Note 4 – Income Taxes

The provision for income taxes consists of the following:



	For the Years Ended December 31,
	2014			2013			2012
	(in thousands)
Current portion of income tax expense
Federal	$	—		$	—		$	—
State	868			2,121			370
Deferred portion of income tax expense (benefit)	397,780			105,555			(29,638		)
Total income tax expense (benefit)	$	398,648		$	107,676		$	(29,268	)
Effective tax rate	37.4		%	38.6		%	35.0		%

The Company reduces its income tax payable to reflect employee stock option exercises. There was no excess income tax benefit associated with stock awards in 2014, 2013, or 2012.

The components of the net deferred income tax liabilities are as follows:



	As of December 31,
	2014			2013
	(in thousands)
Deferred tax liabilities:
Oil and gas properties	$	1,029,424		$	768,463
Derivative asset	220,437			9,529
Other	4,475			1,245
Total deferred tax liabilities	1,254,336			779,237
Deferred tax assets:
Federal and state tax net operating loss carryovers	184,447			91,788
Stock compensation	16,763			18,820
Other long-term liabilities	16,301			13,341
Net Profits Plan liability	9,414			20,913
Total deferred tax assets	226,925			144,862
Valuation allowance	(7,246		)	(5,001		)
Net deferred tax assets	219,679			139,861
Total net deferred tax liabilities	1,034,657			639,376
Less: current deferred income tax liabilities	(152,082		)	(172		)
Add: current deferred income tax assets	9,106			10,921
Non-current net deferred tax liabilities	$	891,681		$	650,125
Current federal income tax refundable	$	4,734		$	4,630
Current state income tax refundable	$	—		$	—
Current state income tax payable	$	25		$	1,460

At December 31, 2014, the Company estimated its federal net operating loss carryforward at $626.2 million, which includes unrecognized excess income tax benefits associated with stock awards of $126.7 million. The federal net operating loss carryforward begins to expire in 2031. The Company has estimated state net operating loss carryforwards of $284.8 million that expire between 2015 and 2035 and it has federal R&D credit carryforwards of $3.5 million that expire between 2028 and 2032. The Company’s valuation allowance relates to charitable contribution carryforwards, state net operating loss carryforwards, and state tax credits, which the Company anticipates will expire before they can be utilized. The change in the valuation allowance from 2013 to 2014 primarily reflects a change in the Company’s position regarding anticipated utilization of cumulative state net operating losses.

Federal income tax expense differs from the amount 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, R&D credits, and other permanent differences, as follows:



	For the Years Ended December 31,
	2014		2013			2012
	(in thousands)
Federal statutory tax expense (benefit)	$	372,644	$	97,514		$	(29,231	)
Increase (decrease) in tax resulting from:
State tax expense (benefit) (net of federal benefit)	21,350		9,400			(992		)
Research and development credit	—		—			(970		)
Change in valuation allowance	2,245		(314		)	1,524
Other	2,409		1,076			401
Income tax expense (benefit)	$	398,648	$	107,676		$	(29,268	)

Acquisitions, divestitures, drilling activity, and basis differentials impacting the prices received for oil, gas, and NGLs affect apportionment of taxable income to the states where the Company owns oil and gas properties. As its apportionment factors change, the Company’s blended state income tax rate changes. This change, when applied to the Company’s total temporary differences, impacts the total state income tax expense (benefit) reported in the current year. Items affecting state apportionment factors are evaluated at the beginning of each year, after completion of the prior year income tax return, and when significant acquisition, divestiture or changes in drilling activity or estimated state revenue occurs during the year.

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 these tax authorities for years before 2007. The Internal Revenue Service (“IRS”) initiated an audit in the first quarter of 2012 related to an R&D tax credit 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 an R&D tax credit claimed for open tax years during the audit period. During the third quarter ended September 30, 2014, the Company successfully reached an agreement with the IRS Appeals Office (“Appeals”) related to the claimed R&D credit and recorded an immaterial adjustment. In the fourth quarter of 2014, Appeals returned the case to the Examination Team for final review. At December 31, 2014, the Company was waiting on final review and evaluating the basis for claiming the R&D credit for the 2012 and 2013 tax years. Subsequent to year-end, the Company concluded its evaluation, and preliminary estimates indicate it may be entitled to claim approximately $2.4 million of additional net R&D credit. The Company anticipates finalizing the amounts and filing amended returns in the first quarter of 2015. The tables above do not include the impact of the estimated amount.

On September 13, 2013, the United States Department of the Treasury and IRS issued 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 as of December 31, 2014.

The Company complies with authoritative accounting guidance regarding uncertain tax provisions. The entire amount of unrecognized tax benefit reported by the Company would affect its effective tax rate if recognized. Interest expense in the accompanying statements of operations includes a negligible amount associated with income taxes. At December 31, 2014, the Company estimates the range of reasonably possible change in 2015 to the table below could be from zero to $1.2 million.

The total amount recorded for unrecognized tax benefits is presented below:



	For the Years Ended December 31,
	2014			2013		2012
	(in thousands)
Beginning balance	$	2,358		$	2,278	$	1,961
Additions for tax positions of prior years	140			80		317
Settlements	(916		)	—		—
Ending balance	$	1,582		$	2,358	$	2,278