(14) Income Taxes

The components of income tax expense (benefit) are as follows:

 

		Years Ended December 31,
		2013				2012				2011
Current income tax expense:
Federal		$	(3,443	)		$	(6,845	)		$	—
State			(1,053	)			763				500
Total Current			(4,496	)			(6,082	)			500
Deferred income tax benefit:
Federal			(64,292	)			(51,557	)			(4,277	)
State			(4,307	)			(5,121	)			—
Total Deferred			(68,599	)			(56,678	)			(4,277	)
Total income tax benefit attributable to continuing operations		$	(73,095	)		$	(62,760	)		$	(3,777	)

A reconciliation of the income tax benefit and the amount computed by applying the statutory federal income tax rate of 35% to loss from continuing operations before income taxes is as follows:

 

		Years Ended December 31,
		2013				2012				2011
U.S. federal income tax benefit at statutory rate			35.0	%			35.0	%			35.0	%
State and local income taxes, net of federal benefit			4.1	%			4.3	%			(8.4	%)
Compensation			(0.3	%)			(0.4	%)			(3.7	%)
Transaction costs			0.0	%			(2.4	%)			(10.2	%)
Change in fair value of contingent consideration			0.1	%			(1.2	%)			6.7	%
Loss on disposal of China Water			0.0	%			0.0	%			976.9	%
Change in valuation allowance			(2.1	%)			55.4	%			(909.5	%)
Other			(1.5	%)			(0.3	%)			10.4	%
Benefit for income taxes			35.3	%			90.4	%			97.2	%

On May 3, 2013, North Dakota enacted SB 2156, which lowered the top corporate income tax rate from 5.15% to 4.53%, effective for tax years beginning after December 31, 2012. This rate reduction resulted in a reduction to the Company’s overall deferred tax liability of $1.1 million, and was recorded as an income tax benefit in the quarter ended June 30, 2013. During 2013, the Company also recorded $3.0 million of adjustments from prior periods to deferred tax assets and liabilities associated with fixed assets, certain acquired intangible assets and net operating loss carryforwards.

 

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

 

		December 31,
		2013				2012
Deferred tax assets:
Reserves		$	11,783			$	3,451
Net operating losses			106,763				85,123
Equity based compensation			1,806				1,434
Other			5,114				4,221
Total			125,466				94,229
Less: Valuation allowance			(6,076	)			(1,657	)
Total deferred tax assets			119,390				92,572
Deferred tax liabilities:
Fixed assets and intangibles			(130,032	)			(167,210	)
Deferred financing costs			(2,041	)			(2,023	)
Other			(227	)			(51	)
Total deferred tax liabilities			(132,300	)			(169,284	)
Net deferred tax liability		$	(12,910	)		$	(76,712	)

 

		December 31,
		2013				2012
Current deferred tax assets, net:
Deferred tax assets		$	31,754			$	11,949
Deferred tax liabilities			(219	)			(45	)
Valuation allowance			(1,463	)			(220	)
Total current deferred tax assets, net			30,072				11,684
Long-term deferred tax liabilities, net:
Deferred tax assets			93,712				82,281
Deferred tax liabilities			(132,081	)			(169,240	)
Valuation allowance			(4,613	)			(1,437	)
Total long-term deferred tax liabilities, net			(42,982	)			(88,396	)
Net deferred tax liability		$	(12,910	)		$	(76,712	)

As of December 31, 2013, the Company had net operating loss (“NOL”) carryforwards for federal income tax purposes of approximately $282.9 million, which expire in 2030-2033, and state NOL carryforwards of approximately $158.4 million, which expire in 2017 through 2033.

As required by GAAP, management assesses the recoverability of the Company’s deferred tax assets on a regular basis and records a valuation allowance for any such assets where recoverability is determined to be not more likely than not. The Company’s evaluation of its valuation allowance resulted in a release of $38.5 million of valuation allowance in 2012. The Company determined that realization of these deferred tax assets is more likely than not based on future taxable income arising from the reversal of deferred tax liabilities acquired in connection with the Power Fuels Merger described in Note 3 and the TFI acquisition described in Note 20. The Company has recorded a valuation allowance of $6.1 million as of December 31, 2013 for certain state net operating loss carryforwards that management does not believe are more likely than not to be realized and for the write-down of the Company’s investment in UGSI, which would result in a capital loss that would more likely than not be unrealizable prior to its expiration.

 

A reconciliation of the Company’s valuation allowance on deferred tax assets for the years ended December 31, 2013 and 2012 is as follows:

 

		2013				2012
Beginning balance at January 1,		$	1,657			$	40,188
Additions to valuation allowance			4,419				—
Valuation allowance release, net			—				(38,531	)
Ending balance at December 31,		$	6,076			$	1,657

Pursuant to United States Internal Revenue Code Section 382, if the Company underwent an ownership change, the NOL carryforward limitations would impose an annual limit on the amount of the taxable income that may be offset by the Company’s NOL generated prior to the ownership change. The Company has determined that an ownership change occurred on November 30, 2012 as a result of the stock consideration transferred in the Power Fuels Merger. The Company does not expect any limitation under Section 382 to result in federal NOL’s expiring unused. If a subsequent ownership change were to occur, the Company may be unable to use a significant portion of its NOL to offset future taxable income.

As of December 31, 2013, the Company had unrecognized tax benefits attributable to discontinued operations totaling approximately $0.3 million which would favorably impact the Company’s effective tax rate if subsequently recognized. As of December 31, 2012, and 2011, the Company had no unrecognized tax benefits recorded.

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

 

		Year Ended December 31, 2013
Unrecognized tax benefits balance at beginning of year		$	—
Additions for tax positions taken in prior periods			306
Reductions for lapses of statute of limitations			(23	)
Unrecognized tax benefits balance at end of year		$	283

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties as of December 31, 2013 was approximately $0.1 million and no interest and penalties were accrued as of December 31, 2012 and 2011. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

The Company anticipates a reduction of $0.1 million in the total amount of unrecognized tax benefits during the next twelve months as a result of the lapsing of the statute of limitations related to a state tax position.

The Company and its subsidiaries are subject to the following significant taxing jurisdictions: U.S. Federal, Pennsylvania, Louisiana, North Dakota, Texas, West Virginia, Arizona, and Oregon. The Company has had NOLs in various years for federal purposes and for many states. The statute of limitations for a particular tax year for examination by the Internal Revenue Service is generally three years subsequent to the filing of the associated tax return. However, the Internal Revenue Service can adjust NOL carryovers up to three years subsequent to the last year in which the loss carryover is finally used. Accordingly, there are multiple years open to examination. The statute of limitations is generally three to four years for many of the states where the Company operates.

During 2013, the Internal Revenue Service completed its examination of the Company’s Federal income tax returns for the years ended December 31, 2008 through 2010 with no changes. The Company is currently not under income tax examination in any other tax jurisdictions.