Income Taxes

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

On March 27, 2020 the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other provisions, permits Net Operating Loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company was a significant taxpayer in the earlier eligible carryback years and expects that the NOL carryback provision of the CARES Act will result in a material cash benefit as a result of the 2020 ordinary tax losses being generated and, to a lesser degree, for the 2019 tax year.

Historically, we calculated our provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss. Upon the Company’s adoption of the liquidation basis of accounting, we employ the discrete method of determining our tax provision based on the pre-tax results for the eight month period ending August 31, 2020 and the one month period ending September 30, 2020.

Income tax benefit from continuing operations for the two months ended August 31, 2020 and three months ended September 30, 2019, was $3.6 million and $3.1 million, respectively, and for the eight months ended August 31, 2020 and nine months ended September 30, 2019, was $17.8 million and $6.6 million, respectively, which in the current period resulted primarily from anticipated use of NOL carrybacks as allowed by the CARES Act. The Company’s effective tax rate for the current year periods differs from the U.S. federal statutory rate of 21% due primarily to the effect of state income taxes, non-deductible executive compensation and the tax provisions of the CARES Act.

The CARES Act receivable included in Income tax receivable on the Condensed, Consolidated Statement of Net Assets as of September 30, 2020 is $80.5 million and includes, in addition to the losses from operations, the ordinary losses incurred on the Noden transaction and the sale of the royalty assets. See Note 21, Subsequent Events, for additional information on the LENSAR spin-off. The Income tax receivable as of September 30, 2020 also includes a refund of $7.9 million for a prior year overpayment that was requested after the 2016 Internal Revenue Service (the “IRS”) audit was settled.

The uncertain tax positions decreased by $4.4 million in September 2020 upon settlement of the IRS audit for the tax year 2016. The Company recorded $1.0 million and $1.1 million of interest related to uncertain tax positions during the eight months ended August 31, 2020 and the nine months ended September 30, 2019, respectively.

The Company’s income tax returns are subject to examination by U.S. federal, foreign, state and local tax authorities for tax years 2000 forward. In September 2020, the Company settled the IRS audit for the tax year 2016. The Company is currently under audit by the California Franchise Tax Board (the “CFTB”) for the tax years 2009 through 2015. The timing of the resolutions to the CFTB audit and the amount to be ultimately paid, if any, is uncertain. Final resolution of this complex matter could have a material impact on our Condensed Consolidated Financial Statements. The Company believes its accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law and judgments; however, the outcome of these audits could result in the payment of tax amounts that substantially differ from the amounts the Company has reserved resulting in incremental expense or a reversal of the Company’s reserves in a future period. At this time, the Company does not anticipate a material change in the unrecognized tax benefits related to the CFTB audit that would affect the effective tax rate or deferred tax assets over the next 12 months.

See Note 21, Subsequent Events, for additional information on the CFTB.