INCOME TAXES

For the years ended December 31, 2016, 2015, and 2014, all of our profit or loss before income taxes was from U.S. operations. The income tax expense (benefit) consisted of the following (in thousands):



	Years Ended December 31,
	2016			2015			2014
Current:
Federal	$	—		$	—		$	—
State	4,259			2,058			—
Total current	$	4,259		$	2,058		$	—
Deferred:
Federal	$	9,815		$	9,819		$	(142,884	)
State	(2,536		)	(4,812		)	(10,275		)
Total deferred	$	7,279		$	5,007		$	(153,159	)
Total income tax expense (benefit)	$	11,538		$	7,065		$	(153,159	)

The reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate was as follows:



	Years Ended December 31,
	2016		2015		2014
Statutory U.S. federal tax rate	35.0	%	35.0	%	(34.0	)%
State taxes, net of federal benefit	6.4		0.1		(7.9	)
Equity-based compensation expense	34.0		0.4		10.6
Contingent consideration	69.9		4.7		3.1
Transaction costs	—		3.9		9.7
Other permanent items, net	21.2		3.2		3.2
Tax credits	(32.3	)	(1.7	)	(3.0	)
Write-down of acquired state net operating losses	114.2		—		—
Valuation allowance	(115.2	)	(28.0	)	(864.9	)
Other, net	(5.8	)	0.1		—
Effective tax rate	127.4	%	17.7	%	(883.2	)%

For the year ended December 31, 2016, we recognized an income tax expense of $11.5 million, representing an effective tax rate of 127.4%. The difference between the expected statutory federal tax rate of 35.0% and the effective tax rate of 127.4% for the year ended December 31, 2016, was primarily attributable to the impact of contingent consideration associated with Lumara Health, equity-based compensation expenses and other permanent items, including meals and entertainment expense, officers compensation and Makena-related expenses, offset by the benefit of the federal research and development and orphan drug tax credits generated during the year. The effective tax rate for the year-ended December 31, 2016 reflected the significance of these permanent differences in relation to the pre-tax income for the year-ended December 31, 2016. As a result of state tax planning during 2016, we analyzed the acquired state net operating losses (“NOLs”) and determined that a significant portion were not utilizable and should be written down. This write-down was offset with a decrease in the valuation allowance as we had previously determined that it was more likely than not that these NOLs would not be utilized.

For the year ended December 31, 2015, we recognized income tax expense of $7.1 million representing an effective tax rate of 17.7%. The difference between the expected statutory federal tax rate of 35.0% and the 17.7% effective tax rate for 2015 was primarily attributable to the impact of a valuation allowance release related to certain deferred tax assets, partially offset by non-deductible transaction costs associated with the acquisition of CBR, and non-deductible contingent consideration expense associated with Lumara Health.

We released a portion of our valuation allowance for the year ended December 31, 2014, due to taxable temporary differences available as a source of income as a result of the Lumara Health acquisition. As of December 31, 2014, we maintained a partial valuation allowance as we benefited only those deferred tax assets to the extent that existing taxable temporary differences could be used as a source of future income to realize the benefits of those deferred tax assets. During the year ended December 31, 2015, we achieved a positive income position, and also acquired additional taxable temporary differences available as a source of income as a result of the CBR acquisition. Based primarily on this evidence, we concluded that as of December 31, 2015, the majority of our deferred tax assets are more likely than not to be realized.

For the year ended December 31, 2014, we recognized an income tax benefit of $153.2 million representing an effective tax rate of (883.2)%. The difference between the statutory tax rate and the effective tax rate was attributable to a non-recurring benefit of $153.2 million for the release of a portion of the valuation allowance due to taxable temporary differences available as a source of income to realize the benefit of certain pre-existing AMAG deferred tax assets as a result of the Lumara Health acquisition. Excluding the impact of this item, our overall tax provision and effective tax rate would have been zero. Other factors resulting in a difference between the statutory tax rate and the effective tax rate included certain non-deductible stock compensation expenses, non-deductible transaction costs and contingent consideration associated with the acquisition of Lumara Health, and other non-deductible expenses for tax purposes.

See Note C, “Business Combinations,” for more information on the Lumara Health and CBR acquisitions.

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future enacted rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2015, we elected to early adopt new guidance issued by the FASB in November 2015 (ASU 2015-17), which simplifies the presentation of deferred income taxes by eliminating the need for entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The components of our deferred tax assets and liabilities were as follows (in thousands):



	December 31,
	2016			2015
Assets
Net operating loss carryforwards	$	116,275		$	172,944
Tax credit carryforwards	9,415			6,262
Deferred revenue	1,811			626
Equity-based compensation expense	8,045			5,464
Capitalized research & development	18,284			25,216
Reserves	8,018			8,900
Contingent consideration	4,140			1,258
Other	9,769			9,636
Liabilities
Property, plant and equipment depreciation	(2,145		)	(2,844		)
Intangible assets and inventory	(367,667		)	(400,357		)
Debt instruments	(1,040		)	(1,213		)
Other	(542		)	(3,178		)
	(195,637		)	(177,286		)
Valuation allowance	(1,429		)	(11,859		)
Net deferred tax liabilities	$	(197,066	)	$	(189,145	)

