12.Income Taxes

On December 22, 2017, the President of the United States signed into law comprehensive tax reform legislation commonly known as Tax Cuts and Jobs Act (the “Tax Act”), which introduces significant changes to the United States tax law. The Tax Act provides numerous provisions including, but not limited to, a reduction to the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, a temporary provision allowing 100% expensing of qualifying capital improvements, a one-time transition tax on foreign earnings, a general elimination of U.S. federal income taxes on dividends received from foreign subsidiaries and a new provision designed to tax global intangible low-taxed income (“GILTI”).

Also, on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides accounting guidance for the Tax Act. SAB 118 provides a measurement period similar to a business combination whereby recognizing provisional amounts to the extent that they are reasonably estimable and adjust them over time as more information becomes available not to extend beyond one year from the Tax Act enactment date. In accordance with SAB 118, a company must reflect the income tax effects of the Tax Act for which the accounting under ASC 740 is complete. To the extent the accounting related to the Tax Act is incomplete but a reasonable estimate is attainable, a provisional estimate should be reflected in the financial statements.

The adjustments reflected in our financial statements related to the application of the Tax Act are provisional amounts estimated based on published guidance and the interpretation of these provisions as of December 31, 2017. The new law directs the United States Treasury to promulgate regulations as it deems appropriate as well as provide guidance implementing the intent of Congress. The Company will recognize any change to the provisional amounts in the period our computations are complete.

The Company calculated reasonable estimates of certain Tax Act provisions including the federal corporate tax rate change, 100% expensing of capital improvements and the one-time transition tax on foreign earnings. In connection with our initial analysis of the Tax Act impact, we have recorded a provisional decrease to net deferred tax assets of $261.3 million with a corresponding increase to deferred tax expense. The Company recorded these provisional amounts in our consolidated financial statements in the period of enactment – December 22, 2017. The Company’s computations are not complete since the Tax Act is unclear in many respects subjecting the legislation to potential technical corrections and interpretation from the United States Treasury and Internal Revenue Service. In addition, there is uncertainty regarding how these U.S. federal income tax changes will affect state and local taxation, which generally use federal taxable income as a starting point for computing the tax liability. The Tax Act also provides for a 100% temporary tax deduction on all qualified assets placed into service after September 27, 2017 and before December 31, 2022 including significant improvements we regularly expend to construct, maintain and renovate our properties. This provision phases out each year thereafter by 20% and will be completely phased out as of January 1, 2027. Beginning in 2018, the new federal rate will also be reflected in the current federal tax expense or benefit in our consolidated statement of operations.

Additionally, upon enactment, there is a one-time deemed repatriation tax on undistributed foreign earnings and profits (“transition tax”). The application of the transition tax is relevant to certain undistributed and previously untaxed post-1986 foreign earnings and profits from our management service contract with Casino Rama located in Orillia, Ontario. The Company recognized a provisional tax expense of $2.6 million related to the transition tax in 2017 and the new law allows a Company to pay this liability over an eight-year period without interest. The Company is continuing to gather additional information to refine the amount of transition tax. As of December 31, 2017, the Company changed its indefinite reinvestment assertion due to new favorable U.S. treatment of foreign dividends and the anticipated termination of the Casino Rama management service contract during the second half of 2018. Because our indefinite reinvestment assertion changed, we recorded foreign withholding taxes of approximately $2.1 million. The Tax Act also contains a new GILTI tax provision and due to the complexity, the Company is continuing to evaluate this provision and application of ASC 740. Therefore, the Company did not record any amount related to GILTI in our financial statements or make a policy decision regarding whether to record deferred taxes related to GILTI. The effects of other provisions within the Tax Act are not expected to have a material impact on our consolidated financial statements for the year ended December 31, 2017.

