Income Taxes

6 Months Ended

Jun. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

As discussed in Note 1, Organization and Business, we deconsolidated Glocal in the three months ended September 30, 2022; accordingly, the financial results of Glocal in the three and six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of June 30, 2023 and December 31, 2022 and the financial results of Glocal in the three and six months ended June 30, 2023 are not included in our unaudited condensed consolidated financial statements.

The income tax benefit (expense) was $(0.9) million and $2.2 million in the three months ended June 30, 2023 and 2022, respectively. The income tax benefit (expense) was $(0.9) million and $4.5 million in the six months ended June 30, 2023 and 2022, respectively.

Consistent with our conclusion as of December 31, 2022, we continue to believe that it is not more likely than not that the deferred tax assets will be realized and we therefore maintained a full valuation allowance against the deferred tax assets as of June 30, 2023. However, we expect to suffer minimal income tax expense due to U.S. tax rules related to the utilization of net operating loss carryforwards. As a result, in the three and six months ended June 30, 2023, we recorded discrete tax items totaling $0.6 million related to the sale of Innovations Group and state minimum income taxes totaling $0.3 million.

The Internal Revenue Service (“IRS”) audited the 2008 and 2009 tax returns for a business in our Integrated Care Management segment for the proper year of inclusion of approximately $15.0 million long-term capital gain on the sale of certain intellectual property rights. The business originally reported the gain on its 2010 S Corporation tax return, matching the year of inclusion for financial accounting purposes. The corporate level tax was paid to California and the business passed the gain through to its shareholders. The IRS has asserted that the business owes C Corporation tax of approximately $5.0 million for 2008, or in the alternative, the business owes C Corporation tax of approximately $5.0 million for 2009 as a built-in gain. In addition, the business could be assessed additional California franchise tax of approximately $1.3 million; and if additional income taxes are imposed, interest will be charged at approximately 4% per year, compounded annually, resulting in potential interest of approximately $3.0 million. The IRS has not asked that penalties be imposed.

The matter is currently pending before the U.S. Tax Court, Docket 11565-15. There are related tax cases for some of the former shareholders of the business for additional income taxes due if the gain is shifted to 2009. On December 4, 2018, the IRS filed a motion for summary judgment; however, the business prevailed, and the motion was denied. In January 2020, the business filed a motion for summary judgment arguing that either the gain was properly reported in 2010 and all taxes have been paid or in the alternative it should have been taxable in 2009 with no built-in gains tax. In both cases, there would be no additional income tax due for 2008 or 2009. The IRS filed an objection to the business’ motion. On March 3, 2021, the U.S. Tax Court, without consideration of the merits of the case, issued a very brief court order dismissing the business’ motion. Had the motion been granted, the need for a trial would have been obviated. The business intends to vigorously defend its position in the case and believes it will prevail if the case is taken to trial. In addition, when we acquired the business in November 2020, all of the former shareholders of the business agreed to indemnify us for any losses as a result of this dispute with the IRS. We have accrued $0.2 million representing probable additional taxes and interest imposed, in other liabilities, current in the unaudited condensed consolidated balance sheets.