |
) |
|
$ |
7,169 |
|
|
$ |
(17,944 |
) |
||
|
|
||||||||||||||
|
|
||||||||||||||
Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. The difference between the Company's effective tax rate and the 35% federal statutory rate for 2015 to 2017 and 21% for 2018 and future years is caused by the elimination of the corporate alternative minimum tax pursuant to the Tax Cuts and Jobs Act enacted on December 22, 2017, non-deductible stock compensation, state taxes and the establishment of a valuation allowance on deferred taxes. The impact of these items varies based upon the Company's full year loss and the jurisdictions that are expected to generate the projected losses.
In recording deferred income tax assets, the Company considers whether it is more likely than not that its deferred income tax assets will be realized in the future. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. The Company believes that after considering all the available objective evidence, historical and prospective, with greater weight given to historical evidence, management is not able to determine that it is more likely than not that all of its deferred tax assets will be realized. As a result, the Company established valuation allowances for its deferred tax assets and U.S. federal and state net operating loss carryforwards that are not expected to be utilized due to the uncertainty of generating taxable income prior to the expiration of the carryforward periods.
The Company will continue to assess the valuation allowances against deferred tax assets considering all available information obtained in future periods.
The difference between the customary rate of 35% for 2015 to 2017 and the effective tax rate on losses is due to the following:
|
|
|
For the Years Ended December 31, |
|
|||||||||
|
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|||
|
|
|
(In thousands)
|
|
|||||||||
|
Tax benefit at statutory rate |
|
$ |
(420,544 |
) |
|
$ |
(44,788 |
) |
|
$ |
(45,272 |
) |
|
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of the Tax Cuts and Jobs Act net of |
|
|
— |
|
|
|
— |
|
|
|
(19,086 |
) |
|
Valuation allowance on deferred tax assets |
|
|
283,585 |
|
|
|
69,890 |
|
|
|
41,116 |
|
|
State income taxes, net of federal benefit |
|
|
(18,218 |
) |
|
|
(18,860 |
) |
|
|
(892 |
) |
|
Nondeductible stock-based compensation |
|
|
539 |
|
|
|
73 |
|
|
|
1,408 |
|
|
Net operating loss expirations |
|
|
— |
|
|
|
— |
|
|
|
1,548 |
|
|
Other |
|
|
193 |
|
|
|
854 |
|
|
|
3,234 |
|
|
Total |
|
$ |
(154,445 |
) |
|
$ |
7,169 |
|
|
$ |
(17,944 |
) |
|
|
|
For the Years Ended December 31, |
|
|||||||||
|
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|||
|
Tax at statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of the Tax Cuts and Jobs Act net of |
|
|
— |
|
|
|
— |
|
|
|
14.8 |
|
|
Valuation allowance on deferred tax assets |
|
|
(23.5 |
) |
|
|
(54.6 |
) |
|
|
(31.8 |
) |
|
State taxes, net of federal tax benefit |
|
|
1.4 |
|
|
|
14.7 |
|
|
|
0.7 |
|
|
Nondeductible compensation |
|
|
— |
|
|
|
(0.1 |
) |
|
|
(1.1 |
) |
|
Net operating loss expirations |
|
|
— |
|
|
|
— |
|
|
|
(1.2 |
) |
|
Other |
|
|
— |
|
|
|
(0.6 |
) |
|
|
(2.5 |
) |
|
Effective tax rate |
|
|
12.9 |
% |
|
|
(5.6 |
%) |
|
13.9 |
% |
|
The tax effects of significant temporary differences representing the net deferred tax liability at December 31, 2016 and 2017 were as follows:
|
|
|
2016 |
|
|
2017 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Property and equipment |
|
$ |
10,536 |
|
|
$ |
— |
|
|
Asset retirement obligation |
|
|
4,628 |
|
|
|
3,489 |
|
|
Net operating loss carryforwards |
|
|
339,914 |
|
|
|
289,803 |
|
|
Alternative minimum tax carryforward |
|
|
20,435 |
|
|
|
1,349 |
|
|
Unrealized hedging loss |
|
|
2,110 |
|
|
|
— |
|
|
Gain on debt exchange and |
|
|
16,169 |
|
|
|
4,336 |
|
|
Other |
|
|
8,523 |
|
|
|
3,782 |
|
|
|
|
|
402,315 |
|
|
|
302,759 |
|
|
Valuation allowance on deferred tax assets |
|
|
(398,120 |
) |
|
|
(298,539 |
) |
|
Deferred tax assets |
|
|
4,195 |
|
|
|
4,220 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
(9,203 |
) |
|
|
(11,878 |
) |
|
Unrealized hedging income |
|
|
— |
|
|
|
(277 |
) |
|
Other |
|
|
(4,118 |
) |
|
|
(2,331 |
) |
|
Deferred tax liabilities |
|
|
(13,321 |
) |
|
|
(14,486 |
) |
|
Net deferred tax liability |
|
$ |
(9,126 |
) |
|
$ |
(10,266 |
) |
At December 31, 2017, Comstock had the following carryforwards available to reduce future income taxes:
|
Types of Carryforward |
|
|
Years of |
|
Amount |
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Net operating loss - U.S. federal |
|
|
2018-2037 |
|
$ |
923,736 |
|
|
Net operating loss – state taxes |
|
|
2020-2037 |
|
$ |
1,517,214 |
|
|
