Note 12 – Income Taxes

In 2014 the Company recorded a valuation allowance against its deferred tax assets, reducing the carrying value of those assets to zero, as a result of historical losses. At December 31, 2016 and 2017, the Company continued to carry a full valuation allowance against its deferred tax assets. The following table summarizes the change in the valuation allowance during 2016 and 2017 (in thousands):

Balance at December 31, 2015	$	31,922
Change during 2016		(264	)
Balance at December 31, 2016		31,658
Change during 2017		(1,726	)
Balance at December 31, 2017	$	29,932

At December 31, 2017 the Company has aggregate tax net operating loss carry forwards of approximately $76.2 million ($61.1 million of unrestricted net operating tax losses and approximately $15.2 million of restricted net operating tax losses) and unused minimum tax credit carry forwards of $0.5 million. Substantially all of the net operating loss carry forwards and unused minimum tax credit carry forwards expire between 2024 and 2036.

The reported tax expense varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the income (loss) before income tax expense for the following reasons in each of the years ending December 31 (in thousands):

	2017			2016
Expected federal statutory tax benefit	$	(228	)	$	14
Increase (reduction) in taxes resulting from:
State income taxes recoverable		21			21
Non-deductible expenses (permanent differences)		51			45
Change in valuation allowance		(1,726	)		(264	)
Tax rate changes		1,477			—
Other		(15	)		205
Income tax (benefit) expense	$	(420	)	$	21

The Company’s utilization of restricted net operating tax loss carry forwards against future income for tax purposes is restricted pursuant to the “change in ownership” rules in Section 382 of the Internal Revenue Code. These rules, in general, provide that an ownership change occurs when the percentage shareholdings of 5% direct or indirect stockholders of a loss corporation have, in aggregate, increased by more than 50 percentage points during the immediately preceding three years.

Restrictions in net operating loss carry forwards occurred in 2001 as a result of the acquisition of the Company by Street Capital. Further restrictions may have occurred as a result of subsequent changes in the share ownership and capital structure of the Company and Street Capital and disposition of business interests by the Company. Pursuant to Section 382 of the Internal Revenue Code, the annual usage of the Company’s net operating loss carry forwards was limited to approximately $2.5 million per annum until 2008 and $1.7 million per annum thereafter. There is no certainty that the application of these “change in ownership” rules may not recur, resulting in further restrictions on the Company’s income tax loss carry forwards existing at a particular time. In addition, further restrictions, reductions in, or expiration of net operating loss and net capital loss carry forwards may occur through future merger, acquisition and/or disposition transactions or failure to continue a significant level of business activities. Any such additional limitations could require the Company to pay income taxes on its future earnings and record an income tax expense to the extent of such liability, despite the existence of such tax loss carry forwards.

All loss taxation years remain open for audit pending the application of the respective tax losses against income in a subsequent taxation year. In general, the statute of limitations expires three years from the date that a company files a tax return applying prior year tax loss carry forwards against income for tax purposes in the later year. The 2014 through 2016 taxation years remain open for audit.

The Company is subject to state income tax in multiple jurisdictions. In most states, the Company does not have tax loss carry forwards available to shield income attributable to a particular state from being subject to tax in that particular state.

The components of the deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows in (thousands):

	2017			2016
Net operating loss carry forwards	$	29,303		$	29,909
Stock based compensation		610			1,070
Write-down of real estate inventory		—			1,569
Trade names		(690	)		(1,363	)
Customer relationships		(123	)		(293	)
Fair value adjustment of contingent consideration		168			(55	)
Other		152			(139	)
Gross deferred tax assets		29,420			30,698
Less: valuation allowance		(29,932	)		(31,658	)
Deferred tax assets (liabilities), net of valuation allowance	$	(512	)	$	(960	)

As a result of the acquisition of NLEX in 2014, and the recognition of an indefinite-lived intangible asset in the amount of $2.4 million related to the NLEX trade name, the Company is required to record a non-current deferred tax liability in the amount of $0.5 million.

The 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017, and significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The Tax Act reduces the U.S. statutory corporate tax rate from 35% to 21% for our tax years beginning in 2018, which resulted in the re-measurement of the federal portion of our deferred tax liabilities as of December 31, 2017 from 35% to the new 21% tax rate; a reduction of approximately $1.5 million. Additionally, the Company had no impact in the U.S. with respect to the Toll Charge under the Tax Act, as a result of the allocation of foreign subsidiary deficits against positive earnings.

Uncertain Tax Positions

The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Upon adoption of this principle in 2007, the Company derecognized certain tax positions that, upon examination, more likely than not would not have been sustained as a recognized tax benefit. As a result of derecognizing uncertain tax positions, the Company has recorded a cumulative reduction in its deferred tax assets of approximately $12.0 million associated with prior years’ tax benefits, which are not expected to be available primarily due to change of control usage restrictions, and a reduction in the rate of the tax benefit associated with all of its tax attributes.

Due to the Company’s historic policy of applying a valuation allowance against its deferred tax assets, the effect of the above was an offsetting reduction in the Company’s valuation allowance. Accordingly, the above reduction had no net impact on the Company’s financial position, operations or cash flow. As of December 31, 2017, the unrecognized tax benefit has been determined to be $12.1 million, which is unchanged from the balance as of December 31, 2016.

In the unlikely event that these tax benefits are recognized in the future, the amount recognized at that time should result in a reduction in the Company’s effective tax rate.

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. Because the Company has tax loss carry forwards in excess of the unrecognized tax benefits, the Company did not accrue for interest and penalties related to unrecognized tax benefits either upon the initial derecognition of uncertain tax positions or in the current period.

It is possible that the total amount of the Company’s unrecognized tax benefits will significantly increase or decrease within the next 12 months. These changes may be the result of future audits, the application of “change in ownership” rules leading to further restrictions in tax losses arising from changes in the capital structure of the Company, reductions in available tax loss carry forwards through future merger, acquisition and/or disposition transactions, failure to continue a significant level of business activities, or other circumstances not known to management at this time. At this time, an estimate of the range of reasonably possible outcomes cannot be made.