Note 4 - Income Taxes

Income tax expense for the three months and six months ended June 30, 2014, and 2013, differs from the amounts that would be provided by applying the statutory United States federal income tax rate to income before income taxes primarily due to the effect of state income taxes, changes in valuation allowances, percentage depletion, research and development (“R&D”) credits, and other permanent differences. The quarterly rate can also be impacted by the proportional effects of forecasted net income as of each period end presented.

The provision for income taxes consists of the following:



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands)
Current portion of income tax expense:
Federal	$	—		$	—		$	—		$	—
State	512			246			1,001			348
Deferred portion of income tax expense	35,537			45,959			73,911			56,239
Total income tax expense	$	36,049		$	46,205		$	74,912		$	56,587
	37.6		%	37.6		%	37.4		%	37.8		%

On a year-to-date basis, a change in the Company’s effective tax rate between reported periods will generally reflect differences in its estimated highest marginal state tax rate due to changes in the composition of income from Company activities among various state tax jurisdictions. Cumulative effects of state rate changes are reflected in the period legislation is enacted. The decrease in the effective rate from the six months ended June 30, 2013, primarily reflects temporary and permanent changes in the mix of highest marginal state tax rates, the effects of valuation allowance adjustments, the state tax rate effect divestitures have between years, drilling activities, and changes in the effects of other permanent differences.

The Company and its subsidiaries file federal income tax returns and various state income tax returns. With certain exceptions, the Company is no longer subject to United States federal or state income tax examinations by tax authorities for years before 2007. Federal tax law allowing for the calculation of an R&D credit was enacted in 2013, which allowed the credit for the 2012 and 2013 tax years. However, the Company has not yet commissioned a study to calculate the credit for these tax years. The table above excludes the impact for any credit that could be claimed for the 2013 tax year. The Internal Revenue Service (“IRS”) initiated an audit in the first quarter of 2012 related to R&D tax credits claimed by the Company for the 2007 through 2010 tax years. On April 23, 2013, the IRS issued a Notice of Proposed Adjustment disallowing $4.6 million of R&D tax credits claimed for open tax years during the audit period. The Company maintains it is entitled to claim the credits and is pursuing its appeal. The appeals process was ongoing at June 30, 2014, and through the filing date of this report.

On September 13, 2013, the United States Department of the Treasury and IRS issued the final and re-proposed tangible property regulations effective for tax years beginning January 1, 2014. The Company has determined it is materially compliant with the requirements of these regulations.