Income Taxes

12 Months Ended

Dec. 31, 2019

Disclosure Text Block

Income Taxes

16. Income Taxes

In general, the Company has not recorded a provision for federal or state income taxes as it has had cumulative net operating losses since inception.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted. This law substantially amended the Internal Revenue Code, including reducing the U.S. corporate tax rates. Upon enactment, the Company’s deferred tax asset and related valuation allowance decreased by approximately $153.9 million. As the deferred tax asset is offset in full by valuation allowance, this enacted legislation had no impact on the Company’s financial position or results of operations. The Company completed its accounting for the tax effects of the Tax Cuts and Job Act as of December 31, 2018 and did not record any material adjustments to its original estimate.

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows (in thousands):

	Year Ended December 31,
	2019		2018		2017
Income tax benefit using U.S. federal statutory rate	$	4,517	$	(59,297)	$	(39,759)
Effect of U.S. tax reform		—		—		153,894
Permanent differences		65		218		34
State income taxes, net of federal benefit		(1,902)		(17,121)		(6,117)
Disallowed Separation related costs		4,658		—		—
Executive compensation - Section 162(m)		662		8		—
Meals and entertainment		495		995		1,346
Non-deductible share-based compensation		(1,202)		(494)		9
Excess tax benefits		3,324		(1,223)		(2,626)
Fair market valuation of Note Hedge Warrants and Convertible Note Hedges		(290)		2,367		1,289
Tax credits		(4,374)		(7,863)		(12,290)
Expiring net operating losses and tax credits		3,764		250		276
Effect of change in state tax rate on deferred tax assets and deferred tax liabilities		(2,563)		1,476		(232)
Change in the valuation allowance		(7,154)		80,684		(95,824)
	$	—	$	—	$	—

Components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

	Year Ended December 31,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards	$	265,494	$	259,450
Tax credit carryforwards		59,892		60,115
Capitalized research and development		9,952		12,113
Contingent consideration		—		14
Share-based compensation		24,401		23,242
Basis difference on North America collaboration agreement		48,594		36,423
Accruals and reserves		6,415		10,867
Basis difference on 2022 Convertible Notes		4,322		7,220
Interest expense		22,020		5,104
Intangibles		—		25,928
Operating lease liability		6,421		—
Other		5,295		18,867
Total deferred tax assets		452,806		459,343
Deferred tax liabilities:
Basis Difference on 2024 Convertible Notes		(7,381)		—
Basis Difference on 2026 Convertible Notes		(10,276)		—
Operating lease right-of-use assets		(4,905)		—
Total deferred tax liabilities		(22,562)		—
Net deferred tax asset		430,244		459,343
Valuation allowance		(430,244)		(459,343)
Net deferred tax asset	$	—	$	—

Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Management has considered the Company’s history of operating losses prior to the year ended December 31, 2019 and concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company will not realize the benefit of its deferred tax assets. Accordingly, the deferred tax assets have been fully reserved at December 31, 2019 and 2018. Management reevaluates the positive and negative evidence on a quarterly basis.

The valuation allowance decreased approximately $29.1 million during the year ended December 31, 2019 primarily due to a decrease of the intangible deferred tax asset due to the recognition of a tax loss during the year ended December 31, 2019 related to the termination of the lesinurad license agreement and establishment of a deferred tax liability for a basis difference in the 2024 Convertible Notes and 2026 Convertible Notes, partially offset by an increase in the deferred tax asset for temporarily disallowed interest expense.

The valuation allowance increased approximately $80.7 million during the year ended December 31, 2018 primarily due to the 2018 net operating loss and increase in tax credit carryforwards; the establishment of a deferred tax asset for temporarily disallowed interest expense; an increase in the basis difference on the collaboration agreement for North America with Allergan; and an increase in intangible deferred tax assets as a result of the impairment of the lesinurad franchise, partially offset by adjustments to the contingent consideration obligation.

Subject to the limitations described below, at each of December 31, 2019 and 2018, the Company had federal net operating loss carryforwards of approximately $1.2 billion to offset future federal taxable income, which expiration began in 2019 and will continue through 2037. The 2019 and 2018 net operating loss of $32.7 million and $89.1 million, respectively, have an indefinite life. As of December 31, 2019 and 2018, the Company had state net operating loss carryforwards of approximately $1.0 billion and approximately $877.1 million, respectively, to offset future state taxable income, which will begin to expire in 2020 and will continue to expire through 2039. The Company also had tax credit carryforwards of approximately $64.6 million and approximately $63.3 million as of December 31, 2019 and 2018, respectively, to offset future federal and state income taxes, which expire at various times through 2039.

Utilization of net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986 (“IRC Section 382”) and with Section 383 of the Internal Revenue Code of 1986, as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change, as defined by IRC Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Company has completed several financings since its inception which may result in a change in control as defined by IRC Section 382, or could result in a change in control in the future.

The following table summarizes the changes in the Company’s unrecognized income tax benefits for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	Year Ended December 31,
	2019		2018		2017
Balance at the beginning of the period	$	38,551	$	24,078	$	26,393
Increases based on tax positions related to the current period		51,699		38,551		24,078
Increases for tax positions related to prior periods		1,400		—		—
Decreases for tax positions in prior periods		(38,551)		(24,078)		(26,393)
Balance at the end of the period	$	53,099	$	38,551	$	24,078

The Company had gross unrecognized tax benefits of approximately $53.1 million, approximately $38.6 million, and approximately $24.1 million as of December 31, 2019, 2018 and 2017, respectively. Of the approximately $53.1 million of total unrecognized tax benefits at December 31, 2019, none of the unrecognized tax positions would, if recognized, affect the Company’s effective tax rate, due to a valuation allowance against deferred tax assets and only impacts the Company’s deferred tax accounting.

The Company will recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2019, no interest or penalties have been accrued.

The statute of limitations for assessment by the Internal Revenue Service (“IRS”) and state tax authorities is open for tax years ended December 31, 2019, 2018, and 2017. There are currently no federal or state income tax audits in progress.