Taxes

In 2016, under the Plan of bankruptcy reorganization, 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 of any other consideration, including equity, issued.

CODI from the discharge of indebtedness was $3,414 million. As a result of the CODI and in accordance with IRC rules, the Company reduced its gross federal net operating loss (NOL) carryovers $3,185 million and its alternative minimum tax (AMT) credits $76 million. The Company was able to retain $957.1 million of gross federal NOLs, $25.6 million of AMT credit and $64.5 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, based on comparing the fair value and carryover tax basis in assets, 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 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 2017 remain open to examination for U.S. federal income tax matters and 2002 through 2017 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
	Year Ended December 31, 2017			October 2 through December 31, 2016			January 1 through October 1, 2016			Year Ended December 31, 2015
(In thousands)
Current:
Federal	$	835		$	—		$	—		$	—
State	31			(252		)	7			3
Total current	866			(252		)	7			3
Deferred:
Federal	(36,162		)	1,352			(4,720		)	(329,393		)
State	41			56			87			(43,990		)
Total deferred	(36,121		)	1,408			(4,633		)	(373,383		)
	$	(35,255	)	$	1,156		$	(4,626	)	$	(373,380	)

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
	Year Ended December 31, 2017			October 2 through December 31, 2016			January 1 through October 1, 2016			Year Ended December 31, 2015
(In thousands)
Income tax provision (benefit) at statutory rate	$	71,118		$	12,112		$	433,109		$	(1,150,283	)
Percentage depletion allowance	(31,255		)	(4,292		)	(3,681		)	(19,035		)
State taxes, net of effect of federal taxes	7,002			633			(46,122		)	(76,445		)
Reversal of cancellation of indebtedness income	—			—			(1,493,162		)	—
Worthless stock deduction	—			—			(80,077		)	—
Change in valuation allowance	(410,983		)	(7,655		)	1,185,326			865,146
Impact of Tax Cuts and Jobs Act of 2017	332,345			—			—			—
Other, net	(3,482		)	358			(19		)	7,237
	$	(35,255	)	$	1,156		$	(4,626	)	$	(373,380	)

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:



	December 31, 2017			December 31, 2016
(In thousands)
Deferred tax assets:
Tax loss carryforwards	$	271,405		$	376,293
Tax credit carryforwards	29,736			22,798
Investment in tax partnerships & corporations	308,653			604,914
Other	28,321			39,251
Gross deferred tax assets	638,115			1,043,256
Valuation allowance	(610,571		)	(1,021,553		)
Total deferred tax assets	27,544			21,703
Deferred tax liabilities:
Plant and equipment	3,674			7,332
Other	1,351			14,258
Total deferred tax liabilities	5,025			21,590
Net deferred tax asset	22,519			113

The Company has gross federal net operating loss carryforwards for regular income tax purposes of $980.2 million at December 31, 2017 that will expire between 2022 and 2037. The Company has an alternative minimum tax credit carryforward of $23.9 million at December 31, 2017, 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 its efforts to create operational efficiency leading up to and through the bankruptcy process, the Company has consolidated its mining operations and land management into a partnership structure to match its 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 than used in 2015 under the Company’s prior legal structure.

Valuation allowances were established in prior years 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 were completely offset by a valuation allowance.

On December 22, 2017 the Tax Cut and Jobs Act of 2017 (“the Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the elimination of the corporate alternative minimum tax regime effective for tax years beginning after December 31, 2017, implementation of a process whereby corporations with unused alternative minimum tax credits will be refunded during 2018-2022, the transition of U.S. international taxation from a worldwide tax system to a territorial system, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, further limitation on the deductibility of certain executive compensation, allowance for immediate capital expensing of certain qualified property, and limitations on the amount of interest expense deductible beginning in 2018.

