Effective Tax Rate - Overview

The Company’s effective income tax rate may be impacted by: (1) changes in the level of income in any of the Company’s taxing jurisdictions; (2) changes in the statutes and rules applicable to taxable income in the jurisdictions in which the Company operates; (3) changes in the expected outcome of income tax audits; (4) changes in the estimate of expenses that are not deductible for tax purposes; (5) income taxes in certain states where the states’ current taxable income is dependent on factors other than the Company’s consolidated net income; and (6) adding facilities in states that on average have different income tax rates from states in which the Company currently operates and the resulting effect on previously reported temporary differences between the tax and financial reporting bases of the Company’s assets and liabilities. The Company’s annual effective tax rate may also be materially impacted by tax expense associated with non-amortizable assets such as broadcasting licenses and goodwill and changes in the deferred tax valuation allowance.

An impairment loss for financial statement purposes will result in an income tax benefit during the period incurred as the amortization of broadcasting licenses and goodwill is deductible for income tax purposes.

		Years Ended December 31,
			2016	2015		2014
			(amounts in thousands)

Federal statutory income tax rate			35%		35%		35%

Computed tax expense at federal statutory rates on income
	before income taxes	$	18,501	$	16,667	$	16,357
State income tax expense, net of federal benefit			(5,202)		1,333		2,491
Non-recognition of expense due to full valuation allowance			-		(244)		-
Tax benefit shortfall associated with share-based awards			286		12		62
Nondeductible expenses and other			1,209		669		1,001
Income taxes		$	14,794	$	18,437	$	19,911

For 2016

The effective income tax rate was 28.0%. This rate was lower than the federal statutory rate of 35% primarily due to the combination of: (1) tax benefits associated with legislative changes in certain single member states; (2) a reduction in our valuation allowances against net operating losses in certain single member states as a result of internal restructuring; and (3) the reliance more on share-based awards issued to senior management that are fully deductible for tax purposes.

For 2015

The effective income tax rate was 38.7%. This rate was higher than the federal statutory rate of 35% primarily due to the combination of: (1) an increase in net deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill; (2) an adjustment for expenses that are not deductible for tax purposes; and (3) a tax benefit shortfall associated with share-based awards.

The income tax rate has been trending down as expenses not deductible for tax purposes have decreased due to the issuance to senior management of a higher percentage of awards that were fully deductible for tax purposes. Effective during the second half of 2015, the estimated annual income tax rate increased due to the impact of acquisitions on the Company’s state income apportionments to states with higher income tax rates. This increase was offset by a discrete state income tax credit due to recent legislation that allowed for the release of a partial valuation allowance in a certain single member state.

For 2014

The effective income tax rate was 42.6%. This rate was higher than the federal statutory rate of 35% primarily due to the combination of: (1) an increase in net deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill; (2) an adjustment for expenses that are not deductible for tax purposes; and (3) a tax benefit shortfall associated with share-based awards. In addition, the Company recorded a discrete tax benefit from legislatively reduced income tax rates in certain states.

Deferred Tax Assets And Deferred Tax Liabilities

The income tax accounting process to determine the Company’s deferred tax assets and liabilities involves estimating all temporary differences between the tax and financial reporting bases of the Company’s assets and liabilities based on tax laws and statutory tax rates applicable to the period in which the differences are expected to affect taxable income. These estimates include assessing the likely future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Changes to these estimates could have a future impact on the Company’s financial position or results of operations.

In November 2015, the accounting guidance for balance sheet classification of deferred taxes was modified to present deferred taxes for each jurisdiction as noncurrent on the balance sheet. Previously, deferred taxes were presented for each jurisdiction as a net current asset or liability and net noncurrent asset or liability. The Company elected to early adopt this standard on a prospective basis as of October 1, 2016, as is permitted under the standard. Due to the prospective treatment, prior periods presented in these financial statements have not been retroactively adjusted.

The tax effects of significant temporary differences that comprise the net deferred tax assets and liabilities are as follows:

			December 31,
			2016		2015
			(amounts in thousands)
Deferred tax assets:
	Employee benefits		$	-	$	783
	Deferred compensation			-		988
	Provision for doubtful accounts			-		835
	Deferred gain on tower transaction			-		235
	Other			-		987
	Total current deferred tax assets before valuation allowance			-		3,828
	Valuation allowance			-		(231)
	Total current deferred tax assets - net			-		3,597
	Federal and state income tax loss carryforwards			126,278		129,944
	Share-based compensation			3,145		3,218
	Investments - impairments			499		499
	Lease rental obligations			3,504		3,440
	Deferred compensation			5,307		3,968
	Deferred gain on tower transaction			3,035		3,039
	Property, equipment and certain intangibles (other
		than broadcasting licenses and goodwill)		4,036		4,804
	Advertiser broadcasting obligations			47		-
	Employee benefits			944		-
	Provision for doubtful accounts			795		-
	Other non-current			1,532		1,014
	Total non-current deferred tax assets before valuation allowance			149,122		149,926
	Valuation allowance			(12,861)		(20,407)
	Total non-current deferred tax assets - net		$	136,261	$	129,519
Deferred tax liabilities:
	Advertiser broadcasting obligations		$	-	$	(133)
	Total current deferred tax liabilities			-		(133)
	Deferral of gain recognition on the extinguishment of debt			(3,031)		(4,568)
	Broadcasting licenses and goodwill			(226,128)		(206,594)
	Total non-current deferred tax liabilities			(229,159)		(211,162)
	Total deferred tax liabilities			(229,159)		(211,295)
	Total net deferred tax liabilities		$	(92,898)	$	(78,179)

Valuation Allowance For Deferred Tax Assets

Judgment is required in estimating valuation allowances for deferred tax assets. Deferred tax assets are reduced by a valuation allowance if an assessment of their components indicates that it is more likely than not that all or some portion of these assets will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in the carryforward periods under tax law. The Company periodically assesses the need for valuation allowances for deferred tax assets based on more-likely-than-not realization threshold criteria. In the Company’s assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, forecasts of future profitability, the duration of statutory carryforward periods and any ownership change limitations under Internal Revenue Code Section 382 on the Company’s future income that can be used to offset historic losses.

