Note 13 – Income Taxes

The income (loss) before income taxes and the components of the income tax expense (benefit) recognized on the Consolidated Statement of Operation are as follows:


(Amounts in thousands)	U.K.		U.S.		Other		Total
Year Ended December 31, 2014:
Net loss before taxes	$	(741,005)	$	(137,440)	$	(16,499)	$	(894,944)

PRT tax current expense		9,172		—		—		9,172
PRT tax deferred benefit		(4,272)		—		—		(4,272)
PRT tax expense		4,900		—		—		4,900

Corporate current expense (benefit)		(127)		—		21		(106)
Corporate deferred benefit		(59,483)		—		—		(59,483)
Corporate tax expense (benefit)		(59,610)		—		21		(59,589)

Total tax expense (benefit)		(54,710)		—		21		(54,689)

Net loss after taxes	$	(686,295)	$	(137,440)	$	(16,520)	$	(840,255)

Year Ended December 31, 2013:
Net loss before taxes	$	(35,273)	$	(44,591)	$	(9,173)	$	(89,037)

PRT tax current expense		20,667		—		—		20,667
PRT tax deferred benefit		(13,978)		—		—		(13,978)
PRT tax expense		6,689		—		—		6,689

Corporate current expense		—		—		30		30
Corporate deferred benefit		(277)		—		—		(277)
Corporate tax expense (benefit)		(277)		—		30		(247)

Total tax expense		6,412		—		30		6,442
Net loss after taxes	$	(41,685)	$	(44,591)	$	(9,203)	$	(95,479)

Year Ended December 31, 2012:
Net income (loss) before taxes	$	(22,959)	$	(91,383)	$	2,344	$	(111,998)

PRT tax current expense		31,796		—		—		31,796
PRT tax deferred benefit		(14,823)		—		—		(14,823)
PRT tax expense		16,973		—		—		16,973

Corporate current expense		—		—		26		26
Corporate deferred benefit		(11,358)		—		—		(11,358)
Deferred tax expense related to U.K. tax law change		8,587		—		—		8,587
Corporate tax expense (benefit)		(2,771)		—		26		(2,745)

Total tax expense		14,202		—		26		14,228
Net income (loss) after taxes	$	(37,161)	$	(91,383)	$	2,318	$	(126,226)

Effective Tax Rate Reconciliation

The following table presents the principal reasons for the difference between our effective tax rates and the United States federal statutory income tax rate of 35%.



	Year Ended December 31,
	2014		2013		2012
Federal income tax benefit at statutory rate	$	(313,230)	$	(31,163)	$	(39,199)
Taxation of foreign operations		(65,478)		21,998		5,859
Effect of out-of-period adjustment		—		—		6,997
Change in valuation allowance		232,513		15,343		30,329
U.K. tax increase from tax law and rate changes		—		—		8,587
Goodwill impairment		90,733		—		—
Disallowed executive compensation		88		247		1,655
Other		685		17		—

Total Income Tax Expense (Benefit)	$	(54,689)	$	6,442	$	14,228
Effective Income Tax Rate		6%		-7%		-13%

During 2014, 2013 and 2012, we incurred taxes primarily related to our operations in the U.K. During 2014, in the U.K. we had a loss before taxes of $741.0 million that included significant oil and gas property impairments (see Note 7 – Property and Equipment). As a result, the U.K realized a net deferred tax asset at December 31, 2014. We recorded a valuation allowance on the deferred tax asset as there was no assurance that we could generate sufficient U.K. taxable earnings to fully utilize all of the deferred tax assets.

In 2014, 2013 and 2012, we had losses before taxes of $137.4 million, $44.6 million and $91.4 million, respectively, in the U.S. and we did not record any income tax benefits on these losses as there was no assurance that we could generate any future U.S. taxable earnings. As a result, we recorded a valuation allowance on the full amount of all deferred tax assets generated in the U.S.

