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 $4,089 million. As a result of the CODI and in accordance with IRC rules, the Company reduced its gross federal net operating loss (NOL) carryovers $3,436 million and its alternative minimum tax (AMT) credits $3 million and the gross basis in timing deferreds $646.3 million. The Company was able to retain $1,384 million of gross federal NOLs, $73.3 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.

During 2018, the IRS completed an audit of AMT NOL carryback claims the Company filed in prior periods. In addition, the Company filed an amended 2016 tax return which changed the amount of available tax attributes and the mix used to offset its bankruptcy CODI as of January 1, 2017. As a result, the Company increased available AMT credits and reduced other tax attributes as of that date. The AMT credits do not require a valuation allowance to be recorded against them due to the law changes enacted as part of the Tax Cut and Jobs Act of 2017 (“The Act”), while the Company’s other tax attributes are fully offset by a valuation allowance. The associated valuation allowance release related to the shift in attributes reflects what the Company believes will be realized upon audit of the amended tax return filing. The Company anticipates that all AMT credits will be converted to cash in the next four years as provided by The Act. In total, these changes resulted in a recorded benefit from income taxes of $48.8 million, which was net of a $26.6 million uncertain tax position charge.

The Company is subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. The tax years 2002 through 2018 remain open to examination for U.S. federal income tax matters and 2002 through 2018 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, 2018			Year Ended December 31, 2017			October 2 through December 31, 2016			January 1 through October 1, 2016
(In thousands)
Current:
Federal	$	86		$	835		$	—		$	—
State	136			31			(252		)	7
Total current	$	222		$	866		$	(252	)	$	7
Deferred:
Federal	(52,309		)	(36,162		)	1,352			(4,720		)
State	(389		)	41			56			87
Total deferred	$	(52,698	)	$	(36,121	)	$	1,408		$	(4,633	)
	$	(52,476	)	$	(35,255	)	$	1,156		$	(4,626	)

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, 2018			Year Ended December 31, 2017			October 2 through December 31, 2016			January 1 through October 1, 2016
(In thousands)
Income tax provision (benefit) at statutory rate	$	54,621		$	71,118		$	12,112		$	433,109
Percentage depletion allowance	(17,725		)	(31,255		)	(4,292		)	(3,681		)
State taxes, net of effect of federal taxes	4,480			7,002			633			(46,122		)
Reversal of cancellation of indebtedness income	—			—			—			(1,493,162		)
Worthless stock deduction	—			—			—			(80,077		)
Change in valuation allowance	(79,961		)	(410,983		)	(7,655		)	1,185,326
Impact of Tax Cuts and Jobs Act of 2017	(17,645		)	332,345			—			—
Other, net	3,754			(3,482		)	358			(19		)
Provision for (benefit from) income taxes	$	(52,476	)	$	(35,255	)	$	1,156		$	(4,626	)

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, 2018			December 31, 2017
(In thousands)
Deferred tax assets:
Tax loss carryforwards	$	307,615		$	271,405
Tax credit carryforwards	5,394			29,736
Investment in partnerships	193,217			308,653
Other	28,747			28,321
Gross deferred tax assets	$	534,973		$	638,115
Valuation allowance	(530,612		)	(610,571		)
Total deferred tax assets	$	4,361		$	27,544
Deferred tax liabilities:
Plant and equipment	3,037			3,674
Other	1,154			1,351
Total deferred tax liabilities	$	4,191		$	5,025
Net deferred tax asset	$	170		$	22,519

The Company has gross federal NOL carryforwards for regular income tax purposes of $1.3 billion at December 31, 2018 that will expire between 2022 and 2037. The Company has an AMT credit carryforward of $61.1 million net of a $26.6 million uncertain tax position charge at December 31, 2018, which has no expiration date and will be refunded during 2019 through 2022. The future annual usage of NOLs and AMT credit will be limited under IRC section 382.

As part of an effort to maximize efficiency, the Company 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 reported based upon the book and tax outside basis difference in the partnership interests as provided in ASC 740-30-25-7.

On December 22, 2017, The Act was signed into law making significant changes to the Internal Revenue Code. The Company provided its best estimate of the impact of the Act at December 31, 2017 and during 2018 completed its analysis as provided by SAB 118. The Company has recorded the impact of the Act in its year-end income tax provision in accordance with the guidance and interpretations available. The following items have been impacted by the Act:

•

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 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 in 2017 and $16.7 million of income tax benefit in 2018, related to the 2016 amended return filing, with offsetting valuation allowance adjustments.

•

One-time transition tax on mandatory deemed repatriation of cumulative foreign earnings: The 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.

•

Elimination of the corporate AMT regime: Existing AMT credits as of December 31, 2018 will be refunded during 2019 through 2022. The Company has determined that it will receive a refund of existing AMT credits of approximately $45.0 million, net of a $26.6 million uncertain tax position charge. The valuation allowance previously recorded against these credits was released in 2017. The credits were reflected as a deferred tax asset. In 2018, the credits have been reclassified from a deferred tax asset to short term and long term receivables.

•

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 an amount of $0.2 million of tax expense in 2017 and $6.1 million of tax expense in 2018, with an offsetting valuation allowance adjustment.


•	Other provisions in the Act such as global intangible low-taxed income “GILTI” rules covering foreign income earned in low-tax countries, base-erosion and anti-abuse tax “BEAT,” and the foreign derived intangible income “FDII” deduction will have no material impact on the company

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 $610.6 million valuation allowance fully offsets all net deferred tax assets, other than alternative minimum tax credits.

At December 31, 2018, the valuation allowance related to sequestration on the AMT credits has been released and the credits have been reclassified from deferred tax assets to short and long term receivables, as all AMT credits will be refunded between 2019 through 2022. The impact of the 2016 amended return and finalization of the AMT NOL 10-yr carryback claims also affects NOLs, AMT credits and the investment in partnerships. A $530.6 million valuation allowance fully offsets all net deferred tax assets.

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



		(In thousands)
Balance at	January 1, 2016	$	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 based on tax positions related to the current year		—
Additions for tax positions of prior years		3,928
Reductions as a result of lapses in the statute of limitations		—
Balance at	December 31, 2017	11,383
Additions for tax positions of prior years		28,387
Additions for tax positions related to the current year		3,228
Reductions for tax positions of prior years		(634		)
Reductions as a result of lapses in the statute of limitations		$	(3,271	)
Balance at	December 31, 2018	$	39,093

If recognized, the entire amount of the gross unrecognized tax benefits at December 31, 2018 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 $0.3 million and $0.6 million at December 31, 2018 and 2017, respectively. In the next 12 months, $0.4 million gross unrecognized tax benefits are expected to be reduced due to the expiration of the statute of limitations.