Income Taxes

The components of income tax expense (benefit) from continuing operations are (in thousands):



	For the Year Ended December 31,
	2017			2016
Current:
Federal	$	(1	)	$	(14	)
State and local	15			(7		)
Total current	$	14		$	(21	)

Below is a reconciliation of the expected federal income tax expense (benefit) using the federal statutory tax rate of 35% to the Company’s actual income tax benefit and resulting effective tax rate (in thousands).



	For the Year Ended December 31,
	2017			2016
Income tax (benefit) at statutory rate	$	(3,802	)	$	1,129

State income taxes, net of federal tax benefit	(54		)	211
Valuation allowance	(131,234		)	14,595
Change in federal tax rate	33,640			—
Change in state tax rate	100,899			(16,475		)
Bankruptcy reorganization	746			437
Uncertain tax positions	(4		)	(35		)
Other	(177		)	117
Total income tax expense (benefit)	$	14		$	(21	)

In 2017, the federal statutory rate for periods beginning after December 31, 2017 was changed to 21%. This change in rate caused a significant change to the Company's deferred tax assets as they pertain to its net operating losses ("NOLs"). The 2017 change in deferred tax assets related to the federal NOLs was $100.9 million in the current year. This was offset by a decrease in the valuation allowance by $100.9 million. Prior to 2016, the Company concluded that it was no longer more likely than not that it would realize a portion of its deferred tax assets. Therefore, the Company maintained a full valuation allowance against its net deferred tax assets as of both December 31, 2017 and 2016.

The Company's determination of the realizable deferred tax assets requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. The Company will continue to assess the need for a valuation allowance in future periods. As of December 31, 2017 and 2016, the Company maintained a valuation allowance of $162.7 million and $292.2 million, respectively, for its deferred tax assets.

In 2017, due to the purchase of HCS, the Company reassessed their state apportionment rates. Based on available information, the Company changed the apportionment factors, specifically the apportionment factor used for allocation of income to the State of Missouri. In this reassessment, the Company determined that as of December 31, 2017 it was no longer appropriate to apportion 100% of the Federal NOL to the state of Missouri, but rather the company would apportion approximately 13%. As a result of this reassessment, the Company recalculated the deferred tax assets which resulted in the reduction of the deferred tax asset related to state NOLs totaling approximately $33.6 million in the current year. This was offset by a decrease in the valuation allowance of approximately $33.6 million. Significant components of the Company’s deferred tax assets and liabilities are (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Basis difference – investments	$	8,015		$	17,261
Federal NOL carryforwards	145,608			239,942
State NOL carryforwards	8,301			35,896
Other	2,756			2,816
Gross deferred tax asset	164,680			295,915
Valuation allowance	(162,708		)	(292,214		)
Deferred tax asset	1,972			3,701
Deferred tax liabilities:
Other	1,972			3,701
Deferred tax liability	1,972			3,701
Net deferred tax asset	$	—		$	—

As of December 31, 2017, the Company had a federal NOL of approximately $692.0 million, including $307.3 million in losses on mortgage securities that have not been recognized for income tax purposes. The federal NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code (the "Code"). If not used, these NOLs will expire in years 2025 through 2037. The Company has state NOL carryforwards arising from both combined and separate filings from as early as 2004. The state NOL carryforwards may expire as early as 2017 and as late as 2037.

The activity in the accrued liability for unrecognized tax benefits, included in other current liabilities, was (in thousands):



	For the Year Ended December 31,
	2017			2016
Beginning balance	$	331		$	368
Gross increases – tax positions in current period	22			2
Lapse of statute of limitations	(25		)	(39		)
Ending balance	$	328		$	331

As of December 31, 2017 and 2016, the total gross amount of unrecognized tax benefits was $0.3 million, which also represents the total amount of unrecognized tax benefits that would impact the effective tax rate. The Company anticipates a reduction of unrecognized tax benefits of less than $0.1 million due the lapse of statute of limitations in the next twelve months. The Company does not expect any other significant change in the liability for unrecognized tax benefits in the next twelve months. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. The benefit for interest and penalties recorded in income tax expense was not significant for 2017 and 2016. There were accrued interest and penalties of less than $0.1 million as of both December 31, 2017 and 2016. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and local jurisdictions. Tax years 2013 to 2017 remain open to examination for both U.S. federal income tax and major state tax jurisdictions.