The following table summarizes the tax effects of temporary differences between the financial statement carrying value of assets and liabilities and their respective tax basis, which are recorded at the prevailing enacted tax rate that will be in effect when these differences are settled or realized. These temporary differences result in taxable or deductible amounts in future years. The Company assessed all available positive and negative evidence to estimate whether sufficient future taxable income will be generated to realize our existing net deferred tax assets. In connection with the failed spin-off-leaseback, the Company continued to record real property assets and a financing obligation of $2.00 billion and $3.52 billion, respectively, on November 1, 2013, which resulted in a substantial increase to our net deferred tax assets of $599.9 million. ASC 740 suggests that additional scrutiny should be given to deferred taxes of an entity with cumulative pre-tax losses during the three most recent three years. Positive evidence of sufficient quantity and quality is required to overcome such significant negative evidence to conclude that a valuation allowance is not warranted.

The components of the Company’s deferred tax assets and liabilities are as follows:


	2017		2016
	(in thousands)
Deferred tax assets:
Stock-based compensation expense	$	15,038	$	17,773
Accrued expenses		39,474		64,175
Loan to the JIVDC		26,237		2,268
Financing obligation to GLPI		900,311		1,359,193
Unrecognized tax benefits		6,565		9,377
Net operating losses and tax credit carryforwards		59,842		78,021
Gross deferred tax assets		1,047,467		1,530,807
Less valuation allowance		(113,699)		(828,501)
Net deferred tax assets		933,768		702,306
Deferred tax liabilities:
Property, plant and equipment, non-master lease		(33,148)		(69,151)
Property, plant and equipment, master lease		(469,363)		(717,602)
Investments in unconsolidated affiliates		(1,218)		(1,383)
Undistributed foreign earnings		(2,061)		(8,596)
Intangibles		(37,035)		(32,498)
Net deferred tax liabilities		(542,825)		(829,230)
Noncurrent deferred tax assets/(liabilities), net	$	390,943	$	(126,924)

The realizability of the net deferred tax assets is evaluated quarterly by assessing the need for a valuation allowance and by adjusting the amount of the allowance, if necessary. The Company gives appropriate consideration to all available positive and negative evidence including projected future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The evaluation of both positive and negative evidence is a requirement pursuant to ASC 740 in determining the net deferred tax assets will be realized. In the event the Company determines that the deferred income tax assets would be realized in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded, which would reduce the provision for income taxes.

The Company determined that a valuation allowance was no longer required against its federal and state net deferred tax assets for the portion that will be realized. The most significant evidence that led to the reversal of the valuation allowance during the three months ended September 30, 2017 includes the following:

Achievement and sustained growth in our three-year cumulative pretax earnings. During the fourth quarter of 2016, we emerged from a three-year cumulative pretax loss position, generating a near break-even cumulative amount of pretax income. This cumulative pretax income increased to $76.6 million as of September 30, 2017 and was expected to rise substantially at year end since the Company had recorded a $161.5 million pretax loss in the fourth quarter of 2014 due to impairment charges of $155.3 million in that period.

Substantial pretax income in seven of the last eight quarters with the only loss reported eight quarters ago.

Lack of significant goodwill and intangible asset impairment charges expected in 2017. The Company had experienced significant impairment charges in connection with the spin-off of its real estate assets to Gaming Leisure Properties, Inc. in November 2013. The Company recorded impairment charges totaling $40.0 million, $159.9 million and $798.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. There were no impairments recorded in 2016 and for the nine months ended September 30, 2017, the Company recorded impairments of $29.9 million.

For the three months ended December 31, 2017, there were no material changes to our core business operations that altered our prior interim conclusion to release the valuation allowance against the federal and state net deferred tax assets for the portion that is more-likely-than-not to be realized. The Company continues to experience significant three-year cumulative pretax income of $152.2 million at December 31, 2017 despite the Jamul impairment charge of $77.9 million during the three months ended December 31, 2017. As such, the Company released $741.9 million of its total valuation allowance for the year ended December 31, 2017 due to the positive evidence outweighing the negative evidence thereby allowing the Company to achieve the “more-likely-than-not” realization standard. This reversal is reflected in our income tax benefit in the accompanying consolidated statements of operations. The Company continues to maintain a valuation allowance of $113.7 million as of December 31, 2017 for federal capital loss carryforwards, as well as certain state filing groups, where it continues to be in a cumulative three-year pretax loss position.