The Company has not completed its analysis for the income tax effects of the Act but has provided its best estimate of the impact of the Act in its year-end income tax provision in accordance with the guidance and interpretations available as of the date of this filing for the items noted below. The Company anticipates finalizing the analysis for the estimate by December 31, 2018, within the one year measurement period under SAB 118, for the following items:

•

Remeasurement of deferred taxes: deferred tax assets and liabilities attributable to the U.S. were remeasured from 35% to the reduced tax rate of 21%. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $330.9 million of income tax expense, with an offsetting valuation allowance adjustment. Finalization of the remeasurement of deferred taxes will occur upon finalization of 2017 taxable income and attribute carryback claims.

•

One-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings: The provisional amount of income tax expense related to the mandatory deemed repatriation of foreign earnings was $1.5 million based on cumulative foreign earnings of $4.2 million. The deemed repatriation tax is completely offset with net operating loss carryforwards, with an offsetting valuation allowance adjustment and will not result in a cash tax liability. Finalization of 2017 earnings and profits calculations and receipt of further guidance in the form of Notices or Regulations may change the provisional calculation.

•

Elimination of the corporate AMT regime: Existing AMT credits as of December 31, 2017 will be refunded over the next four years. The refund may be subject to a sequestration reduction rate of approximately 6.6%. The Company has provisionally determined that it will receive a refund of existing AMT credits of approximately $22.4 million after an estimated sequestration reduction of $1.5 million. The valuation allowance previously recorded against these credits has been released and a tax benefit of $22.4 million was recorded. The Company’s accounting policy regarding the balance sheet presentation of the AMT credits is to record the balance as a deferred tax asset until a return is filed claiming a refund of a portion of the credit, at which time the amount will be presented as a tax receivable. Finalization of the AMT credit balance will occur upon finalization of 2017 taxable income and attribute carryback claims as well as the receipt of further guidance in the form of Notices or Regulations.

•

Elimination of executive compensation exemptions: The Act made changes to the $1 million limit on deductible compensation paid to certain “covered” employees. The Act eliminated exemptions for qualified performance based compensation and compensation paid after termination and expanded the number of employees to which the limit applies. The Company recorded a provisional amount of $0.2 million of tax expense, with an offsetting valuation allowance adjustment. The Act contains transitional rules, the implementation of which is uncertain at this time. The Company is still analyzing related aspects of the Act including the impact of the transitional rules. The provisional amount detailed above may change when further guidance is released that addresses these rules.

Other provisions in the Act that may impact the company in future years include limitations on interest expense deductions and the global intangible low-taxed income “GILTI” rules covering foreign income earned in low-tax countries. There was no impact recorded for these changes in the 2017 provision. Additional work is necessary to do a more detailed review of the Act, but is anticipated to be completed by December 31, 2018.

At December 31, 2017 additional tax losses were realized primarily as a result of the reversal of deductible temporary differences and percentage depletion. A $35.7 million benefit was recorded from the release of valuation allowance offsetting alternative minimum tax credits that have become refundable by the Act, as well as carryback claims filed in the fourth quarter related to specific liability losses that resulted in claims for refund of previously paid alternative minimum taxes. At December 31, 2017 a $610.5 million valuation allowance fully offsets all net deferred tax assets, other than alternative minimum tax credits.

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



		(In thousands)
Balance at	January 1, 2015	$	34,709
Additions based on tax positions related to the current year		4,168
Balance at	December 31, 2015	38,877
Additions based on tax positions related to the current year		2,979
Additions for tax positions of prior years		2,709
Reductions as a result of lapses in the statute of limitations		(37,110		)
Balance at	December 31, 2016	7,455
Additions for tax positions of prior years		—
Additions for tax positions related to the current year		3,928
Reductions as a result of bankruptcy		—
Balance at	December 31, 2017	$	11,383

If recognized, the entire amount of the gross unrecognized tax benefits at December 31, 2017 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 $0.6 million and $0.5 million at December 31, 2017 and 2016, respectively. In the next 12 months, $3.3 million gross unrecognized tax benefits are expected to be reduced due to the expiration of the statute of limitations.