Income Taxes

The components of loss from continuing operations before income taxes were as follows:



	Years Ended December 31,
	2017			2016
	(In millions)
U.S.	$	(29.4	)	$	(34.9	)
International	0.7			(4.8		)
Total	$	(28.7	)	$	(39.7	)

The components of the income tax (provision) benefit from continuing operations were as follows:



	Years Ended December 31,
	2017			2016
	(In millions)
Current
Federal	$	5.9		$	—
International	(0.1		)	(0.1		)
Deferred
International	—			—
Total	$	5.8		$	(0.1	)

The income tax provision from continuing operations differs from the amount computed by applying the statutory United States income tax rate (35 percent) because of the following items, stated before reduction of the minority interest:



	Years Ended December 31,
	2017			2016
	(In millions)
Tax at statutory U.S. tax rate	$	10.0		$	13.9
State income taxes, net of federal benefit	1.0			0.7
Net effect of international operations	1.2			(0.8		)
Federal rate reduction effect on deferred tax assets	(104.9		)	—
Valuation allowances	91.8			(14.3		)
Tax on unremitted earnings of foreign subsidiaries	5.1			3.1
U.S. tax on foreign earnings	(0.2		)	(0.8		)
Stock-based compensation	(0.9		)	(1.6		)
Uncertain tax positions	—			(0.1		)
Goodwill impairment	(1.4		)	—
Minimum tax credit refundable	2.2			—
Reclassification to discontinued operations and other	1.9			(0.2		)
Income tax (provision) benefit	$	5.8		$	(0.1	)

The largest amount in the rate reconciliation was the federal tax rate reduction effect on deferred assets (primarily federal net operating loss carryforwards), which were revalued to reflect the decrease in the corporate tax rate from 35% to 21% beginning in 2018. Because these deferred assets had a full valuation allowance, adjustments were also made to the valuation allowances.

Other tax legislation from the Tax Cuts and Jobs Act (“Tax Reform Act”) passed on December 22, 2017 was also incorporated into the tax provision. The Tax Reform Act made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

A tax law change that had a significant impact on the Company's 2017 tax provision is the ability to realize minimum tax credit carryovers as cash refunds, with the elimination of the corporate alternative minimum tax. The Company’s minimum tax credit carryover previously had a full valuation allowance. A tax benefit of $2.2 million was recorded in continuing operations and will be received as a cash refund with the filing of the 2018 through 2021 corporate income tax returns ($1 million in 2019, $.5 million in 2020, and $.3 million in each of 2021 and 2022). Nexsan also recorded a $.1 million benefit for its minimum tax credit cash refund to be received in years 2019 through 2022.

Tax reform changes related to international subsidiaries did not impact the tax provision. The Deemed Repatriation Transition Tax on previously untaxed accumulated and current earnings and profits of foreign subsidiaries is zero for the Company. This is because the calculation allows deficits of controlled subsidiaries to offset earnings of other controlled subsidiaries, which resulted in a net deficit in unrepatriated earnings and therefore no tax.

Other tax law changes affected financial statement presentation without a current tax impact. Tax laws require certain items to be included in our tax returns at different times than the items are reflected in our results of operations. Some of these items are temporary differences that will reverse over time. We record the tax effect of temporary differences as deferred tax assets and deferred tax liabilities in our Consolidated Balance Sheets.

In 2017 and 2016 the net cash paid for income taxes, relating to both continuing and discontinued operations, was $0.0 million and $0.1 million, respectively.

The components of net deferred tax assets and liabilities were as follows:



	As of December 31,
	2017			2016
	(In millions)
Accounts receivable allowances	$	—		$	0.4
Inventories	1.9			3.7
Compensation and employee benefits	1.5			3.9
Tax credit carryforwards	23.9			28.4
Net operating loss carryforwards	190.9			278.6
Accrued liabilities and other reserves	2.1			6.1
Pension	6.7			8.6
Property, plant and equipment	(0.1		)	0.5
Intangible assets, net	0.3			—
Capital losses	9.4			14.1
Other, net	1.3			1.3
Total deferred tax assets	237.9			345.6
Valuation allowance	(237.9		)	(340.5		)
Net deferred tax assets	—			5.1
Intangible assets, net	—			(1.2		)
Unremitted earnings of foreign subsidiaries	(1.0		)	(6.1		)
Total deferred tax liabilities	(1.0		)	(7.3		)
Valuation allowance	—			1.2
Total deferred tax liabilities	(1.0		)	(6.1		)
Net deferred tax liabilities	$	(1.0	)	$	(1.0	)

We regularly assess the likelihood that our deferred tax assets will be recovered in the future. A valuation allowance is recorded to the extent we conclude a deferred tax asset is not considered more-likely-than-not to be realized. We consider all positive and negative evidence related to the realization of the deferred tax assets in assessing the need for a valuation allowance.

Our accounting for deferred tax consequences represents our best estimate of future events. A valuation allowance established or revised as a result of our assessment is recorded through income tax provision in our Consolidated Statements of Operations. Changes in our current estimates due to unanticipated events, or other factors, could have a material effect on our financial condition and results of operations.

