6.Income Taxes

Income Tax Provision

The table below sets forth the provision for income taxes attributable to continuing operations for the periods presented.


	Year Ended		Year Ended		Year Ended
	December 31, 2015		December 31, 2014		December 31, 2013
	(In Thousands)		(In Thousands)		(In Thousands)
Current:
Federal	$	—	$	—	$	—
State		—		—		—
Total Current Tax Expense	$	—	$	—	$	—

Deferred:
Federal	$	3,043	$	33,499	$	—
State		44		1,488		—
Total Deferred Tax Expense	$	3,087	$	34,987	$	—

Total Income Tax Expense	$	3,087	$	34,987	$	—

Prior to its corporate merger, the Company was a partnership and not subject to federal income tax or state income tax (in most states). Accordingly, no provision for federal or state income taxes was recorded prior to the corporate merger as the Company’s equity holders were responsible for income tax on the Company’s profits. In connection with the closing of the merger, the Company merged into a corporation and became subject to federal and state income taxes. The Company’s book and tax basis in assets and liabilities differed at the time of its change in tax status due primarily to different cost recovery periods utilized for book and tax purposes for the Company’s oil and natural gas properties.

At December 31, 2014, the Company recorded a net deferred tax expense of $35.0 million, which includes estimated deferred tax expense of $81.7 million to recognize a deferred tax liability related to the Company’s initial book and tax basis differences from the change in tax status. The deferred tax liability was preliminary and included estimates related to the pre-corporate reorganization period of 2014. Estimates about utilization of tax loss carryforwards obtained through the merger with Forest and tax loss carryforwards generated in the post-corporate reorganization period were also preliminary and reduced the deferred tax impact. The preliminary calculation was based on information available to management at the time such estimates were made.

The Company completed its analysis of the book and tax basis differences with the filing of the corporate income tax return and purchase accounting adjustments. At December 31, 2015, the Company recorded a deferred tax expense of $3.1 million attributable to an increase in the valuation allowance which offsets the additional deferred tax assets recorded through purchase accounting for Forest.

As part of the corporate merger, the Company’s historical owners contributed entities that were under common control into Forest. At December 31, 2014, the Company also estimated a net deferred tax asset of $20.5 million related to tax loss carryforwards for these entities. The Company recognized the benefit of the net deferred tax asset in equity. This deferred tax asset was preliminary and based on information available to management at the time the estimate was made. At December 31, 2015, the Company increased the deferred tax asset by $2.1 million to $22.6 million related to tax loss carryforwards for these entities. This increase was a result of a change in estimate and was included in the tax impact recorded in 2015.

At December 31, 2014, the Company’s effective tax rate differs from the federal statutory rate of 35% due to earnings prior to the corporate merger that are not subject to corporate income tax, recording the initial book and tax basis differences associated with the change in tax status, state income taxes and impairment of non-deductible goodwill. At December 31, 2015, the Company’s effective tax rate differs from the federal statutory rate of 35% primarily due to the change in the Company’s full valuation allowance recorded against the net deferred tax asset balance, other changes in estimate to post-corporate reorganization period and state income taxes.

The reconciliation of income taxes calculated at the U.S. federal tax statutory rate to the Company’s effective tax rate is set forth below:


	Year Ended			Year Ended			Year Ended
	December 31, 2015			December 31, 2014			December 31, 2013
	(In Thousands)			(In Thousands)			(In Thousands)
Federal income tax at 35% of earnings from continuing operations before income taxes	$	(782,795)		$	(102,107)		$	3,702
State income taxes, net of federal income tax benefits		(7,422)			(2,131)			—
Earnings not subject to tax		—			(40,509)			(3,702)
Change in non-tax deductible goodwill		—			16,767			—
Change in tax status		—			81,728			—
Change in prior year estimate		3,087
Other		846			8			—
Change in valuation allowance (current year activity only)		789,371			81,231			—

Total income tax	$	3,087		$	34,987		$	—
Effective Tax Rate		(0.14)	%		(11.99)	%		0.00	%

