INCOME TAXES

9 Months Ended

Sep. 30, 2022

INCOME TAXES

INCOME TAXES

19.  INCOME TAXES

The Company records income tax expense during interim periods based on the best estimate of the full year’s tax rate as adjusted for discrete items, if any, that are taken into account in the relevant interim period. Each quarter, the Company updates its estimate of the annual effective tax rate and any change in the estimated rate is recorded on a cumulative basis. The effective tax rate from continuing operations was 34.4% and 30.7% for the three months ended September 30, 2022 and 2021, respectively, and 61.8% and 33.5% for the nine months ended September 30, 2022 and 2021, respectively.

The higher effective tax rate for the three months ended September 30, 2022 compared to the same period in 2021 is primarily due to an increase in the reserves for unrecognized tax benefits.

The higher effective tax rate in the nine months ended September 30, 2022 compared to the same period in 2021 is primarily due to the derecognition of the Company’s Section 199 tax benefits for tax years 2008 through 2016 upon the unfavorable decision by the United States Tax Court in the matter of Bats Global Markets Holdings, Inc. and Subsidiaries v. Commissioner of Internal Revenue, on March 31, 2022.

The Company petitioned the U.S. Tax Court on January 13, 2017, May 7, 2018, and November 29, 2018 for a redetermination of IRS notices of deficiency for Cboe and certain of its subsidiaries for tax years 2011 through 2015 related to its Section 199 claims. These petitions resulted in the establishment of three cases before the U.S. Tax Court. The Company also filed a complaint on October 9, 2018 with the Court of Federal Claims for a refund of Section 199 claims related to tax years 2008 through 2010, resulting in the establishment of a single case before the Court of Federal Claims.

The first case that went to trial involved certain subsidiaries related to electronic trading for tax years 2011 through 2013. The U.S. Tax Court held the trial remotely from May 24, 2021 to June 1, 2021. On March 31, 2022, the U.S. Tax Court issued its decision rejecting the Company’s basis for its Petition (the “Opinion”). On May 26, 2022, the U.S. Tax Court entered its decision, which gave effect to the Opinion. The Company filed a notice of appeal with the U.S. Court of Appeals for the 10th Circuit on August 12, 2022. The Company filed its opening brief on September 28, 2022, and briefing is underway. Two cases remain pending in U.S. Tax Court and the case before the Court of Federal Claims also remains pending. Trial dates in those cases have not been established. One of the two cases pending before the U.S. Tax court involves certain Company subsidiaries (other than those that were involved in the first case that went to trial) but also for tax years 2011 through 2013. The IRS filed a motion for partial summary judgment on August 26, 2022, and briefing is underway.

As a result of the Opinion, the Company’s Section 199 positions no longer meet the recognition threshold provided by ASC 740-10. Accordingly, in the first quarter of 2022, the Company increased its provision for income taxes in order to fully reserve for the expected aggregate amount of additional liabilities that the Company currently expects would result from these cases if they were all decided against the Company.

On August 16, 2022, President Biden signed into law H.R. 5376 (commonly called the “Inflation Reduction Act of 2022” or simply the “IRA”). Tax measures contained in the new law include, among other items, a corporate alternative minimum tax of 15%. The new 15% corporate alternative minimum tax is based on the “adjusted financial statement income” of certain large corporations reporting at least $1 billion average adjusted pre-tax net income on their consolidated financial statements for tax years beginning after December 31, 2022. This new tax is not expected to result in a material impact to the Company.