Note 3 - Income Taxes

12 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

3. INCOME TAXES

The provision (benefit) from income taxes consists of the following:

	2020			2019
Current:
Federal	$	(420,000	)	$	132,000
State		15,000			—
		(405,000	)		132,000
Deferred:
Federal		808,000			(4,685,000	)
State		(218,000	)		(1,707,000	)
		590,000			(6,392,000	)
	$	185,000		$	(6,260,000	)

The difference between the statutory federal income tax rate and the Company’s effective rate is summarized below:

	2020			2019
Statutory federal income tax rate		21.0	%		21.0	%
State franchise taxes (net of federal tax benefit)		5.6			4.5
Effect of state rate change on beginning balance of deferred tax liabilities		(9.4	)		(0.2	)
Business meals/gifts/other permanent differences		0.6			(0.1	)
Goodwill impairment		—			(6.5	)
Dividends received deduction		(11.1	)		1.5
Revenue recognized for book but not tax		0.4			—
Prior year true-up		—			0.2
Foreign tax credits		(0.4	)		0.1
CARES Act benefits		(4.4	)		—
Others		2.1			(0.6	)
Effective tax rate		4.4	%		19.9	%

The Company’s deferred income tax assets and liabilities were comprised of the following:

	2020			2019
Deferred tax assets attributable to:
Accrued liabilities, including supplemental compensation and vacation pay accrual	$	415,000		$	178,000
Impairment losses on investments		1,016,000			2,201,000
Bad debt reserves not yet deductible		55,000			41,000
Depreciation and amortization		3,482,000			3,999,000
Deferred revenues		913,000			885,000
Goodwill		590,000			677,000
Net operating losses		4,768,000			5,195,000
Credits and other		432,000			456,000
Total deferred tax assets		11,671,000			13,632,000
Deferred tax liabilities attributable to:
Unrealized gains on investments		(35,870,000	)		(37,241,000	)
Net deferred income taxes	$	(24,199,000	)	$	(23,609,000	)

For fiscal 2020, the Company recorded an income tax provision of $185,000 on pretax income of $4,226,000.  The effective tax rate was less than the statutory rate primarily due to the dividends received deduction (“DRD”), a benefit resulting from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and net state tax benefits.   The effective tax rate for the fiscal 2020 was 4.4%, after including the DRD, the tax benefits from the CARES Act and state taxes.

The CARES Act, which was signed into law on March 27, 2020, contains two federal tax provisions beneficial to the Company.  One provision provides that net operating losses arising in tax years beginning in 2018, that were previously only available to be carried forward, can now be carried back to the five previous years.  In addition, any alternative minimum tax credits carried forward from prior years can be claimed as a refund in years beginning in 2018.  Consequently, the Company recorded a tax benefit resulting from carrying back a portion of the net operating loss generated in fiscal 2019 to fiscal 2014.  The Company anticipates receiving a refund for all taxes and alternative minimum taxes paid in fiscal 2014.  The tax benefit of $187,000 resulting from carrying back the net operating loss is primarily attributable to the difference in the federal tax rates of 34% in fiscal 2014 and 21% in fiscal 2019.

During fiscal 2020, the Company recorded net unrealized losses on investments of $3,099,000. An income tax benefit of $1,371,000 resulting from these losses was recorded as a temporary difference in deferred income taxes. The Company also recorded a net gain of $4,193,000 on the sales of marketable securities.

For fiscal 2019, the Company recorded an income tax benefit of $6,260,000 on a pretax loss of $31,476,000.  The effective tax rate was below the statutory rate due to the impairment of goodwill, partially offset by the dividends received deduction and a benefit for state taxes.

The Company’s effective tax rate was 4.4% for fiscal 2020 as compared with 20% in the prior fiscal year.

The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2017 with regard to federal income taxes and fiscal 2016 for state income taxes. 

The Company has federal and state income tax net operating losses (“NOLs”). A portion of the fiscal 2017 federal and state NOLs were carried back to previous years and a portion of the fiscal 2019 federal NOL was carried back to fiscal 2014. As of September 30, 2020, the Company had federal, California and other state NOL carryforwards of $20.1 million, $6.1 million and $2.6 million, respectively. These NOLs will expire at various dates from fiscal 2036 through 2039, as follows:

Fiscal Year ended	Federal NOL		California NOL		Other State NOL
	(in millions)
September 30, 2036	$	.8	$	—	$	—
September 30, 2037		6.6		—		.3
September 30, 2038		11.1		5.4		2.0
September 30, 2039		—		.7		.3
No expiration		1.6		—		—

The Company believes it is more likely than not that the benefit of these NOLs will be realized in the future. Consequently, the Company has not provided a valuation allowance.