Taxes

Under the Plan, the Company’s pre-petition equity, bank related debt and certain other obligations were cancelled and extinguished. Absent an exception, a debtor recognizes cancellation of debt income (CODI) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. In accordance with Internal Revenue Code (IRC) Section 108, the Company excluded the amount of discharged indebtedness from taxable income since the IRC provides that a debtor in a bankruptcy case may exclude CODI from income but must reduce certain tax attributes by the amount of CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less than the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued, and (iii) the fair market value the fair market value of any other consideration, including equity, issued.

CODI from the discharge of indebtedness was $3,353 million. As a result of the CODI and in accordance with IRC rules, the Company reduced its gross federal net operating loss (NOL) carryovers $3,015 million, its alternative minimum tax (AMT) credits $92 million, its capital loss carryforwards $59.2 million and the tax basis in certain assets $3.2 million. The Company was able to retain $931.1 million of gross federal NOLs, $22.8 million of AMT credit and $5.9 million of capital loss carryforwards following the bankruptcy.

Due to changes in ownership that occurred in connection with the Company’s emergence from bankruptcy, there was a change in ownership for purposes of IRC Section 382. Section 382 provides a combined annual limitation with respect to the ability of a corporation to use its NOLs, AMT credits and capital loss carryforwards generated before the ownership change against future taxable income. The Company’s annual limit under IRC section 382 is estimated to be $29.8 million. The Company had a net unrealized built-in gain at the time of the ownership change, therefore, certain built-in gains recognized within five years after the ownership change will increase the annual IRC section 382 limit for the five year recognition period beginning October 1, 2016 through September 30, 2021. There is significant uncertainty surrounding which assets with built-in gain will be realized within the five year period following the Company’s emergence from bankruptcy and allow the Company to realize the incremental net operating losses and credit in excess of the base 382 limitation. The Company is reflecting a deferred tax asset for the full amount of the net operating losses and credit carryforwards. If at some point in time it becomes evident that some portion of the deferred tax assets will not be realizable, the deferred tax asset, and offsetting valuation allowance will be reduced.

The Company is subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. The tax years 2002 through 2016 remain open to examination for U.S. federal income tax matters and 2004 through 2016 remain open to examination for various state income tax matters.

Significant components of the provision for (benefit from) income taxes are as follows:



	Successor			Predecessor
	October 2 through December 31, 2016			January 1 through October 1, 2016			Year Ended December 31, 2015			Year Ended December 31, 2014
(In thousands)
Current:
Federal	$	—		$	—		$	—		$	—
State	(252		)	7			3			25
Total current	(252		)	7			3			25
Deferred:
Federal	1,352			(4,720		)	(329,393		)	18,535
State	56			87			(43,990		)	7,074
Total deferred	1,408			(4,633		)	(373,383		)	25,609
	$	1,156		$	(4,626	)	$	(373,380	)	$	25,634

A reconciliation of the statutory federal income tax provision (benefit) at the statutory rate to the actual provision for (benefit from) income taxes follows:



	Successor			Predecessor
	October 2 through December 31, 2016			January 1 through October 1, 2016			Year Ended December 31, 2015			Year Ended December 31, 2014
(In thousands)
Income tax provision (benefit) at statutory rate	$	12,112		$	433,109		$	(1,150,283	)	$	(186,452	)
Percentage depletion allowance	(4,292		)	(3,681		)	(19,035		)	(12,692		)
State taxes, net of effect of federal taxes	633			(46,122		)	(76,445		)	(3,903		)
Reversal of cancellation of indebtedness income	—			(1,493,162		)	—			—
Worthless stock deduction	—			(80,077		)	—			—
Change in valuation allowance	(7,655		)	1,185,326			865,146			226,929
Other, net	358			(19		)	7,237			1,752
	$	1,156		$	(4,626	)	$	(373,380	)	$	25,634

Significant components of the Company’s deferred tax assets and liabilities that result from carryforwards and temporary differences between the financial statement basis and tax basis of assets and liabilities are summarized as follows:



