NOTE 10 INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carry-forwards. Under this method, deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that includes the enactment date.

In 2013, the State of North Dakota lowered its corporate income tax rate. The impact of this rate change was to lower the Company's deferred state income tax expense by approximately $0.5 million during the year ended December 31, 2013.

The income tax provision (benefit) for the year ended December 31, 2015, 2014, and 2013 consists of the following:

	2015			2014		2013
Current	$	(73,649	)	$	3,259,445	$	(8,386	)
Deferred
Federal		(186,150,724	)		87,625,430		29,826,000
State		(16,199,831	)		8,482,125		1,950,000
Total Expense (Benefit)	$	(202,424,204	)	$	99,367,000	$	31,767,614

The following is a reconciliation of the reported amount of income tax expense for the years ended December 31, 2015, 2014, and 2013 to the amount of income tax expenses that would result from applying the statutory rate to pretax income.

	2015			2014			2013
Income (Loss) Before Taxes and NOL	$	(1,177,778,745	)	$	263,112,945		$	84,834,650
Federal Statutory Rate		X 35	%		X 35	%		X 35	%
Taxes Computed at Federal Statutory Rates		(412,223,000	)		92,090,000			29,692,000
State Taxes, Net of Federal Taxes		(23,825,000	)		5,404,300			909,614
Non-Deductible Compensation		777,000			1,872,700			1,166,000
Other		586,796			-			-
Valuation Allowance		232,260,000			-			-
Reported Provision (Benefit)	$	(202,424,204	)	$	99,367,000		$	31,767,614

A valuation allowance is established to reduce deferred tax assets if it is determined that it is more likely than not that the related tax benefit will not be realized. On a quarterly basis, management evaluates the need for and adequacy of valuation allowances based on the expected realizability of the deferred tax assets and adjusts the amount of such allowances, if necessary. During 2015, in evaluating whether it was more likely than not that the Company's net deferred tax assets were realized through future net income, management considered all available positive and negative evidence, including (i) its earnings history, (ii) its ability to recover net operating loss carry-forwards, (iii) the existence of significant proved oil and natural gas reserves, (iv) its ability to use tax planning strategies, (v) its current price protection utilizing oil hedges, (vi) its future revenue and operating cost projections and (vii) the current market prices for oil and natural gas. Based on all the evidence available, during the year ended December 31, 2015, management determined it was more likely than not that the net deferred tax assets were not realizable, therefore a valuation allowance of $232.3 million was recorded.

At December 31, 2015, the Company had a net operating loss carryforward for federal income tax purposes of $524.9 million. If unutilized, the federal net operating losses will expire from 2027 to 2035. At December 31, 2015, the Company had an alternative minimum tax credit for federal income tax purpose of $3.2 million. This credit carryforward does not expire.

The components of the Company's deferred tax assets (liabilities) were as follows:

	Year Ended December 31,
	2015			2014
Deferred Tax Assets
Current:
Share Based Compensation	$	-		$	1,141,000
Accrued Interest		-			1,238,000
Accrued Expenses		-			986,000
Other		-			683,000
Total Current		-			4,048,000

Non-Current:
Net Operating Loss (NOLs) and Tax Credit Carryforwards		195,207,000			194,227,445
Share Based Compensation		1,762,000			-
Accrued Interest		1,723,000			-
Allowance for Doubtful Accounts		1,662,000			-
Crude Oil and Natural Gas Properties and Other Properties		55,939,000			-
Other		-			94,000
Total Non-Current		256,293,000			194,321,445
Total Deferred Tax Asset	$	256,293,000		$	198,369,445

Deferred Tax Liabilities
Current:
Derivative Instruments	$	-		$	(47,877,000	)
Other		-			(110,000	)
Total Current	$	-		$	(47,987,000	)

Non-Current:
Crude Oil and Natural Gas Properties and Other Properties		-			(343,657,000	)
Derivative Instruments		(23,855,000	)		(9,076,000	)
Other		(178,000	)		-
Total Non-Current		(24,033,000	)		(352,733,000	)
Total Deferred Tax Liabilities⁽¹⁾	$	(24,033,000	)		(400,720,000	)

Total Net Deferred Tax Assets (Liabilities) Before Valuation Allowance		232,260,000			(202,350,555	)

Valuation Allowance		(232,260,000	)		-

Total Net Deferred Tax Assets Liabilities	$	-		$	(202,350,555	)

(1)

All deferred tax liabilities and assets as of December 31, 2015, are classified as noncurrent on the accompanying balance sheets upon the Company's adoption of ASU 2015-17 on a prospective basis. Prior year amounts have not been restated. Please refer to Note 2 "New Accounting Pronouncements" for additional disclosure.

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company's tax returns that do not meet these recognition and measurement standards. The Company has no liabilities for unrecognized tax benefits.

The Company's policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2015, 2014 and 2013, the Company did not recognize any interest or penalties in its statements of operations, nor did it have any interest or penalties accrued in its balance sheet at December 31, 2015 and 2014 relating to unrecognized benefits.

The tax years 2015, 2014, 2013 and 2012 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject.