NOTE 16. INCOME TAXES

Effective June 4, 2018, pursuant to the Plan, the Successor became a corporation subject to federal and state income taxes. Prior to the Plan being effective, the Predecessor was a limited partnership and organized as a pass-through entity for federal and most state income tax purposes. As a result, the Predecessor’s limited partners were responsible for federal and state income taxes on their share of taxable income. The Predecessor was subject to the Texas gross margin tax for partnership activity in the state of Texas. Tax obligations of the Predecessor and Successor are recorded as “Income tax benefit (expense)” in the consolidated statements of operations.

The tax benefit (expense) for the Successor period indicated is comprised of the following (in thousands):


			Seven Months
	Year Ended		Ended
	December 31, 2019		December 31, 2018
Current tax benefit (expense):
Federal	$	—	$	—
State		13		(78)
Total		13		(78)
Deferred tax benefit (expense):
Federal		—		—
State		—		—
Total		—		—
Total tax benefit (expense):
Federal		—		—
State		13		(78)
Total	$	13	$	(78)

During the five months ended May 31, 2018, the Predecessor recorded income tax expense of $0.2 million related to state income taxes. During the year ended December 31, 2017, the Predecessor recognized approximately $0.2 million of tax benefits primarily as a result of tax refunds.

A reconciliation of the statutory federal income tax expense to the income tax expense or benefit from continuing operations provided for the Successor period is as follows (in thousands):


			Seven Months
	Year Ended		Ended
	December 31, 2019		December 31, 2018
Tax expense at statutory rate	$	29,049	$	(5,050)
State income tax benefit (expense), net of federal benefit		13		(62)
Changes in valuation allowance		(28,957)		4,999
Other		(92)		35
Total income tax benefit (expense)	$	13	$	(78)

The Successor’s net deferred tax is comprised of the following (in thousands):


	December 31, 2019		December 31, 2018
Deferred tax assets:
Net operating loss carryforward	$	30,643	$	19,086
Asset retirement obligation		19,909		26,948
Other		1,588		2,365
Total deferred tax assets before valuation allowance		52,140		48,399
Valuation allowance		(45,976)		(15,573)
Net deferred tax assets		6,164		32,826

Deferred tax liability:
Oil and natural gas properties		4,785		30,200
Derivative instruments		1,379		2,626
Total deferred tax liability		6,164		32,826

Total net deferred tax	$	—	$	—

Management assesses the available positive and negative evidence to estimate whether it is more likely than not that sufficient future taxable income will be generated to realize the Company’s deferred tax assets. In making this determination, Management considers all available positive and negative evidence and makes certain assumptions. Management considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for future years. Due to significant negative evidence, the Company has established a valuation allowance against its net deferred tax asset of $46.0 million as of December 31, 2019.

As of December 31, 2019, the Company had federal net operating loss (“NOL”) carryforwards of approximately $131.9 million, which can be carried forward indefinitely, and state NOLs of $31.6 million, which will expire in varying amounts beginning in 2025.

ASC 740, Income Taxes (“ASC 740”) prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. For those benefits to be recognized, an income tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company must recognize the tax effects of any uncertain tax positions it may adopt, if the position taken is more likely than not sustainable based on its technical merits. Interest and penalties related to uncertain tax positions are reported in the income tax provision. The Company has an uncertain tax position of $1.6 million related to the limitation of current deductibility of business interest expense. The tax effects of such uncertain tax positions should have no earnings impact because of the anticipated net operating loss carryforwards and the established valuation allowance.

The Company’s tax returns are subject to periodic audits by the various jurisdictions in which the Company operates. These audits can result in adjustments of taxes due or adjustments of the NOL carryforwards that are available to offset future taxable income.