Net Deferred Tax Assets and Liabilities

On November 20, 2015 the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” as part of the FASB’s simplification initiative aimed to reducing complexity in accounting standards. The new guidance requires that all deferred tax assets and liabilities, along with any valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirements that only permits offsetting within jurisdictions. The new guidance is effective for public business entities in fiscal years beginning after December 15, 2016. However, as early adoption is permitted as of the beginning of an interim or annual reporting period in which the ASU 2015-17 was issued, we decided to apply the new standard for the December 31, 2014 and December 31, 2015 period. As guidance allows for retrospective application of the new standard, prior period financial statements have been retrospectively adjusted. The effects of the application of the new standard on previously reported December 31, 2014 balances in the Form 10-Q for the Quarterly Period ended March 31, 2015 are presented below:


	Consolidated Balance Sheet
	as of December 31, 2014
	As Previously Reported		As Currently Reported

	(in thousands)
Assets
Other assets:
Deferred income taxes		117,662		—
Total assets	$	2,509,928	$	2,392,266

Liabilities and shareholders’ deficit
Current liabilities:
Deferred income taxes	$	117,662	$	—
Total liabilities and shareholders’ deficit	$	2,509,928	$	2,392,266


	Year Ended		Year Ended
	December 31, 2015		December 31, 2014
	(in thousands)
Deferred tax assets:
Property and equipment	$	654,229	$	279,955
Goodwill		8,630		9,302
Net operating loss carryforwards		353,579		180,134
Liabilities subject to compromise		49,070		—
Other		23,860		48,372
Total gross deferred tax assets	$	1,089,368	$	517,763
Less valuation allowance	$	(1,087,637)	$	(344,740)
Net deferred tax assets	$	1,731	$	173,023


Deferred tax liabilities:
Unrealized gains on derivative instruments, net	$	—	$	(27,766)
Long-term liabilities		(52)		(143,259)
Other		(1,679)		(1,998)
Total gross deferred tax liabilities	$	(1,731)	$	(173,023)

Tax Attributes

Net Operating Losses

U.S. federal net operating loss carryforwards (“NOLs”) at December 31, 2015 were approximately $1,010 million, of which $495 million is subject to limitation under Section 382 of the Internal Revenue Code. The NOL balance excludes NOLs the Company believes the likelihood of utilization to be remote as a result of limitations imposed under Section 382 of the Internal Revenue Code. The NOLs are scheduled to expire in 2019.

The statute of limitations is closed for Sabine’s U.S. federal income tax returns for years ending on or before December 31, 2010. The statute of limitations is also closed for Forest’s U.S. federal income tax returns for years ending on or before December 31, 2008. However, Forest has utilized, and the Company will continue to utilize, NOLs in its open tax years. The earliest available NOLs were generated in the tax year beginning January 1, 1999, but are potentially subject to adjustment by the federal tax authorities in the tax year in which they are utilized. Thus, the Company’s earliest U.S. federal income tax return that is closed to potential audit adjustment is the tax year ending December 31, 1998.

Valuation Allowance

A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company believes it is more likely than not that the overall deferred tax asset will not be realized. At December 31, 2015, the Company has a valuation allowance of $1,088 million, which is the amount of deferred tax assets that exceed deferred tax liabilities.

Accounting for Uncertainty in Income Taxes

The table below sets forth the reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits. The Company records interest and penalty accrual in income tax expense, to the extent they apply. The Company does not expect a material amount of unrecognized tax benefits to reverse in the next twelve months. If recognized, none of the uncertain tax positions would impact tax expense.


	Year Ended		Year Ended		Year Ended
	December 31, 2015		December 31, 2014		December 31, 2013
	(In Thousands)		(In Thousands)		(In Thousands)

Gross unrecognized tax benefits at beginning of period	$	8,691	$	—	$	—
Increases as a result of tax positions taken during a prior period		—		8,691		—
Decreases as a result of tax positions taken during a prior period		—		—		—
Gross unrecognized tax benefits at end of period	$	8,691	$	8,691	$	—