Income Taxes

Income tax expense from continuing operations consists of:



	For the Year
	2017			2016			2015
	(In thousands)
Current tax provision:
U.S. Federal	$	(44,177	)	$	(15,089	)	$	6,740
State and other	(3,378		)	(1,520		)	(418		)
	(47,555		)	(16,609		)	6,322
Deferred tax provision:
U.S. Federal	1,678			1,382			(38,262		)
State and other	57			(75		)	(3,191		)
	1,735			1,307			(41,453		)
Income tax expense	$	(45,820	)	$	(15,302	)	$	(35,131	)

A reconciliation of the federal statutory rate to the effective income tax rate on continuing operations follows:



	For the Year
	2017		2016		2015
Federal statutory rate (benefit)	35	%	35	%	35	%
State, net of federal benefit	3		—		10
Valuation allowance	(42	)	(19	)	348
Tax rate change due to new tax act	40		—		—
Noncontrolling interests	(1	)	(1	)	(3	)
Installment sale ace adjustment	—		2		—
Stock based compensation	11		—		5
Goodwill	25		—		—
Merger costs	18		—		—
Oil and gas percentage depletion	—		—		(1	)
Other	(1	)	—		1
Effective tax rate	88	%	17	%	395	%

The effective tax rate for all years includes an expense for state income taxes and non-deductible expenses, reduced by a tax benefit related to noncontrolling interests. The effective tax rate for 2017 also includes an expense for non-deductible goodwill related to the sale of our owned mineral assets and non-deductible transaction costs related to the Merger with D.R. Horton. Other 2017 differences, including the remeasurement of our deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act ("Tax Act"), are fully offset by a change in our valuation allowance. The effective tax rate for 2016 includes a change in valuation allowance due to a decrease in our deferred tax assets. The effective rate for 2015 includes the establishment of a valuation allowance against our deferred tax assets.

Significant components of deferred taxes are:



	At Year-End
	2017			2016
	(In thousands)
Deferred Tax Assets:
Real estate	$	37,513		$	50,759
Employee benefits	1,510			13,185
Net operating loss carryforwards	2,305			2,804
Oil and gas properties	—			1,672
AMT credits	1,690			5,900
Income producing properties	794			2,055
Oil and gas percentage depletion carryforwards	—			3,478
Accruals not deductible until paid	196			552
Gross deferred tax assets	44,008			80,405
Valuation allowance	(39,578		)	(73,405		)
Deferred tax asset net of valuation allowance	4,430			7,000
Deferred Tax Liabilities:
Undeveloped land	—			(1,359		)
Convertible debt	(2,402		)	(5,035		)
Timber	—			(283		)
Gross deferred tax liabilities	(2,402		)	(6,677		)
Net Deferred Tax Asset (Liability)	$	2,028		$	323

The Tax Act was enacted on December 22, 2017, and reduced the federal corporate tax rate from 35 percent to 21 percent for all corporations effective January 1, 2018. ASC 740 requires companies to reflect the effects of a tax law change in the period in which the law is enacted. Accordingly, we have remeasured our deferred tax assets and liabilities along with the corresponding valuation allowance as of the enactment date. This remeasurement resulted in no additional tax expense or benefit except for the release of a portion of the valuation allowance for AMT credits which become fully refundable in future years as a result of the tax law change. We have determined based on current available information that no other tax law changes as a result of the Tax Act have a significant impact on our 2017 tax expense. The adjustment to the deferred tax accounts and our determination that no other tax law changes have a significant impact on our 2017 tax expense are our best estimate based on the information available at this time and may change as additional information, such as regulatory guidance, becomes available. Adjustments to estimated amounts, if any, would be reflected as a discrete expense or benefit in the quarter that it is identified, as allowed by SEC Staff Accounting Bulletin No. 118.

On October 5, 2017, D.R. Horton acquired 75 percent of our common stock resulting in an ownership change under Section 382. Section 382 limits our ability to use certain tax attributes and built-in losses and deductions in a given year. Any tax attributes or built-in losses and deductions that are limited in the current year are expected to be fully utilized in future years.

At year-end 2017, we had approximately $9,200,000 and $69,200,000 of federal and state net operating loss carryforwards, which include certain recognized built-in losses that are deferred under Section 382. These carryforwards are subject to a full valuation allowance and $45,600,000 of the state carryforwards are attributable to states in which we are not currently doing business due to our exit from the oil and gas business. If not utilized, the federal carryforwards will expire in 2037 and the state carryforwards will expire in 2020 to 2037. We had approximately $1,690,000 of AMT credit carryforwards which are refundable over the next four years if not used to offset current taxes.

At year-end 2017 and 2016, we have provided a valuation allowance for our deferred tax asset of $39,578,000 and $73,405,000 for the portion of the deferred tax asset that is more likely than not to be unrealizable. The decrease in the valuation allowance for the year was primarily attributable to the remeasurement of deferred tax assets and liabilities as a result of the tax rate decrease from the Tax Act.

In determining our valuation allowance, we assessed available positive and negative evidence to estimate whether sufficient future taxable income would be generated to permit use of the existing deferred tax asset. A significant piece of objective evidence was the cumulative loss incurred over the three-year period ended December 31, 2017, principally driven by impairments of oil and gas and real estate assets. Such evidence limited our ability to consider other subjective evidence, such as our projected future taxable income.

The amount of deferred tax asset considered realizable could be adjusted if negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projected future taxable income.

We file income tax returns in the U.S. and in various state jurisdictions. All federal statutes of limitations for tax years prior to 2012 are closed. As a result of filing refund claims for the 2012 through 2014 tax years for carrybacks from the 2015 tax year, the Internal Revenue Service (“IRS”) initiated and completed an audit of our 2012 through 2015 tax years during 2017 resulting in no change to our tax liability. As a result, the IRS cannot re-open the 2012 through 2015 tax years for audit unless they identify an issue that meets the criteria for re-opening an audit under Section 5 of Rev. Proc. 2005-32. We believe there are no such issues in our 2012 through 2015 tax years that meet this criteria and, therefore, we believe the IRS will not re-open our 2012 through 2015 tax years for audit. We are no longer subject to state income tax examinations before 2013.

A reconciliation of the beginning and ending amount of tax benefits not recognized for book purposes is as follows:



	At Year-End
	(In thousands)
	2017			2016		2015
Balance at beginning of year	$	2,499		$	—	$	—
Increases (decreases) for tax positions of current year	—			2,499		—
Decreases for dispositions and other	(1,449		)	—		—
Balance at end of year	$	1,050		$	2,499	$	—

If the total amount of unrecognized tax benefits were recognized at year-end 2017, it would result in a $1,050,000 deferred tax asset and a corresponding tax benefit.

We recognize interest accrued related to unrecognized tax benefits in income tax expense. In 2017, 2016 and 2015, we recognized no interest related to unrecognized tax benefits. At year-end 2017 and 2016, we had no accrued interest or penalties.