Income Taxes

The Company recognized income tax benefit of $2.7 million and $18 thousand for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively, as compared to $3.4 million for the year ended December 31, 2017. Income tax benefit recognized during the period from February 10, 2018 through December 31, 2018 reflects primarily the favorable resolution of certain tax audits during the period. Income tax benefit recognized during the period from January 1, 2018 through February 9, 2018 reflects the tax impact of the Predecessor operations, reorganization adjustments and the fresh start accounting adjustments. The income tax benefit recognized during the year ended December 31, 2017 resulted primarily from adjustments to reduce the valuation allowance due to tax law changes under the Tax Act, offset in part by tax expense related to goodwill and nominal current state tax. Deferred taxes in 2018 and 2017 have been reduced by a valuation allowance due to a determination that it is more likely than not that some or all of the deferred tax assets will not be realized based on the weight of all available evidence. The effective tax rate and tax benefit continue to be low as a result of the Company not recognizing an income tax benefit associated with net losses.

Under the WIMC Prepackaged Plan, a substantial amount of the Company’s debt was discharged. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The amount of CODI recognized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued.

The Code provides that a debtor whose debt is discharged pursuant to a confirmed Chapter 11 plan does not recognize taxable CODI but must reduce certain of its tax attributes by the amount of the CODI excluded from taxable income. The reduction in the Company's tax attributes for excluded CODI has been estimated in connection with the determination of Company's tax liability for the tax year ending December 31, 2018, and will be finalized upon the Company's preparation and filing of the 2018 tax return.

As provided by Section 382 of the Code and similar state law provisions, utilization of certain tax attributes may be subject to substantial annual limitations due to an ownership change in the Company. Under the rules, statutorily defined ownership changes may limit the amount of tax attributes that can be utilized annually to offset future taxable income and tax. In general, an ownership change, as defined by Section 382 for federal income tax purposes, results from transactions that increase the ownership of statutorily defined 5% stockholders in the stock of a corporation by more than 50% in the aggregate over a testing period, generally three years.

The Company experienced an ownership change in connection with the Company's emergence from the WIMC Chapter 11 Case on February 9, 2018. The Company currently expects to apply the rules under Section 382(l)(5) of the Code and the U.S. Treasury regulations thereunder that would allow the Company to mitigate the limitations imposed under Section 382 with respect to the Company's remaining tax attributes and the Company’s deferred tax assets and liabilities have been computed on such basis. However, the application of such provision remains subject to examination by the IRS. Taxpayers who qualify for this provision may, at their option, elect not to apply it. If such provision does not apply, the Company's ability to realize the value of its tax attributes would be subject to limitation and the amount of its deferred tax assets and liabilities may differ. Also, an ownership change subsequent to the Company's emergence from bankruptcy could severely limit or effectively eliminate its ability to realize the value of its tax attributes.

Income tax benefit consists of the following components (in thousands):



	Successor			Predecessor
	For the Period From February 10, 2018 Through December 31, 2018			For the Period From January 1, 2018 Through February 9, 2018			For the Year Ended December 31, 2017
Current
Federal	$	(3,430	)	$	(112	)	$	2,757
State and local	(1,647		)	70			(2,315		)
Current income tax expense (benefit)	(5,077		)	(42		)	442
Deferred
Federal	3,193			83			(4,215		)
State and local	(767		)	(59		)	416
Deferred income tax expense (benefit)	2,426			24			(3,799		)
Total income tax benefit	$	(2,651	)	$	(18	)	$	(3,357	)

Income tax benefit at the Company’s effective tax rate differed from the statutory tax rate as follows (in thousands):



	Successor			Predecessor
	For the Period From February 10, 2018 Through December 31, 2018			For the Period From January 1, 2018 Through February 9, 2018			For the Year Ended December 31, 2017
Income (loss) before income taxes	$	(207,745	)	$	520,989		$	(430,256	)

Tax provision at statutory tax rate (21% and 35% in 2018 and 2017, respectively)	(43,627		)	109,408			(150,590		)
Effect of:
Valuation allowance exclusive of Tax Act	43,565			(160,644		)	162,496
Section 108 attribute reduction	—			92,343			—
Cancellation of debt income exclusion	(94		)	(91,859		)	—
State and local income tax	(4,904		)	25,127			(26,396		)
Section 382 interest adjustment	—			15,750			—
Share-based compensation	—			8,044			—
Non-deductible restructuring costs	149			1,978			13,475
Federal rate change related to Tax Act	—			—			173,405
Valuation allowance related to Tax Act	—			—			(180,033		)
Other	2,260			(165		)	4,286
Total income tax benefit	$	(2,651	)	$	(18	)	$	(3,357	)