We maintain a valuation allowance related to our U.S. deferred tax assets and the majority of our foreign deferred tax assets. The valuation allowance was $237.9 million and $339.3 million as of December 31, 2017 and 2016, respectively. The deferred tax asset changes and corresponding valuation allowance changes in 2017 compared to 2016 were due primarily to restating the tax benefit associated with federal net operating loss carryovers at 60% of their former amount, due to the federal tax rate reduction of 35% to 21% effective for 2018 and future years. We also eliminated the minimum tax credit carryover and associated valuation allowance, and the ASC 740-10-25-3 (formerly known as APB23) liability for US tax on unrepatriated earnings and the associated valuation allowance, as will be discussed subsequently.

In November 2015, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which amends the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. This accounting guidance simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This determination is still required to be performed at a jurisdiction-by-jurisdiction basis. This accounting guidance is effective for the Company beginning in the first quarter of 2017, but we elected to adopt this guidance prospectively as of December 31, 2015. As a result, we classified all deferred tax liabilities and assets as non-current in the Consolidated Balance Sheet at December 31, 2015. The table below shows the components of our deferred tax balances as they are recorded on our Consolidated Balance Sheets:



	As of December 31
	2017			2016
	(In millions)
Deferred tax liability - non-current	(1.0		)	(1.0		)
Total	$	(1.0	)	$	(1.0	)

Federal net operating loss carryforwards totaling $673.0 million will begin expiring in 2026. This figure includes $587.5 million for GlassBridge and its wholly owned subsidiaries, and $85.5 million related to Nexsan of which $27.9 million are subject to limitations imposed by Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended (the “Code”). The Company has had analysis performed by outside consultants to confirm that none of the federal net operating loss carryovers, other than the aforementioned Nexsan pre-acquisition losses, are limited by Section 382. This limitation could result if there is a more than 50 percent ownership shift in the GlassBridge shares within a three year testing period. No such ownership shift has occurred through December 31, 2017.

The Company’s $673.0 million in federal net operating loss carryforwards continue to be subject to the historical tax rules that allow carryforward for 20 years from origin, with the ability to offset 100 percent of future taxable income. Any net operating losses generated by the Company after December 31, 2017 will be subject to the Tax Reform Act limitations which, while having indefinite life, can offset only 80 percent of future taxable income.

We have state income tax loss carryforwards of $513.3 million, which will expire at various dates up to 2037. We have U.S. and foreign tax credit carryforwards of $22.8 million, $3.0 million of which will expire between 2018 and 2020, and the remainder of which will expire between 2021 and 2032. Federal capital losses of $37.7 million will expire between 2018 and 2021. Of the aggregate foreign net operating loss carryforwards totaling $95.5 million, $1.1 million will expire between 2018 and 2020, $42.4 million will expire at various dates up to 2026 and $52.0 million may be carried forward indefinitely.

During the fourth quarter of 2014, the Company changed its assertion related to the permanent reinvestment of foreign unremitted earnings due to its reassessment of possible future cash needs associated with the continued execution of its strategic transformation. Accordingly, the permanent reinvestment assertion of foreign unremitted earnings was removed and a deferred tax liability was recorded for the estimated impact of future repatriation of the unremitted foreign earnings. Due to the one-time Deemed Repatriation Transition Tax calculation required by the Tax Reform Act, resulting in a net foreign earnings deficit, we removed both the deferred tax liability for unremitted earnings of subsidiaries with positive earnings and profits, and the related valuation allowance. All that remains as a deferred tax liability as of December 31, 2017 is a $1.0 million liability related to foreign tax withholding, assuming such repatriation were to occur.

Our income tax returns are subject to review by various U.S. and foreign taxing authorities. As such, we record accruals for items that we believe may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position in the financial statements is that the position must be more-likely-than-not to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be realized.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2017			2016
	(In Millions)
Beginning Balance	$	1.3		$	1.7
Additions:
Additions for tax positions of current years	—			—
Additions for tax positions of prior years	—			—
Reductions:
Reductions for tax positions of prior years	—			—
Settlements with taxing authorities	—			—
Reductions due to lapse of statute of limitations	(0.4		)	(0.4		)
Total	0.9			1.3

The total amount of unrecognized tax benefits as of December 31, 2017 was $0.9 million. If the unrecognized tax benefits remaining at December 31, 2017 were recognized in our consolidated financial statements, $0.9 million would ultimately affect income tax expense and our related effective tax rate.

It is reasonably possible that the amount of the unrecognized tax benefits could increase or decrease significantly during the next twelve months; however, it is not possible to reasonably estimate the effect on the unrecognized tax benefit at this time.

Our federal income tax returns for 2014 through 2017 are subject to examination by the Internal Revenue Service. We currently have foreign tax audits underway in various jurisdictions. Based on available information, the uncertain tax position associated with these foreign audits have been assessed and included in our income tax provision. For state and foreign tax purposes, the statutes of limitation vary by jurisdiction. With few exceptions, we are no longer subject to examination by foreign tax jurisdictions or state and local tax jurisdictions for years before 2011.