Following the ownership change of the Tropicana Las Vegas, the Company has a total federal net operating loss carry-forwards in the amount of $143.4 million for the year ended December 31, 2017, which will expire on various dates from 2029 through 2034. These tax attributes are subject to limitations under the Internal Revenue Code and underlying Treasury Regulations, however we believe it is more-likely-than-not that the benefit from these tax attributes will be realized.

For state income tax reporting, the Company has gross state net operating loss carry-forwards aggregating approximately $478.3 million available to reduce future state income taxes, primarily for the Commonwealth of Pennsylvania and the States of Missouri, New Mexico, Maine, Illinois, and Ohio localities as of December 31, 2017. The tax benefit associated with these net operating loss carry-forwards is approximately $28.7 million. Due to statutorily limited operating loss carry-forwards and income and loss projections in the applicable jurisdictions, a valuation allowance has been recorded to reflect the net operating losses which are not presently expected to be realized in the amount of $28.3 million. If not used, substantially all the carry-forwards will expire at various dates from December 31, 2018 to December 31, 2037.

Additionally, included in the Company’s valuation allowance is $0.1 million for realized federal capital losses that will expire if not used via the realization of capital gains by December 31, 2018, as well as $26.2 million for an unrealized capital loss associated with our loan to the JIVDC. Overall the Company’s valuation allowance at December 31, 2017 decreased from December 31, 2016 by a net amount of $714.8 million primarily due to the reversal of the federal valuation allowance, and a partial reversal of the state valuation allowance.

The domestic and foreign components of income before income tax expense for the years ended December 31, 2017, 2016 and 2015 was as follows:


Year ended December 31,	2017	2016	2015

Domestic	(29,538)	116,693	54,443
Foreign	4,494	3,924	2,167
Total	(25,044)	120,617	56,610

The provision for income taxes charged to operations for the years ended December 31, 2017, 2016 and 2015 was as follows:


Year ended December 31,	2017		2016		2015
	(in thousands)
Current tax expense (benefit)
Federal	$	16,318	$	8,721	$	(5,158)
State		6,062		3,489		133
Foreign		(2,981)		(9,639)		3,713
Total current		19,399		2,571		(1,312)
Deferred tax (benefit) expense
Federal		(480,712)		4,701		51,817
State		(39,255)		3,279		5,419
Foreign		2,061		756		—
Total deferred		(517,906)		8,736		57,236
Total income tax (benefit) provision	$	(498,507)	$	11,307	$	55,924

The negative pretax income magnifies the impact of one-time items including reversal of the valuation allowance and the federal deferred rate change in the Company’s effective tax rate for the year ended December 31, 2017. The following table reconciles the statutory federal income tax rate to the actual effective income tax rate for 2017, 2016 and 2015:


Year ended December 31,	2017		2016		2015
Percent of pretax income
Federal statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes - net of federal benefits	6.3	%	1.2	%	6.1	%
Nondeductible expenses	(16.0)	%	0.3	%	3.0	%
Goodwill impairment	(20.5)	%	—	%	—	%
Compensation	29.5	%	(1.5)	%	2.8	%
Contingent liability settlement	22.9	%	0.6	%	—	%
Foreign	11.3	%	(8.5)	%	5.2	%
Valuation allowance	2,962.3	%	(17.1)	%	55.3	%
Federal tax reform enactment - deferred rate change	(1,043.5)	%	—	%	—	%
Other miscellaneous items	3.3	%	(0.6)	%	(8.6)	%
Total effective tax rate	1,990.6	%	9.4	%	98.8	%

The income tax (benefit)/expense differs from the federal statutory amount because the effect of the items detailed in the table below.