The following table summarizes the components of deferred tax assets and liabilities (in thousands):



	Successor			Predecessor
	December 31, 2018			December 31, 2017
Deferred tax assets
Goodwill	$	65,426		$	66,699
Reverse loans	60,776			48,814
Servicer and protective advances	40,497			37,793
Curtailment liability	25,228			33,724
Net operating losses	16,644			113,315
Disallowed interest expense	10,997			—
Intangible assets	8,677			20,978
Accrued expenses	6,310			8,396
Net investment in residential loans	4,772			—
Accrued legal contingencies and settlements	3,388			6,727
Other	31,397			50,638
Total deferred tax assets	274,112			387,084
Valuation allowance	(221,913		)	(328,661		)
Total deferred tax assets, net of valuation allowance	52,199			58,423
Deferred tax liabilities
Servicing rights	(53,617		)	(52,587		)
Net investment in residential loans	—			(3,972		)
Other	(454		)	(1,312		)
Total deferred tax liabilities	(54,071		)	(57,871		)
Deferred tax assets (liabilities), net	$	(1,872	)	$	552

The following table summarizes the activity in the valuation allowance on deferred tax assets (in thousands):



	Successor		Predecessor
	For the Period From February 10, 2018 Through December 31, 2018		For the Period From January 1, 2018 Through February 9, 2018			For the Year Ended December 31, 2017
Balance at beginning of period	$	178,303	$	328,661		$	346,199
Fresh start accounting adjustments	—		(148,091		)	—
ASC 610 accounting adjustments	45		10,286			—
Charges to income tax expense	43,565		—			—
Deductions	—		(12,553		)	(17,538		)
Balance at end of period	$	221,913	$	178,303		$	328,661

The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if it is determined, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company’s evaluation focuses on identifying significant, objective evidence that it will more likely than not be able to realize its deferred tax assets in the future. The Company considers both positive and negative evidence when evaluating the need for a valuation allowance, which is highly judgmental and requires subjective weighting of such evidence. The Company had a valuation allowance of $221.9 million and $328.7 million at December 31, 2018 and 2017, respectively.

At December 31, 2018, the Company had gross federal operating loss carryforwards of $24.7 million, of which less than $0.1 million will expire between 2036 and 2038, while the remaining balance does not have an expiration date, and gross state operating loss carryforwards of $14.5 million, resulting in net tax carryforwards of $16.6 million. In addition, at December 31, 2018 the Company had tax credit carryforwards of $0.2 million that have no expiration date.

In December 2017, the Tax Act was signed into law. Among other things, the Tax Act lowered the corporate federal income tax rate to 21% from the prior maximum rate of 35%, effective for tax years that included or commenced January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, GAAP required companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. This revaluation resulted in a provision of $173.4 million to income tax expense in continuing operations and a reduction in the valuation allowance of $180.0 million. The Tax Act provided for changes in the carryforward of NOLs and ability to utilize NOLs to offset future taxable income as well as the elimination of the corporate alternative minimum tax for which changes the Company adjusted its valuation allowance.

The final determination of the Tax Act and the remeasurement of the Company's deferred assets and liabilities was completed as of December 31, 2018 and other than the aforementioned impacts of these tax law changes, there were no material changes needed.

Uncertain Tax Positions

The Company recognizes tax benefits in accordance with the accounting guidance concerning uncertainty in income taxes. This guidance establishes a more-likely-than-not recognition threshold that must be met before a tax benefit can be recognized in the Consolidated Financial Statements.

A reconciliation of the beginning and ending balances of the total liability for unrecognized tax benefits is as follows (in thousands):



	Successor			Predecessor
	For the Period From February 10, 2018 Through December 31, 2018			For the Period From January 1, 2018 Through February 9, 2018		For the Year Ended December 31, 2017
Balance at the beginning of the period	$	3,090		$	3,088	$	5,414
Increases (reductions) related to prior year tax positions	(1,287		)	2		(2,766		)
Increases related to current year tax positions	—			—		440
Balance at the end of the period	$	1,803		$	3,090	$	3,088

The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $1.8 million and $3.1 million at December 31, 2018 and 2017, respectively. For the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, income tax expense (benefit) included $(0.7) million, $19 thousand and $(1.5) million, respectively, for interest and penalties accrued on the liability for unrecognized tax benefits. At December 31, 2018 and 2017, accrued interest and penalties were $1.9 million and $2.5 million, respectively, which are included in payables and accrued liabilities on the consolidated balance sheets.

The Company’s tax years that remain subject to examination by the IRS are 2013 through 2018 and by various states are 2012 through 2018.