	Successor			Predecessor
	December 31, 2016			December 31, 2015
(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	376,293		$	1,086,332
Alternative minimum tax credit carryforwards	22,798			120,994
Investment in tax partnerships & corporations	604,914			—
Reclamation and mine closure	—			121,276
Goodwill	5,135			38,671
Workers’ compensation	—			42,835
Share based compensation	—			22,612
Sales contracts	—			17,466
Retiree benefit plans	4,013			16,996
Advance royalties	—			18,751
Losses from disposed operations resulting from Patriot Coal bankruptcy	—			39,287
Other, primarily accrued liabilities	30,103			45,303
Gross deferred tax assets	1,043,256			1,570,523
Valuation allowance	(1,021,553		)	(1,135,399		)
Total deferred tax assets	21,703			435,124
Deferred tax liabilities:
Plant and equipment	7,332			389,169
Deferred development	—			41,047
Sales contracts	12,658			—
Other	1,600			4,706
Total deferred tax liabilities	21,590			434,922
Net deferred (asset) liability	(113		)	(202		)

The Company has gross federal net operating loss carryforwards for regular income tax purposes of $931.1 million at December 31, 2016 that will expire between 2022 and 2036. The Company has an alternative minimum tax credit carryforward of $22.8 million at December 31, 2016, which has no expiration date and can be used to offset future regular tax in excess of the alternative minimum tax. The future annual usage of NOLs and AMT credit will be limited under IRC section 382.

As part of our efforts to create operational efficiency leading up to and through the bankruptcy process, we have consolidated our mining operations and land management into a partnership structure to match our legal form with the Company’s streamlined operations during 2016. As such, deferred taxes related to those operations are now reported based upon the book and tax outside basis difference in the partnership interests as provided in ASC 740-30-25-7, which results in a different basis of presentation that was used in 2015 under our prior legal structure.

As recent cumulative losses constitute significant negative evidence with regards to future taxable income, the Company has relied solely on the expected reversal of taxable temporary differences to support the future realization of its deferred tax assets. The Company performs a detailed scheduling process of its net taxable temporary differences.

At December 31, 2014, all deductible temporary differences were expected to be realized as there were sufficient deferred tax liabilities within the same jurisdiction and of the same character that are available to offset them. Valuation allowances were established for federal and state net operating losses and tax credits that were not offset by the reversal of other net taxable temporary differences before the expiration of the attribute.

At December 31, 2015, additional losses were realized relating primarily to financial conditions and asset impairment charges. As a result, the expected reversal of taxable temporary differences were not sufficient to support the future realization of the deferred tax assets and an additional $865.1 million valuation allowance was recorded. Net deferred tax assets of $1,135 million were completely offset by a valuation allowance.

At December 31, 2016, additional tax losses were realized primarily as a result of the non-recognition of CODI under section 108 of the IRC by the Predecessor entity. As a result, the expected reversal of taxable temporary differences were not sufficient to support the future realization of the deferred tax assets and an additional $1,185 million valuation allowance was recorded to the provision. Offsetting this increase was a net reduction in the valuation allowance of $1,289 million which did not impact the provision. This reduction was primarily the result of a decrease in NOLs and AMT credits due to the IRC section 108 offset rules. Net deferred tax assets of $1,022 million are completely offset by a valuation allowance.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:



		(In thousands)
Balance at	January 1, 2014	$	31,789
Additions based on tax positions related to the current year		2,920
Balance at	December 31, 2014	34,709
Additions based on tax positions related to the current year		4,168
Balance at	December 31, 2015	38,877
Additions for tax positions of prior years		2,979
Additions for tax positions related to the current year		2,709
Reductions as a result of bankruptcy		(37,110		)
Balance at	December 31, 2016	$	7,455

If recognized, the entire amount of the gross unrecognized tax benefits at December 31, 2016 would affect the effective tax rate.

As a result of the bankruptcy, federal and state governments are precluded from assessing additional tax in audits of tax periods ending prior to bankruptcy. As a result, the Company has released $37.1 million of gross unrecognized tax benefits for years 2015 and prior. These gross unrecognized tax benefits are fully offset by a corresponding release in valuation allowance.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued interest and penalties of $0.5 million and $1.7 million at December 31, 2016 and 2015, respectively. In the next 12 months, no gross unrecognized tax benefits are expected to be reduced due to the expiration of the statute of limitations.