5.Income Taxes

Income Tax Provision

The table below sets forth the provision for income taxes attributable to continuing operations for the periods presented.


	Year Ended		Year Ended		Year Ended
	December 31, 2014		December 31, 2013		December 31, 2012
	(In Thousands)		(In Thousands)		(In Thousands)
Current:
Federal	$	—	$	—	$	—
State		—		—		—
Total Current Tax Expense	$	—	$	—	$	—

Deferred:
Federal	$	33,499	$	—	$	—
State		1,488		—		—
Total Deferred Tax Expense	$	34,987	$	—	$	—

Total Income Tax Expense	$	34,987	$	—	$	—

Prior to its corporate merger, the Company was a partnership and not subject to federal income tax or state income tax (in most states). Accordingly, no provision for federal or state income taxes was recorded prior to the corporate merger as the Company’s equity holders were responsible for income tax on the Company’s profits. In connection with the closing of the merger, the Company merged into a corporation and became subject to federal and state income taxes. The Company’s book and tax basis in assets and liabilities differed at the time of its change in tax status due primarily to different cost recovery periods utilized for book and tax purposes for the Company’s oil and natural gas properties.

At December 31, 2014, the Company recorded a net deferred tax expense of $35 million, which includes estimated deferred tax expense of $81.7 million to recognize a deferred tax liability related to the Company’s initial book and tax basis differences from the change in tax status. This deferred tax liability is preliminary and includes estimates related to the pre-corporate reorganization period of 2014. Estimates about utilization of tax loss carryforwards obtained through the merger with Forest and tax loss carryforwards generated in the post-corporate reorganization period are also preliminary and are reducing the deferred tax impact. These preliminary calculations are based on information available to management at the time such estimates were made.

As part of the corporate merger, the Company’s historical owners contributed entities that were under common control into Forest. At December 31, 2014, the Company also estimated a net deferred tax asset of $20.5 million related to tax loss carryforwards for these entities. The Company recognized the benefit of the net deferred tax asset in equity. This deferred tax asset is preliminary and is based on information available to management at the time the estimate was made. The Company may record adjustments as a result of changes in such estimates upon filing the corporate income tax return.

The Company’s effective tax rate differs from the federal statutory rate of 35% due to earnings prior to the corporate merger that are not subject to corporate income tax, recording the initial book and tax basis differences associated with the change in tax status, state income taxes and impairment of non-deductible goodwill.

The reconciliation of income taxes calculated at the U.S. federal tax statutory rate to the Company’s effective tax rate for the year ended December 31, 2014 is set forth below:


	Year Ended			Year Ended			Year Ended
	December 31, 2014			December 31, 2013			December 31, 2012
	(In Thousands)			(In Thousands)			(In Thousands)
Federal income tax at 35% of earnings from continuing operations before income taxes	$	(102,107)		$	3,702			(240,374)
State income taxes, net of federal income tax benefits		(2,131)			—			—
Earnings not subject to tax		(40,509)			(3,702)			240,374
Change in non-tax deductible goodwill		16,767			—			—
Change in tax status		81,728			—			—
Other		8			—			—
Change in valuation allowance (current year activity only)		81,231			—			—

Total income tax	$	34,987		$	—		$	—
Effective Tax Rate		(11.99)	%		0.00	%		0.00	%

Net Deferred Tax Assets and Liabilities

The components of net deferred tax assets and liabilities at December 31, 2014 and 2013 are as follows:


	Year Ended		Year Ended
	December 31, 2014		December 31, 2013
	(In Thousands)		(In Thousands)
Deferred tax assets:
Property and equipment	$	277,558	$	—
Goodwill		38,570		—
Net operating loss carryforwards		39,487		—
Other		45,509		—
Total gross deferred tax assets	$	401,124	$	—
Less valuation allowance		(204,093)		—
Net deferred tax assets	$	197,031	$	—

Deferred tax liabilities:
Unrealized gains on derivative instruments, net	$	(54,638)	$	—
Long-term liabilities		(140,396)		—
Other		(1,997)		—
Total gross deferred tax liabilities	$	(197,031)	$	—

Net deferred tax assets	$	0	$	—

Current deferred tax assets (liabilities)	$	(46,084)	$	—
Non-current deferred tax assets (liabilities)		46,084		—
Net deferred tax assets (liabilities)	$	0	$	—

Tax Attributes

Net Operating Losses

U.S. federal net operating loss carryforwards (“NOLs”) at December 31, 2014 were approximately $112.8 million, of which $81.1 million is subject to limitation under Section 382 of the Internal Revenue Code. The NOL balance excludes NOLs the Company believes the likelihood of utilization to be remote as a result of limitations imposed under Section 382 of the Internal Revenue Code. The NOLs are scheduled to expire in 2019. Additional analysis of the IRC 382 limitations will be done upon filing the corporate income tax return and could result in a change to the value of the NOLs.

The statute of limitations is closed for Sabine’s U.S. federal income tax returns for years ending on or before December 31, 2010. The statute of limitations is also closed for Forest’s U.S. federal income tax returns for years ending on or before December 31, 2008. However, Forest has utilized, and the Company will continue to utilize, NOLs in its open tax years. The earliest available NOLs were generated in the tax year beginning January 1, 1999, but are potentially subject to adjustment by the federal tax authorities in the tax year in which they are utilized. Thus, the Company’s earliest U.S. federal income tax return that is closed to potential audit adjustment is the tax year ending December 31, 1998.

Valuation Allowance

A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company believes it is more likely than not that the overall deferred tax asset will not be realized. At December 31, 2014, the Company has a valuation allowance of $204.1 million, which is the amount of deferred tax assets that exceed deferred tax liabilities. The Company’s deferred tax liability of $81.7 million related to change in status is partially offset against the Company’s post-merger deferred tax asset and reduced the total valuation allowance recorded in 2014. As discussed above, the deferred tax expense for change in tax status is based on preliminary calculations based on information available to management at the time such estimates were made. Further analysis will be made upon filing the tax returns that will result in a change to the net deferred tax expense recorded.

Accounting for Uncertainty in Income Taxes

The table below sets forth the reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits. The Company records interest and penalty accrual in income tax expense, to the extent they apply. The Company does not expect a material amount of unrecognized tax benefits to reverse in the next twelve months. If recognized, none of the uncertain tax positions would impact tax expense.


	Year Ended		Year Ended		Year Ended
	December 31, 2014		December 31, 2013		December 31, 2012
	(In Thousands)		(In Thousands)		(In Thousands)

Gross unrecognized tax benefits at beginning of period	$	—	$	—	$	—
Increases as a result of tax positions taken during a prior period		8,691		—		—
Decreases as a result of tax positions taken during a prior period		—		—		—
Gross unrecognized tax benefits at end of period	$	8,691	$	—	$	—