Income Taxes

12 Months Ended

Dec. 31, 2019

The (expense) benefit for income taxes consisted of the following for the periods indicated:



	Year Ended December 31,
	2019		2018			2017
	(in thousands)
Current:
Federal	$	—	$	—		$	1,402
State	—		—			—
Deferred:
Federal	35,806		(1,777		)	—
State	6,310		(50		)	—
Total	$	42,116	$	(1,827	)	$	1,402

Income tax (expense) benefit differed from the amounts computed by applying the U.S. federal income tax rate of 21% to pretax income for the years ended December 31, 2019 and 2018 and 35% to pretax income for the year ended December 31, 2017 from continuing operations as a result of the following:



	Year Ended December 31,
	2019			2018			2017
	(in thousands)
Income tax (expense) benefit at the federal statutory rate	$	37,159		$	(25,840	)	$	48,869
State income tax (expense) benefit, net of federal tax effect	6,002			(5,144		)	4,030
Change in federal tax rate	—			—			(64,949		)
Refundable AMT credits	—			—			1,402
Nondeductible equity-based compensation	(1,895		)	(3,101		)	(13,655		)
Nondeductible costs in connection with Merger	—			(2,545		)	—
Other permanent items	(157		)	(418		)	(37		)
Change in valuation allowance	628			36,321			(35,684		)
Change in valuation allowance due to TCJA	—			—			64,949
Change in valuation allowance - Section 382	—			64,994			—
Change in apportioned state tax rates	275			(723		)	(1,086		)
Eliminate UT jurisdiction NOL's and credits	—			—			(2,647		)
Change in ownership - Section 382	—			(64,994		)	—
Other, net	104			(377		)	210
Income tax (expense) benefit	$	42,116		$	(1,827	)	$	1,402

On the date of the Merger, the Fifth Creek assets were acquired in a nontaxable transaction pursuant to Section 351 of the Internal Revenue Code. Accordingly, a deferred tax liability of $137.7 million was recorded to reflect the difference between the fair value recorded and the income tax basis of the assets acquired and liabilities assumed.

The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities as of December 31, 2019 and 2018 are presented below:



	As of December 31,
	2019			2018
	(in thousands)
Long-term:
Deferred tax assets:
Net operating loss carryforward	$	112,409		$	112,898
Stock-based compensation	1,368			1,962
Deferred rent	—			628
Financing obligation	2,163			1,174
Accrued expenses	38			250
Derivative instruments	287			—
Other assets	148			2,409
Capital loss carryforward	890			1,028
Less: Valuation allowance	(12,587		)	(13,215		)
Total long-term deferred tax assets	104,716			107,134
Deferred tax liabilities:
Oil and gas properties	(201,396		)	(219,390		)
Long-term derivative instruments	—			(26,700		)
Prepaid expenses	(462		)	(374		)
Deferred compensation	(276		)	(204		)
Total long-term deferred tax assets (liabilities)	(202,134		)	(246,668		)
Net long-term deferred tax assets (liabilities)	$	(97,418	)	$	(139,534	)

In connection with the Merger, the Company had a greater than 50% ownership change pursuant to Section 382 of the Internal Revenue Code. As a result of the ownership change, the Company's ability to use pre-change net operating losses ("NOLs") and credits against post-change taxable income is limited to an annual amount plus any built-in gains recognized within five years of the ownership change. The Company's annual limitation amount is approximately $11.7 million and the net unrealized built-in gain is projected to be $176.9 million. The Company has reduced its federal and state NOLs by $276.1 million and $14.0 million, respectively, and eliminated its state tax credits by $8.2 million to reflect the expected impact of the Section 382 limitation. Deferred tax assets and the corresponding valuation allowance have been reduced by $65.0 million for the expected tax effect of the Section 382 limitation. As of December 31, 2019, the Company projected approximately $455.8 million and $456.2 million of federal and state NOLs, respectively. The federal NOLs begin to expire in 2025 and the state NOLs begin to expire in 2029.

On December 22, 2017, Congress signed into law the Tax Cut and Jobs Act of 2017 ("TCJA"). The TCJA includes significant changes to the U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018. Accordingly, the 21% federal tax rate is utilized in computing the Company's annualized effective tax rate. Other provisions of TCJA include the elimination of the corporate alternative minimum tax ("AMT"), the acceleration of depreciation for US tax purposes, limitations on deductibility of interest expense, expanded Section 162(m) limitations on the deductibility of officer's compensation, the elimination of net operation loss carrybacks and indefinite carryforwards on losses generated after 2017, subject to restrictions on their utilization.

In assessing the ability to realize the benefit of the deferred tax assets, management must consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers all available evidence (both positive and negative) in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence. In regard to the Company's deferred tax assets, the Company considered all available evidence in assessing the need for a valuation allowance.

The Company accounts for uncertainty in income taxes for tax positions taken or expected to be taken in a tax return. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits. The Company did not have any additions, reductions or settlements of unrecognized tax benefits. In 2019, the Company generated no uncertain tax positions.

The Company's policy is to classify accrued penalties and interest related to unrecognized tax benefits in the Company's income tax provision. As of December 31, 2019, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the current year.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various states. With few exceptions, the Company is subject to U.S. federal tax examination for years 2016 through 2019 and is subject to state tax examination for years 2015 through 2019.