Deferred Tax Assets and Liabilities

Deferred income taxes result from the net tax effects of temporary timing differences between the carrying amounts of assets and liabilities reflected on the financial statements and the amounts recognized for income tax purposes.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows at December 31:


	2014		2013
Net deferred tax asset:
Deferred compensation	$	1,861	$	2,401
Asset retirement obligation		53,140		84,941
Net operating loss and capital loss carryforward		422,828		423,374
Unrealized loss on embedded derivative instruments		—		1,265
Property, plant and equipment		19,633		14,086
Inventory / other		769		2,185
Total deferred tax assets		498,231		528,252
Less valuation allowance		(335,251)		(103,171)
Total deferred tax assets after valuation allowance		162,980		425,081

Deferred tax liability:
Property, plant and equipment		(192,847)		(526,274)
Petroleum revenue tax, net of tax benefit		(16,100)		(17,967)
Debt discount		—		(471)
Total deferred tax liabilities		(208,947)		(544,712)
Net deferred tax liability	$	(45,967)	$	(119,631)

Tax Attributes

At December 31, 2014, we had the following tax attributes available to reduce future income taxes:



		As of December 31,
		2014			2013
	Types of Tax Attributes	Years of Expiration	Carry-forward Amount		Years of Expiration	Carry-forward Amount
U.K.
Corporate tax	NOL	Indefinite	$	610,743	Indefinite	$	638,466
Supplemental Corporate tax	NOL	Indefinite		346,828	Indefinite		455,318

U.S.
Corporate Income tax	NOL	2023 - 2034		354,171	2023 - 2033		232,745
State Income tax	NOL	2015 - 2034		84,069	2014 - 2033		83,613
Capital gains tax	Capital loss	2015		1,848	2015		1,848

In the U.S., as a result of the Bankruptcy Cases, the ultimate realization of our net operating losses (“NOL”) and tax basis is dependent on the terms of our restructuring. If a portion of our debt is cancelled upon emergence from Chapter 11, the amount of the cancelled debt will reduce tax attributes such as our NOLs and tax basis, which, depending on our plan of reorganization, could partially or fully reduce our available NOLs.

Valuation Allowances and Unrecognized Tax Benefits

Recognition of the benefits of the deferred tax assets requires that we generate future taxable income. In the U.S., there can be no assurance that we will generate any earnings or any specific level of earnings in future years. Therefore, we have established a valuation allowance for deferred tax assets of approximately $149.7 million and $103.0 million as of December 31, 2014 and 2013, respectively, primarily related to our U.S. operations. In the U.K. there can be no assurance that we will generate sufficient earnings to fully utilize the existing deferred tax assets. Therefore, we established a valuation allowance for deferred tax assets of $185.5 million as of December 31, 2014.

During 2014, the valuation allowance in the U.S. increased $47.0 million due to net operating losses, increased $185.5 million in the U.K. and decreased $0.4 million in other jurisdictions.

During 2013, the valuation allowance in the U.S. increased $18.3 million, $2.9 million for net revisions and $15.4 million due to net operating losses, and increased $0.2 million for net operating losses in other jurisdictions. During 2012, the valuation allowance in the U.S. increased $29.1 million due to net operating losses and decreased $3.0 million in other jurisdictions. For U.S. federal income tax purposes, certain limitations are imposed on an entity’s ability to utilize its NOLs in future periods if a change of control, as defined for federal income tax purposes, has taken place. In general terms, the limitation on utilization of NOLs and other tax attributes during any one year is determined by the value of an acquired entity at the date of the change of control multiplied by the then-existing long-term, tax-exempt interest rate. We have determined that, for federal income tax purposes, a change of control occurred during 2004 and 2007, however, we do not believe such limitations will significantly impact our ability to utilize the NOL. The timing of NOL utilization will be determined by our future net income.

Uncertain Tax Positions

At December 31, 2013, we had an unrecognized tax benefit of $6.8 million relating to various U.K. tax matters. That amount increased $0.7 million during the year. However, the statute of limitations for assessing tax for this benefit expired at the end of 2014, thus allowing the full recognition of these benefits. The benefit was recorded as a reduction to tax expense.

For the years ended December 31, 2014, 2013 and 2012, no interest or penalty expense had been incurred.

The following represents a reconciliation of the change in our unrecognized tax benefits, for the year ended December 31, 2014.



		December 31,
		2014		2013
Balance at the beginning of the year	$	6,820	$	6,820
Decrease in unrecognized tax benefits from lapse in statute of limitations		(6,820)		—
Balance at the end of the year	$	—	$	6,820

The following tax years remain subject to examination:



Tax Jurisdiction
U.K.	2013 - 2014
All others	2012 - 2014

Foreign Earnings and Credits

As of December 31, 2014, we had de minimus unremitted earnings in our foreign subsidiaries. If these unremitted earnings had been dividend to the U.S., the U.S. NOLs not subject to the limitations mentioned above would be fully available to offset any incremental U.S. federal income tax. Further, the foreign tax credits associated with the unremitted earnings would be sufficient to offset any incremental U.S. tax liabilities associated with the dividend.