18. INCOME TAXES

During the year ended December 31, 2015, the Company recorded an out of period adjustment to reverse its valuation allowance specific to its Washington, D.C. tax positions, resulting in the recognition of a deferred tax benefit of $121, offset by income tax expense of $436, both related to the New Hampshire Avenue project. Because this error was not material to any previously filed consolidated financial statements and the impact of correcting this error in the current fiscal year is not material, the Company recorded the correction in the first quarter of 2015.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recorded valuation allowances for certain tax attributes and other deferred tax assets. At this time, sufficient uncertainty exists regarding the future realization of these deferred tax assets through future taxable income. If, in the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances will be reversed. With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance.

The Company currently has approximately $123 million in federal and state NOLs, which based on current statutory tax rates, have potential fair value of approximately $48 million in tax savings. If unused, these NOLs will begin expiring in 2028. Under Code Section 382 (“Section 382”) rules, if a change of ownership is triggered, the Company’s NOL assets and possibly certain other deferred tax assets may be impaired. We estimate that as of December 31, 2015, the cumulative shift in ownership of the Company’s stock would not cause an impairment of our NOL asset. However, if an ownership change were to occur, the Section 382 limitation would not be expected to materially impact the Company’s financial position or results of operations as of December 31, 2015, because of the Company’s full valuation allowance on its net deferred tax assets.

The Company’s ability to use its NOLs (and in certain circumstances, future built-in losses and depreciation deductions) can be negatively affected if there is an “ownership change” as defined under Section 382. In general, an ownership change occurs whenever there is a shift in ownership by more than 50 percentage points by one or more 5% stockholders over a specified time period (generally three years). Given Section 382’s broad definition, an ownership change could be the unintended consequence of otherwise normal market trading in the Company’s stock that is outside of the Company’s control. In an effort to preserve the availability of these NOLs, Comstock adopted a Section 382 rights agreement, which expired in May 2014. In June 2015, at the 2015 Annual Meeting of Stockholders, the Company’s stockholders approved a new Internal Revenue Code Section 382 Rights Agreement (the “Rights Agreement”) to protect stockholder value. The Rights Agreement expires on March 27, 2025. The Rights Agreement was adopted to reduce the likelihood of such an unintended “ownership change”, thus preserving the value of these tax benefits. Similar plans have been adopted by a number of companies holding similar significant tax assets over the past several years.

The Company has not recorded any accruals related to uncertain tax positions as of December 31, 2015 and 2014, respectively. We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2011 through 2014 tax years remain subject to examination by federal and most state tax authorities.

As a result of the conversion of the Stonehenge Note to Series B Preferred Stock, the Company realized a taxable gain on conversion, and accordingly released $1.0 million of the Company’s federal deferred tax asset valuation allowance. Pursuant to the requirements of ASC 740-20-45, the tax on the conversion gain credited directly to equity is reported net in equity; whereas, the tax benefit realized from the reversal of the valuation allowance was recorded in the income tax line in the Company’s statement of operations. The effective tax rate for the years ended December 31, 2015 and 2014 was 5.6% and 4.5%, respectively.

Income tax provision consists of the following as of December 31:


	2015			2014
Current:
Federal	$	—		$	—
State		(327	)		(368	)

		(327	)		(368	)
Deferred:
Federal		918			4,063
State		180			741

		1,098			4,804
Valuation allowance		(1,086	)		(4,804	)

Total income tax expense	$	(315	)	$	(368	)


	2015			2014
Deferred tax assets:
Inventory	$	2,094		$	1,092
Warranty		122			323
Net operating loss and tax credit carryforwards		47,974			47,967
Accrued expenses		4			92
Stock based compensation		411			457
Investments in affiliates		480			2,233

		51,085			52,164
Less - valuation allowance		(51,048	)		(52,135	)

Net deferred tax assets		37			29

Deferred tax liabilities:
Depreciation and amortization		(35	)		(29	)

Net deferred tax liabilities		(35	)		(29	)

Net deferred tax assets (liabilities)	$	2		$	—

A reconciliation of the statutory rate and the effective tax rate after adjustments for non-includable partnership income arising from non-controlling interest follows:


	2015			2014
Federal statutory rate		(35.00	)%		(35.00	)%
State income taxes - net of federal benefit		(3.90	)%		(3.90	)%
Permanent differences		18.80	%		0.07	%
Tax reserve and other		38.54	%		(18.35	)%
Change in valuation allowance		(19.46	)%		58.04	%
Current state income tax		7.81	%		4.45	%
Other, net		(1.15	)%		(0.86	)%

Effective tax rate		5.64	%		4.45	%