NOTE 9 - INCOME TAXES

On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act significantly changed the U.S. corporate income tax law by lowering the statutory corporate tax rate from 35% to 21%, imposed a one-time mandatory repatriation tax on deferred earnings of foreign subsidiaries, and changed how foreign earnings are subject to U.S. tax. As the result of the Tax Act and under the guidance of the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118, we recorded a provisional tax expense of approximately $13.0 million for the impact of the Tax Act in the fourth quarter of 2017. During the fourth quarter of 2018, upon finalizing the analysis of the impact from the Tax Act, we recorded a tax benefit of $2.3 million as an adjustment to the provisional estimate, for a net tax impact of $10.7 million. The $2.3 million is comprised of an adjustment of $1.2 million to the impact of the one-time mandatory repatriation tax on previously undistributed earnings of our foreign subsidiaries and $1.1 million from the re-measurement of federal net deferred tax liabilities resulting from the reduction in the U.S. statutory corporate tax rate.

Income before income taxes includes the following:



(Dollars in thousands)	2018		2017		2016
United States	$	(3,039)	$	(5,143)	$	(1,886)
Foreign		19,983		38,820		14,717
Income before income taxes and equity earnings of unconsolidated joint ventures	$	16,944	$	33,677	$	12,831
Equity earnings of unconsolidated joint ventures:
United States		—		—		—
Foreign		974		815		999
Income before income taxes	$	17,918	$	34,492	$	13,830

Significant components of the provision for income taxes are as follows:



(Dollars in thousands)	2018		2017		2016
Current income tax expense (benefit)
Federal (1)	$	297	$	(7,846)	$	2,982
State		382		775		675
Foreign		6,158		7,079		4,685
Total		6,837		8		8,342
Deferred income tax expense (benefit)
Federal		(3,869)		3,654		(4,197)
State		22		(2,351)		(422)
Foreign		430		2,069		415
Total		(3,417)		3,372		(4,204)
Total income tax expense	$	3,420	$	3,380	$	4,138

(1)

The 2017 amount includes a federal tax benefit of $7,785 related to changes in unrecognized tax benefits and related interest.

Deferred income taxes reflect the “temporary differences” between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate. The components of the deferred tax assets and liabilities are as follows:



	December 31,
(Dollars in thousands)	2018		2017
Deferred Tax Assets:
Net operating loss carry-forwards	$	8,199	$	8,579
Alternative minimum tax credit carry-forwards		1,117		939
Foreign Tax Credit		2,715		—
Compensation and employee benefits		3,906		4,146
Deferred revenue		2,266		2,500
Accrued expenses		6,916		6,017
Accrued taxes		2,086		2,440
Land and property		7,373		8,457
Other		—		106
Total Deferred Tax Assets		34,578		33,184
Deferred Tax Liabilities:
Intangibles		(1,256)		(1,087)
Cancellation of indebtedness		—		(481)
Other		(367)		—
Total Deferred Tax Liabilities		(1,623)		(1,568)
Net deferred tax assets before valuation allowance		32,955		31,616
Valuation allowance		(6,720)		(6,870)
Net deferred tax asset	$	26,235	$	24,746

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we considered all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. We believe the evidence connected with New Zealand loss carryforwards and certain US state loss carryforwards do not support a conclusion of being more-likely-than-not to be realized. Accordingly as of December 31, 2018, we recorded a valuation allowance of $6.7 million.

As of December 31, 2018, we had the following carry-forwards:

approximately $2.2 million in U.S. alternative minimum tax credit carry-forwards with no expiration date and $1.1 million is refundable beginning tax year 2018;

approximately $11.7 million in Federal loss carryforwards expiring in 2037;

approximately $4.9 million in California loss carryforwards expiring in 2037;

approximately $1.8 million in Hawaii loss carryforwards expiring in 2037;

approximately $43.3 million in New York state loss carryforwards expiring in 2034;

approximately $43.3 million in New York city loss carryforwards expiring in 2034; and,

approximately $8.1 million in available New Zealand loss carry-forwards with no expiration date.

We expect no substantial limitations on the future use of U.S. or foreign loss carry-forwards.

The provision for income taxes is different from amounts computed by applying U.S. statutory rates to consolidated losses before taxes. The significant reason for these differences is as follows:



(Dollars in thousands)	2018		2017		2016
Expected tax provision	$	3,763	$	12,073	$	4,704
Increase (decrease) in tax expense resulting from:
Foreign tax rate differential		1,874		(2,160)		(668)
Change in valuation allowance		(451)		(905)		129
State and local tax provision		405		(541)		307
Prior year adjustments		41		(79)		(954)
Unrecognized tax benefits		438		(8,498)		262
Advance to Overseas Subsidiary		—		(7,620)		—
Impact of Tax Act		(2,265)		13,018		—
Non-taxable insurance proceeds		—		(1,871)		—
GILTI		193		—		—
Foreign Tax Credit		(846)		—		—
Other		268		(37)		358
Total income tax expense	$	3,420	$	3,380	$	4,138

The undistributed earnings of the Company's Australian subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for state income taxes has been provided on such undistributed earnings. Due to the 2017 enactment of the Tax Act, future repatriations of foreign earnings will generally not be subject to U.S. federal taxation but may incur minimal state taxes.

The following table is a summary of the activity related to unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2018, 2017, and 2016:



(Dollars in thousands)	2018		2017		2016
Unrecognized tax benefits – gross beginning balance	$	3,123	$	11,480	$	11,022
Gross increase (decrease) - prior year tax positions		2,304		(7,905)		133
Gross increase (decrease) - current period tax positions		—		—		325
Settlements		(718)		(452)		—
Unrecognized tax benefits – gross ending balance	$	4,709	$	3,123	$	11,480

As of December 31, 2018 and 2017, if recognized, $4.7 million and $3.1 million respectively, of the unrecognized tax benefits would impact the Company’s effective tax rate.

We record interest and penalties related to income tax matters as part of income tax expense. During the year ended December 31, 2017, we recorded an increase to tax interest of $203,000, resulting in a total $9.1 million in interest. During the year ended December 31, 2018, we recorded an increase to tax interest of $430,000, resulting in a total $9.5 million in interest.

It is difficult to predict the timing and resolution of uncertain tax positions. Based upon the Company’s assessment of many factors, including past experience and judgments about future events, it is probable that within the next 12 months the reserve for uncertain tax positions will increase within a range of $500,000 to $1.5 million. The reasons for such change include but are not limited to tax positions expected to be taken during 2018, revaluation of current uncertain tax positions, and expiring statutes of limitations.

Generally, changes to our federal and most state income tax returns for the calendar year 2014 and earlier are barred by statutes of limitations. Certain U.S. subsidiaries filed federal and state tax returns for periods before these entities became consolidated with us. These subsidiaries were examined by IRS for the years 1996 to 1999 and significant tax deficiencies were assessed for those years. Those deficiencies have been settled, as discussed in “Tax Audit/Litigation,” Note 12 – Commitments and Contingencies.

As of December 31, 2018, federal income tax returns for 2015 and after are open for examination, with the 2015 return being currently under examination. California worldwide unitary income tax returns for 2014 and after are open for examination, but an examination of 2013 through 2015 has been completed. Income tax returns filed in Puerto Rico for 2014 and after are open for examination. Australia income tax returns for calendar years 2013 and after are open for examination. A review of returns for 2014 and 2015 has been completed with final terms under negotiation. Generally, New Zealand returns for 2015 and after remain open for examination. An examination of New Zealand income tax returns for calendar year 2009 and after have been completed with one issue remaining unsettled, for which a litigation claim has been filed.