13. INCOME TAXES

The Company will be included in the consolidated federal, state and local income tax returns filed by ERI for the period September 19 to December 31, 2014 (Successor). The allocation of the Company's share of ERI's consolidated income tax expense is determined under the separate return method. Under this method, the Company determines its income tax provision as if the Company filed a separate income tax return. The Company does not have tax sharing agreements with the other members within the consolidated ERI group.

The components of the Company's provision for income taxes are presented below (amounts in thousands):

	Successor			Predecessor
	Successor			Predecessor
	September 19 to December 31, 2014			January 1 to September 18, 2014
							Year ended December 31, 2013			Year ended December 31, 2012


Current:
Federal	$	(10	)	$	(29	)	$	(630	)	$	(109	)
State and local		59			367			(55	)		171

Total Current		49			338			(685	)		62

Deferred:
Federal		846			2,031			3,424			2,944
State and local		217			468			728			571

Total Deferred		1,063			2,499			4,152			3,515

Provision for income taxes	$	1,112		$	2,837		$	3,467		$	3,577

The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits:

	Successor		Predecessor
	Successor		Predecessor
	September 19 to December 31, 2014		January 1 to September 18, 2014
					Year ended December 31, 2013			Year ended December 31, 2012


Balance January 1	$	—	$	—	$	418		$	418
Increase related to prior period tax positions		—		—		—			—
Reductions related to prior period tax positions		—		—		(418	)		—

Balance December 31	$	—	$	—	$	—		$	418

We do not expect a significant increase to the total amounts of unrecognized tax benefits within the next twelve months. We recognize interest accrued related to unrecognized tax benefits in income tax expense, and penalties in operating expense. No interest or penalties were recognized during the period September 19 to December 31, 2014 (Successor), the period January 1 to September 18, 2014 (Predecessor), and the year ended December 31, 2013. We recognized interest and penalties of $14,000 during 2012.

The following is a reconciliation of the statutory federal income tax rate (benefit) to the Company's effective tax rate:

	Successor			Predecessor
	Successor			Predecessor
	September 19 to December 31, 2014			January 1 to September 18, 2014
							Year ended December 31, 2013			Year ended December 31 2012


Statutory federal income tax federal rate (benefit)		(35.0	)%		(35.0	)%		(35.0	)%		(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes		(5.7	)%		(2.2	)%		(4.0	)%		19.0	%
Permanent items		4.7	%		29.1	%		2.4	%		12.4	%
Valuation allowance		48.7	%		24.3	%		102.9	%		197.5	%
Attribute adjustments and expirations		0.4	%		4.0	%		—			—
Tax contingencies		—			—			(3.8	)%		—
Other		0.1	%		1.7	%		(1.3	)%		(2.6	)%

Effective tax rate		13.2	%		21.9	%		61.2	%		191.3	%

The difference between the effective tax rate and statutory rate is primarily due to the federal and state valuation allowances on deferred tax assets. As a result of the operating losses, the Company expects to continue to provide a full valuation allowance against its federal and state deferred tax assets in future periods. The permanent items not deductible for income tax purposes resulted primarily from the payment of nondeductible expenses including $1.1 million, $9.6 million, $0.3 million and $0.4 million in the period September 19 to December 31, 2014 (Successor), and the Predecessor periods January 1 to September 18, 2014 and the years ended December 31, 2013 and 2012, respectively, related to merger facilitation costs and our lobbying efforts for gaming.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax assets and liabilities were as follows (in thousands):

	Successor			Predecessor
	December 31, 2014			December 31, 2013


Deferred tax assets:
Loss and credit carryforwards	$	43,903		$	38,274
Impairment losses		—			4,031
Deferred expenses and accrued liabilities		4,464			5,291
Fixed assets		12,409			—
Debt		23,827			—
Stock-based compensation		179			1,634
Other		—			48

		84,782			49,278
Valuation allowance—federal deferred tax assets including federal net operating loss carryforwards		(72,257	)		(29,588	)
Valuation allowance—state deferred tax assets including state net operating loss carryforwards		(10,599	)		(3,925	)

Deferred tax assets		1,926			15,765

Deferred tax liabilities:
Identified intangibles		(146,715	)		(12,365	)
Fixed assets		—			(19,809	)
Prepaid expenses		(1,721	)		(1,840	)
Other		(17	)		—

Deferred tax liabilities		(148,454	)		(34,014	)

Net deferred tax liabilities	$	(146,528	)	$	(18,249	)

Management determined the realization of deferred tax assets for U.S. federal and state income tax purposes was not considered more likely than not, due to the consumption of our net operating loss carryback potential, our prior history of pre-tax losses and uncertainty about the timing of and ability to generate taxable income in the future. We have recorded a full valuation allowance against our net deferred tax assets, excluding deferred tax liabilities related to indefinite-lived assets. The Company has generated additional deferred tax liabilities related to the tax amortization of certain assets because these assets are indefinite-lived and are not amortized for book purposes. Specifically, deferred tax liabilities related to indefinite-lived assets include a deferred tax liability recorded in connection with the fair value adjustments related to the Mergers for gaming licenses and goodwill of approximately $135.9 million, and a deferred tax liability of approximately $2.2 million recorded in connection with the fair value adjustments related to the Mergers for land improvements. The tax amortization in current and future years gives rise to a deferred tax liability which will only reverse upon ultimate sale or book impairment. Due to the uncertain timing of such reversal, the temporary differences associated with indefinite-lived intangibles and certain land improvements cannot be considered a source of future taxable income for purposes of determining a valuation allowance. This resulted in deferred tax expense related to naked credits of $1.1 million, $2.4 million, $3.4 million, and $2.8 million for the period September 19 to December 31, 2014 (Successor), the period January 1 to September 18, 2014 (Predecessor), and the years ended December 31, 2013 and 2012, respectively.

Valuation allowances of $72.3 million and $29.6 million were provided at December 31, 2014 and 2013, respectively, for the Company's net federal deferred tax assets. In addition, valuation allowances of $10.6 million and $3.9 million were provided at December 31, 2014 and 2013, respectively, for state deferred tax assets. During 2014 and 2013, the aggregate valuation allowances for deferred tax assets increased by $49.3 million and $6.1 million, respectively. The 2014 increase primarily relates to the fair value adjustments recorded in connection with the Mergers and the increase in federal and state net operating loss carryforwards that are not considered more likely than not realizable. The 2013 increase primarily relates to the increase in federal and state net operating loss carryforwards that are not considered more likely than not realizable.

For federal income tax purposes, we have $118.4 million in net operating loss carryforwards, $0.2 million in capital loss carryforwards, $0.6 million in alternative minimum tax credit carryforwards, and $0.5 million in other federal credit carryforwards at December 31, 2014. The net operating loss carryforwards begin to expire in 2027 and the capital loss carryforwards begin to expire in 2015. The alternative minimum tax credit can be carried forward indefinitely and the other federal credits begin to expire in 2026. We have state net operating loss carryforwards of $28.8 million that begin to expire in 2018.

Utilization of net operating loss, credit and other carryforwards are subject to annual limitations due to ownership changes as provided by the Internal Revenue Code of 1986, as amended and similar state provisions. An ownership change is defined as a greater than 50% change in ownership over a three year period. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, the Company had a "change in ownership" event that limits the utilization of net operating loss, credit and other carryforwards that were previously available to offset future taxable income. The "change in ownership" event occurred on September 19, 2014 in connection with the Mergers. This limitation resulted in no significant loss of federal attributes, but did result in significant loss of state attributes. The federal and state operating loss, credit and other carryforwards are stated net of limitations.