Alternative minimum tax credits |
|
|
Unlimited |
|
$ |
1,349 |
|
At December 31, 2017, the Company had $923.7 million in U.S. federal net operating loss carryforwards and $1.5 billion in certain state net operating loss carryforwards. A valuation allowance has been established against all of the federal loss carryforwards and $1.4 billion of the state loss carryforwards due to the uncertainty of generating future taxable income prior to the expiration of the net operating loss carryforward periods. During 2017 the Company established an additional valuation allowance of $41.1 million for its estimated U.S. federal and state net operating loss carryforwards and other deferred tax assets that are not expected to be utilized due to uncertainty of generating taxable income prior to the expiration of the respective state carry-over periods, and $1.5 million of the Company's federal net operating losses expired.
The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, reduced the corporate income tax rate effective January 1, 2018 from 35% to 21%. Among the other significant tax law changes that potentially affect the Company are the elimination of the corporate alternative minimum tax ("AMT"), changes that require operating losses incurred in 2018 and beyond be carried forward indefinitely with no carryback up to 80% of taxable income in a given year, and limitations on the deduction for interest expense incurred in 2018 or later of up to 70% of its taxable income for the taxable year. The Tax Cuts and Jobs Act preserved deductibility of intangible drilling costs for federal income tax purposes, which allows the Company to deduct a portion of drilling costs in the year incurred and minimizes current taxes payable in periods of taxable income. At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Tax Cuts and Jobs Act; however, it has made reasonable estimates of the effects on its existing deferred tax balances. The Company has remeasured certain deferred federal tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The provisional amount recognized related to the remeasurement of its deferred federal tax balance was $140.4 million, which was subject to a valuation allowance at December 31, 2017. The Tax Cuts and Jobs Act also repealed the AMT for tax years beginning on or after January 1, 2018 and provides that existing AMT credit carryforwards can be utilized to offset federal taxes for any taxable year. In addition, 50% of any unused AMT credit carryforwards can be refunded during tax years 2018 through 2020. The Company accordingly reversed the valuation allowance on its AMT credit carryforward of $19.1 million that will now be refundable through 2021 and has reclassified this amount from a deferred tax asset to a non-current receivable. The Company is still analyzing certain aspects of the Tax Cuts and Jobs Act, and refining its calculations, which could potentially affect the measurement of those balances or potentially give rise to new deferred tax amounts. Comstock's estimates may also be affected in the future as the Company gains a more thorough understanding of the Tax Cuts and Jobs Act, and how the individual states are implementing this new law.
Future use of the Company's federal and state net operating loss carryforwards may be limited in the event that a cumulative change in the ownership of Comstock's common stock by more than 50% occurs within a three-year period. Such a change in ownership would result in a substantial portion of Comstock's net operating loss carryforwards being eliminated or becoming restricted, and the Company would need to recognize additional valuation allowances reflecting the restricted use of the net operating loss carryforwards in the period when such an ownership change occurred. It is highly likely that a change in ownership that would result from conversion of the Company's convertible notes would result in limits on the future use of its net operating loss carryforwards.
The Company's federal income tax returns for the years subsequent to December 31, 2013 remain subject to examination. The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2012. The Company currently believes that its significant filing positions are highly certain and that all of its other significant income tax filing positions and deductions would be sustained upon audit or the final resolution would not have a material effect on the consolidated financial statements. Therefore, the Company has not established any significant reserves for uncertain tax positions. Interest and penalties resulting from audits by tax authorities have been immaterial and are included in the provision for income taxes in the consolidated statements of operations.