As changes occur in the Company’s assessments regarding its ability to recover its deferred tax assets, the Company’s tax provision is increased in any period in which the Company determines that the recovery is not probable.

The Company recognizes liabilities for uncertain tax positions based on whether evidence indicates that it is more likely than not that the position will be sustained on audit. It is inherently difficult and subjective to estimate such amounts, as this requires the Company to estimate the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis. Changes in assumptions may result in the recognition of a tax benefit or an additional charge to the tax provision.

The Company classifies interest and penalties that are related to income tax liabilities as a component of income tax expense. The income tax liabilities and accrued interest and penalties are presented as non-current liabilities, as payments are not anticipated within one year of the balance sheet date. These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheets.

The Company’s liabilities for uncertain tax positions are reflected in the following table:

		Years Ended December 31,
		2016		2015		2014
		(amounts in thousands)

Beginning of year balance		$	(7,690)	$	(7,690)	$	(7,690)
Prior year positions
	Gross Increases		-		-		-
	Gross Decreases		-		-		-
Current year positions
	Gross Increases		-		-		-
	Gross Decreases		-		-		-
Settlements with tax authorities			-		-		-
Reductions due to statute lapse			552		-		-
End of year balance		$	(7,138)	$	(7,690)	$	(7,690)

Ending liability balance included above that was
	reflected as an offset to deferred tax assets	$	(7,138)	$	(7,623)	$	(7,623)

The gross amount of the Company’s unrecognized tax benefits is reflected in the above table which, if recognized, would impact the Company’s effective income tax rate in the period of recognition. The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for a number of reasons including the expiration of statutes of limitations, audit settlements and tax examination activities.

Federal And State Income Tax Audits

The Company is subject to federal and state income tax audits from time to time that could result in proposed assessments. Management believes that the Company has made sufficient tax provisions for tax periods that are within the statutory period of limitations not previously audited and that are potentially open for examination by the taxing authorities. Potential liabilities associated with these years will be resolved when an event occurs to warrant closure, primarily through the completion of audits by the taxing jurisdictions, or if the statute of limitations expires. To the extent audits or other events result in a material adjustment to the accrued estimates, the effect would be recognized during the period of the event. There can be no assurance, however, that the ultimate outcome of audits will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.

The Company cannot predict with certainty how these audits will be resolved and whether the Company will be required to make additional tax payments, which may include penalties and interest. During 2010, the Company concluded an audit by the IRS with no proposed adjustment for the tax years of 2004 through 2008. For most states where the Company conducts business, the Company is subject to examination for the preceding three to six years. In certain states, the period could be longer.

Income Tax Payments, Refunds And Credits

The Company paid a $0.2 million Alternative Minimum Tax (“AMT”) associated with expected income subject to tax for 2016, before the offset of available net operating loss carryforwards (“NOLs”). The AMT is available to be carried forward indefinitely to be used as a credit to offset future income tax liabilities.

The following table provides the amount of income tax payments and income tax refunds for the periods indicated:

Net Operating Loss Carryforwards

The Company has recorded a valuation allowance for certain of its state NOLs as the Company does not expect to obtain a benefit in future periods. In addition, utilization in future years of the NOL carryforwards may be subject to limitations due to the changes in ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions.

Windfall tax benefits will be recognized for book purposes and recorded to paid-in capital only when realized. The Company does not recognize a deferred tax asset for unrealized tax benefits associated with the tax deductions in excess of the compensation recorded (excess tax benefit). Effective January 1, 2017 under new accounting guidance, the Company will recognize past and future unrealized tax benefits associated with the excess tax benefit.

The Company applies the “with and without” approach for utilization of tax attributes upon realization of NOLs in the future. This method allocates stock-based compensation benefits last among other tax benefits recognized.

In connection with the Merger, the Company believes it will be limited in its future annual ability to utilize its NOLs due to the ownership change.

The NOLs reflected in the following table exclude these windfall stock compensation deductions. In addition, the NOLs reflect an estimate of the NOLs for the 2016 tax filing year as these returns will not be filed until later in 2017:

Corporate Structure Simplification

To simplify its corporate structure and accounting processes, effective December 31, 2016, the Company merged into Radio one of its wholly-owned subsidiaries that provided financing and lending to other operating affiliates. The upstream merger of this entity with and into Radio was treated as a nontaxable Section 332 liquidation for federal income tax purposes. As a result, no gain or loss was recognized by the subsidiary on the distribution of property to the parent. The tax basis of the property received by Radio was a carryover basis and any tax attributes of the merged subsidiary were carried over to Radio by virtue of IRC Section 381. The upstream merger did not result in any additional federal or state income tax liabilities.

As a result of this upstream merger described above, the Company determined it will be able to utilize a higher percentage of State NOLs prior to their expiration. Therefore, the Company released valuation allowances against its State NOLs in the amount of $4.7 million, thereby reducing its income tax provision in 2016.