The valuation allowance decreased by approximately $10.4 million for the year ended December 31, 2016, which was primarily attributable to the write-down of the acquired Lumara Health state NOLs. As a result of state tax planning during 2016, we analyzed the acquired state NOLs and determined that a significant portion were not utilizable and should be written down. We have considered several sources of taxable income in making our valuation allowance assessment, including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and forecasted future income. At December 31, 2016, the remaining valuation allowance related primarily to our federal capital loss carryforward and our state NOL carryforwards acquired from Lumara Health.

At December 31, 2016, we had federal and state NOL carryforwards of approximately $377.6 million and $122.0 million, respectively, of which $281.1 million and $19.6 million federal and state NOL carryforwards, were acquired as part of the Lumara Health transaction, respectively. Also included in the state NOL carryforwards at December 31, 2016 were $20.1 million of state NOL carryforwards which were acquired as part of the CBR transaction. The state NOL carryforwards acquired from Lumara Health are subject to a full valuation allowance as it is not more likely than not that they will be realized. We also had federal capital loss carryforwards of $1.5 million to offset future capital gains. At December 31, 2016, $58.3 million and $33.2 million of federal and state NOLs, respectively, related to excess equity-based compensation tax deductions, the benefits for which will be recorded to additional paid-in capital when recognized through a reduction of cash taxes paid. The federal and state NOLs expire at various dates through 2036. The capital loss carryforwards will expire through 2021. We have federal tax credits of approximately $8.6 million to offset future tax liabilities of which $1.5 million were acquired as part of the Lumara Health transaction. We have state tax credits of $1.2 million to offset future tax liabilities. These federal and state tax credits will expire periodically through 2036 if not utilized.

Utilization of our NOLs and research and development (“R&D”) credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986 (“Section 382”) as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change as defined by Section 382 results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. Since our formation, we have raised capital through the issuance of capital stock on several occasions. These financings, combined with the purchasing shareholders’ subsequent disposition of those shares, could result in a change of control, as defined by Section 382. We conducted an analysis under Section 382 to determine if historical changes in ownership through December 31, 2016 would limit or otherwise restrict our ability to utilize these NOL and R&D credit carryforwards. As a result of this analysis, we do not believe there are any significant limitations on our ability to utilize these carryforwards. The NOL's and tax credits acquired from Lumara health are subject to restrictions under Section 382. These restricted NOL's and credits may be utilized subject to an annual limitation. While we identified two ownership changes associated with the attributes acquired as part of the Lumara Health transaction and determined these attributes are subject to an annual limitation, we do not expect the limitations to result in expiration of these attributes prior to utilization. However, future changes in ownership after December 31, 2016 could affect the limitation in future years and any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization.

Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. As of December 31, 2016, we had $13.3 million of unrecognized tax benefits, of which $13.0 million would impact the effective tax rate, if recognized. As of December 31, 2015 we had $12.7 million of unrecognized tax benefits, of which $12.4 million would impact the effective tax rate, if recognized. We had no uncertain tax benefits recorded as of December 31, 2014.

A reconciliation of our changes in uncertain tax positions is as follows (in thousands):



	Years Ended December 31,
	2016			2015		2014
Uncertain tax benefits at the beginning of the year	$	12,695		$	—	$	—
Additions based on tax positions related to the current year	300			12,695		—
Additions for tax positions from prior years	379			—		—
Subtractions for tax positions from prior years	(44		)	—		—
Uncertain tax benefits at the end of the year	$	13,330		$	12,695	$	—

During the year ended December 31, 2016, our unrecognized tax benefits increased by $0.6 million due primarily to tax reserves established on R&D tax credits.

During the year ended December 31, 2015, we completed studies of our historical R&D tax credits and other tax attributes, including those acquired in connection with the Lumara Health transaction. The increase in our unrecognized tax benefits is attributable to the results of these studies, which identified uncertain tax benefits of $12.7 million related to federal and state R&D credits and NOL carryforwards. These amounts were recorded as a reduction to our deferred tax assets as of December 31, 2015. A valuation allowance was recorded against these attributes at December 31, 2014, therefore there was no impact to income tax expense as a result of recording the unrecognized tax benefits during the year ended December 31, 2015.

We have recorded minimal interest or penalties on unrecognized benefits since inception. We recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. We do not expect our uncertain tax benefits to change significantly in the next 12 months.

The statute of limitations for assessment by the Internal Revenue Service (the “IRS”) and most state tax authorities is closed for tax years prior to December 31, 2013, although carryforward attributes that were generated prior to tax year 2013 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. We file income tax returns in the U.S. federal and various state jurisdictions. There are currently no federal or state audits in progress.