INCOME TAXES

12 Months Ended

Dec. 31, 2019

Prior to the Partnership’s IPO, all of the membership interests of the Predecessor were owned by a single member. Under applicable federal income tax provisions, the Predecessor’s legal existence as an entity separate from its sole owner was disregarded for U.S. federal income tax purposes. As a result, the Predecessor’s owner, Diamondback, was responsible for federal income taxes on its share of the Predecessor’s taxable income. Similarly, the Predecessor had no tax attributes such as net operating loss carryforwards because such tax attributes are treated for federal income tax purposes as attributable to the Predecessor’s owner.

In certain circumstances, GAAP requires or permits entities such as the Predecessor to account for income taxes under the principles of ASC Topic 740, “Income Taxes” (“ASC Topic 740”), notwithstanding the fact that the separate legal entity’s activity is attributed to its owner for income tax purposes. Accordingly, the Predecessor has applied the principles of ASC Topic 740 to its financial statements herein, for periods prior to the Partnership’s IPO, as if the Predecessor had been subject to taxation as a corporation. Consistent with the overall basis of presentation as described in Note 1—Organization and Basis of Presentation, for the years ended December 31, 2019 and 2018, net income for the period prior to the Partnership’s IPO reflects income taxes based on federal and state income tax rates, net of federal benefit, applicable to the Predecessor as if it had been subject to taxation as a corporation. At the closing of the IPO, an adjustment of $31.1 million to equity of the Predecessor was recorded for the elimination of current and deferred tax liabilities related to the period prior to the IPO.

Subsequent to the Partnership’s IPO, the Partnership provides for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, specifically the Partnership’s investment in the Operating Company, using enacted tax rates expected to be in effect during the year in which the basis differences reverse. Valuation allowances are established when management determines it is more likely than not that some portion, or all, of the Partnership’s deferred tax assets will not be realized.

For the year ended December 31, 2019, net income for the period prior to the IPO reflects income tax expense of $18.2 million and net income from continuing operations for the period subsequent to the IPO reflects income tax expense of $8.1 million. For the years ended December 31, 2018 and 2017, net income of the Predecessor reflects income tax expense of $17.4 million and $4.7 million, respectively. Total income tax expense from continuing operations for the 2019 and 2018 periods differed from applying the U.S. statutory corporate income tax rate of 21% to pre-tax income primarily due to state income taxes, net of federal benefit, and due to net income attributable to the noncontrolling interest for the 2019 period subsequent to the IPO. In addition, total income tax expense of the Predecessor for the year ended December 31, 2017, differed from the U.S. statutory corporate income tax rate of 35% primarily due to deferred tax benefit of $4.5 million recognized as a result of the reduction in the carrying amount of its deferred tax assets and liabilities from 35% to the 21% federal statutory rate enacted in the fourth quarter of 2017.

The components of the provision for income taxes from continuing operations for the years ended December 31, 2019, 2018 and 2017 are as follows:



	Year Ended December 31,
	2019 Subsequent to IPO		2019 Prior to IPO		2018		2017
			Predecessor		Predecessor		Predecessor
	(In thousands)
Current income tax provision:
Federal	$	—	$	7,694	$	11,089	$	—
State	189		270		425		217
Total current income tax provision	189		7,964		11,514		217
Deferred income tax provision:
Federal	7,600		9,983		5,689		4,237
State	282		235		156		234
Total deferred income tax provision	7,882		10,218		5,845		4,471
Total provision for income taxes	$	8,071	$	18,182	$	17,359	$	4,688

A reconciliation of the statutory federal income tax amount from continuing operations to the recorded expense is as follows:



	Year Ended December 31,
	2019 Subsequent to IPO			2019 Prior to IPO		2018		2017
	(In thousands)
Income tax expense at the federal statutory rate ⁽¹⁾	$	26,679		$	17,677	$	16,867	$	8,873
Impact of nontaxable noncontrolling interest	(18,982		)	—		—		—
State income tax expense, net of federal tax effect	372			505		492		317
Income tax benefit relating to change in statutory tax rate	—			—		—		(4,502		)
Other, net	2			—		—		—
Provision for income taxes	$	8,071		$	18,182	$	17,359	$	4,688

(1) The federal statutory rates for the years ended December 31, 2019, 2018 and 2017 were 21%, 21%, and 35%, respectively.

The components of the deferred tax assets and liabilities as of December 31, 2019 and 2018 of the Partnership and the Predecessor are as follows:



	Year Ended December 31,
	2019		2018 Predecessor
	(In thousands)
Deferred tax assets
Net operating loss and other carryforwards (indefinite life)	$	232	$	—
Investment in the Operating Company	—		—
Other	—		—
Total deferred tax assets	232		—
Deferred tax liabilities
Investment in the Operating Company	8,059		—
Midstream assets	—		12,912
Other	—		—
Total deferred tax liabilities	8,059		12,912
Net deferred tax liabilities	$	7,827	$	12,912

The Partnership and Predecessor had net deferred tax liabilities of approximately $7.8 million and $12.9 million at December 31, 2019 and 2018, respectively. Subsequent to the deemed formation of the Operating Company as a partnership for federal income tax purposes upon the Partnership’s IPO, deferred taxes are no longer provided on the underlying assets and liabilities of the Predecessor but are provided on the difference between the Partnership’s basis for financial accounting purposes and basis for federal income tax purposes in its investment in the Operating Company. The Partnership incurred a tax net operating loss (“NOL”) in the current year due principally to the Operating Company’s tax deductions for accelerated depreciation, which exceeded its other items of taxable income. At December 31, 2019, the Partnership had approximately $0.2 million of federal NOLs with an indefinite carryforward life. The Partnership principally operates in the state of Texas and, for the year ended December 31, 2019, has accrued state income tax expense of $0.2 million for its share of Texas margin tax attributable to the Partnership’s results which are included in a combined tax return filed by Diamondback.

Management considers the likelihood that the Partnership’s net operating losses and other deferred tax attributes will be utilized prior to their expiration, if applicable. At December 31, 2019, management’s assessment included consideration of all available positive and negative evidence including the anticipated timing of reversal of deferred tax liabilities. As a result of the assessment, management determined that it is more likely than not that the Partnership will realize its deferred tax assets. At December 31, 2019, the Partnership did not have any significant uncertain tax positions requiring recognition in the financial statements.