Year ended December 31,	2017		2016		2015
	(in thousands)
Amount of pretax income
Federal statutory rate	$	(8,765)	$	42,216	$	19,814
State and local income taxes - net of federal benefits		(1,567)		1,498		3,435
Nondeductible expenses		4,018		371		1,717
Goodwill impairment		5,131		—		—
Compensation		(7,376)		(1,817)		1,559
Contingent liability settlement		(5,740)		756		—
Foreign		(2,840)		(10,268)		2,955
Valuation allowance		(741,872)		(20,675)		31,288
Federal tax reform enactment - deferred rate change		261,329		—		—
Other miscellaneous items		(825)		(774)		(4,844)
Total income tax provision	$	(498,507)	$	11,307	$	55,924

A reconciliation of the beginning and ending amount for the liability for unrecognized tax benefits is as follows:


	Unrecognized
	tax benefits
	(in thousands)
Unrecognized tax benefits	$	33,569
Cumulative advance deposits on account		(31,371)
Balance at December 31, 2015	$	2,198

Additions based on current year positions		—
Additions based on prior year positions		3,749
Decreases due to settlements and/or reduction in reserves		(9,091)
Currency translation adjustments		2,565
Settlement payments		(4,000)
Unrecognized tax benefits at December 31, 2016	$	26,792

Additions based on current year positions		2,979
Additions based on prior year positions		2,836
Decreases due to settlements and/or reduction in reserves		(1,322)
Currency translation adjustments		(119)
Settlement payments		(216)
Unrecognized tax benefits at December 31, 2017	$	30,950

The Company is required under ASC 740 to disclose its accounting policy for classifying interest and penalties, the amount of interest and penalties charged to expense each period, as well as the cumulative amounts recorded in the consolidated balance sheets. The Company will continue to classify any income tax related penalties and interest accrued related to unrecognized tax benefits in income tax provisions within the consolidated statements of operations.

The U.S. and Canadian competent authorities have effectively settled and issued refunds for the transfer pricing dispute related to our Casino Rama management service agreement. During the year ended December 31, 2017, the Company received a cash refund of $9.5 million and $29.7 million from U.S. and Canada (inclusive of advances on account listed in the table above), respectively, which was classified in other current assets at December 31, 2016.

During the year ended December 31, 2017, the Company recorded $3.6 million of tax reserves and accrued interest and penalties related to current year uncertain tax positions. In regard to prior year tax positions, the Company recorded $3.1 million of tax reserves and accrued interest and reversed $1.4 million of previously recorded tax reserves and accrued interest for uncertain tax positions that have settled and/or closed. The unrecognized tax benefits of $31.8 million is classified in other noncurrent tax liabilities. Overall, the Company recorded a net tax expense of $8.0 million in connection with its uncertain tax positions for the year ended December 31, 2017.

Included in the liability for unrecognized tax benefits at December 31, 2017 and 2016 were $25.1 million and $9.4 million, respectively, of tax positions that, if reversed, would affect the effective tax rate. Also included in the reserve at December 31, 2017 and 2016 were $0.1 million and $1.7 million gain of currency translation related to foreign currency tax positions and the settlement receivable on account, respectively.

During the years ended December 31, 2017 and 2016, the Company recognized approximately $1.7 million and $0.3 million, respectively, of interest and penalties, net of deferred taxes. In addition, due to settlements and/or reductions in previously recorded liabilities, the Company had reductions in previously accrued interest and penalties of $0.1 million, net of deferred taxes. These accruals are included in noncurrent tax liabilities and prepaid expenses within the consolidated balance sheets at December 31, 2017 and 2016, respectively.

The Company is currently in various stages of the examination process in connection with its open audits. Generally, it is difficult to determine when these examinations will be closed, but the Company reasonably expects that its ASC 740 liabilities will not significantly change over the next twelve months.

As of December 31, 2017, the Company is subject to U.S. federal income tax examinations for the tax years 2014, 2015, and 2016. The 2013 U.S. federal income tax return was audited by the Internal Revenue Service and the examination concluded on September 27, 2017 with no adjustments other than the expected Canada competent authority settlement. The 2013 income tax return statute of limitation was extended to June 30, 2018 to accommodate the processing of this change. In addition, the Company is subject to state and local income tax examinations for various tax years in the taxing jurisdictions in which the Company operates.

At December 31, 2017 and 2016, prepaid expenses within the consolidated balance sheets included prepaid income taxes of $12.0 million and $30.1 million, respectively. The Company received federal income tax refunds of $28.1 million including interest during the year related to net operating loss carryback, general business credit carryback and a prior year overpayment.