J. INCOME TAXES

For the years ended December 31, 2015, 2014, and 2013, 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,
	2015		2014		2013
Current:
Federal	$	—	$	—	$	—
State		2,058		—		—
Total current	$	2,058	$	—	$	—
Deferred:
Federal	$	9,819	$	(142,884)	$	—
State		(4,812)		(10,275)		—
Total deferred	$	5,007	$	(153,159)	$	—
Total income tax expense (benefit)	$	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,
	2015		2014		2013
Statutory U.S. federal tax rate	35.0	%	(34.0)	%	(34.0)	%
State taxes, net of federal benefit	0.1		(7.9)		2.4
Equity-based compensation expense	0.4		10.6		9.4
Contingent consideration	4.7		3.1		—
Transaction costs	3.9		9.7		—
Other permanent items, net	3.2		3.2		5.3
Tax credits	(1.7)		(3.0)		0.5
Valuation allowance	(28.0)		(864.9)		16.4
Other, net	0.1		—		—
Effective tax rate	17.7	%	(883.2)	%	(0.0)	%

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 benefitted 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 have concluded that 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. We did not recognize any federal or state income tax expense or benefit for the year ended December 31, 2013 as we were subject to a full valuation allowance.

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. We adopted this guidance prospectively and, as a result, prior consolidated balance sheets were not retrospectively adjusted. As of December 31, 2014, we allocated the valuation allowance between current and noncurrent deferred tax assets and liabilities. As a result of this allocation, we had recorded a long-term deferred tax liability of $77.6 million and a short-term deferred tax asset of $32.1 million on the balance sheet. The components of our deferred tax assets and liabilities were as follows (in thousands):


	December 31,
	2015		2014
Assets
Net operating loss carryforwards	$	172,944	$	188,873
Tax credit carryforwards		6,262		24,574
Deferred revenue		626		17,216
Equity-based compensation expense		5,464		3,436
Capitalized research & development		25,216		32,359
Intangibles		—		272
Debt instruments		—		731
Reserves		8,900		7,782
Property, plant and equipment		—		61
Other		10,894		5,014
Liabilities
Property, plant and equipment depreciation		(2,844)		—
Intangible assets and inventory		(400,357)		(290,491)
Debt instruments		(1,213)		—
Other		(3,178)		(1,795)
		(177,286)		(11,968)
Valuation allowance		(11,859)		(33,557)
Net deferred taxes	$	(189,145)	$	(45,525)

The decrease in our tax credit carryforwards is primarily related to the results of studies of research and development (“R&D”) tax credits and other tax attributes completed during the year ended December 31, 2015. The studies resulted in the write-off of federal and state R&D credit carryforwards of $3.1 million and $2.8 million, respectively. Additionally, uncertain tax benefits of $12.7 million were recorded related to the federal and state R&D credit carryforwards and net operating loss (“NOL”) carryforwards. The uncertain tax benefits are described in more detail below. A valuation allowance was recorded against the R&D credit carryforwards and other tax attributes for the year ended December 31, 2014.

The valuation allowance decreased by approximately $21.7 million for the year ended December 31, 2015 primarily due to the results of the R&D tax credit study, as well as our conclusion that it is more likely than not that we will realize the benefit of the majority of our deferred tax assets, as discussed above. At December 31, 2015, the remaining valuation allowance related primarily to our federal capital loss carryforward and our state NOL carryforwards acquired from Lumara Health.

At December 31, 2015, we had federal and state NOL carryforwards of approximately $502.5 million and $415.3 million, respectively of which $280.5 million and $275.0 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, 2015 were $24.6 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 $1.7 million to offset future capital gains. At December 31, 2015, $55.6 million and $30.5 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 2035. The capital loss carryforwards will expire through 2017. We have federal tax credits of approximately $5.5 million to offset future tax liabilities of which $1.9 million were acquired as part of the Lumara Health transaction. We have state tax credits of $1.1 million to offset future tax liabilities. These federal and state tax credits will expire periodically through 2035 if not utilized.

Utilization of our NOLs and 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, 2015 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. However, future changes in ownership after December 31, 2015 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.

We had no uncertain tax benefits recorded prior to 2015. During the year ended December 31, 2015, we added $12.7 million of uncertain tax benefits related to tax positions of prior tax years, as discussed below.

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 have been recorded as a reduction to our deferred tax assets. 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.

The amount of uncertain tax benefits that, if recognized, would impact our effective tax rate is $12.4 million. We have not recorded any interest or penalties on any unrecognized benefits since inception. We would 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, 2012, although carryforward attributes that were generated prior to tax year 2012 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.