Note 13 - Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Text Block]

Note 13 – Income Taxes

We account for income taxes under the provisions of ASC Topic 740, Income taxes, which provides for an asset and liability approach for income taxes.  Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes.

Our provision for income taxes for the year ended December 31, 2011 and the period from April 9, 2010 (inception) to December 31, 2010 consisted of the following:

	2011			2010
Current taxes	$	-		$	-
Deferred tax benefit		(1,680,905	)		(451,400	)
Valuation allowance		-			-
Net income tax provision (benefit)	$	(1,680,905	)	$	(451,400	)

The effective income tax rate for the year ended December 31, 2011 and the period from April 9, 2010 (inception) to December 31, 2010 consisted of the following:

	2011	2010
Federal statutory income tax rate	35.00%	35.00%
State income taxes	3.41%	6.37%
Permanent differences	(0.03%)	0.00%
Change in valuation allowance	1.99%	(3.43%)
Net effective income tax rate	40.37%	37.94%

The components of the deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:

	2011			2010
Deferred tax assets:
Federal and state net operating loss carryovers	$	2,932,099		$	800,000
Stock compensation		336,229			-
Reorganization costs		51,464			-
Asset retirement obligation		1,498			-
Total deferred tax assets	$	3,321,290		$	800,000
Deferred tax liabilities:
Ceiling test impairment, intangible drilling costs and other exploration costs capitalized for financial reporting purposes	$	(1,731,321	)		-
Deferred revenue		(2,192,619	)		(2,693,000	)
Property and equipment		(21,752	)		-
Total deferred liabilities		(3,945,692	)		(2,693,000	)
Net deferred tax liabilities		(624,402	)		(1,893,000	)
Less: valuation allowance		(387,693	)		(800,000	)
Deferred tax liabilities	$	(1,012,095	)	$	(2,693,000	)

As of December 31, 2011, the Company has approximately a $7,633,301 net operating loss carryover.  Under existing Federal law, the net operating loss may be utilized to offset taxable income through the year ended December 31, 2031.  A portion of the net operating loss carryover begins to expire in 2030.

At December 31, 2010 the Company recognized a valuation allowance reducing the carrying value of its deferred tax assets to zero and resulting in a deferred tax liability being shown related to its deferred revenue.  ASC Topic 740 provides that a valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized.  The valuation allowance was recognized in consideration of many factors, primarily the Company’s losses incurred since its spin-off and the inherent uncertainties of exploring for oil and gas.  Due to changes in circumstances and recent projections of income, the Company reduced its deferred tax asset valuation allowance from $800,000 to $387,693 as of December 31, 2011.  This reduction was to reflect an allowance on only a portion of its deferred tax assets which the Company believes it is more likely than not that the benefit of these assets will not be realized.

The Company files annual US Federal income tax returns and annual income tax returns for the states of Minnesota and North Dakota.  We are not subject to income tax examinations by tax authorities for years before 2010 for all returns. Income taxing authorities have conducted no formal examinations of our past Federal or state income tax returns and supporting records.

The Company adopted the provisions of ASC Topic 740 regarding uncertainty in income taxes.  The Company has found no significant uncertain tax positions as of any date on or before December 31, 2011.