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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes |
11. | Income Taxes
The components of the income tax expense (benefit) for each of the periods presented below are as follows:
|  | Successor |  |  | Predecessor
|  | Year Ended December 31, 2022 |  | Period from February 10, 2021 through December 31, 2021 |  |  | Period from January 1, 2021 through February 9, 2021 |  | Year Ended December 31, 2020
Current |  |  |  |  |  |  |  |  |
Federal |  | $ | 37 |  |  | $ | — |  |  |  | $ | — |  |  | $ | (3) |
State |  | 10 |  |  | — |  |  |  | — |  |  | (6) |
Current Income Taxes |  | 47 |  |  | — |  |  |  | — |  |  | (9) |
Deferred |  |  |  |  |  |  |  |  |
Federal |  | (1,112) |  |  | (45) |  |  |  | (54) |  |  | — |
State |  | (220) |  |  | (4) |  |  |  | (3) |  |  | (10) |
Deferred Income Taxes |  | (1,332) |  |  | (49) |  |  |  | (57) |  |  | (10) |
Total |  | $ | (1,285) |  |  | $ | (49) |  |  |  | $ | (57) |  |  | $ | (19) |
The income tax expense (benefit) reported in our consolidated statement of operations is different from the federal income tax expense (benefit) computed using the federal statutory rate for the following reasons:
|  | Successor |  |  | Predecessor
|  | Year Ended December 31, 2022 |  | Period from February 10, 2021 through December 31, 2021 |  |  | Period from January 1, 2021 through February 9, 2021 |  | Year Ended December 31, 2020
Income tax expense (benefit) at the federal statutory rate of 21% |  | $ | 767 |  |  | $ | 188 |  |  |  | $ | 1,119 |  |  | $ | (2,051) |
State income taxes (net of federal income tax benefit) |  | 75 |  |  | (86) |  |  |  | 238 |  |  | (41) |
Change in valuation allowance due to Acquisitions |  | 19 |  |  | (49) |  |  |  | — |  |  | — |
Change in valuation allowance excluding impact of Acquisitions |  | (2,147) |  |  | (179) |  |  |  | (1,191) |  |  | 2,010 |
Reorganization items |  | — |  |  | 60 |  |  |  | (173) |  |  | 41 |
Transaction costs |  | 2 |  |  | 11 |  |  |  | — |  |  | — |
Removal of stranded tax effects in accumulated other comprehensive income |  | — |  |  | — |  |  |  | (57) |  |  | — |
Other |  | (1) |  |  | 6 |  |  |  | 7 |  |  | 22 |
Total |  | $ | (1,285) |  |  | $ | (49) |  |  |  | $ | (57) |  |  | $ | (19) |
We recognize certain permanent book-to-tax differences relating to reorganization items such as differences in the treatment of the extinguishment of liabilities, differences due to the non-deductibility of certain expenses associated with administering the plan of reorganization, and the adjustment to deferred tax assets which are subject to expiration before they are utilizable. In the Successor Period, we recognized a difference due to the non-deductibility of certain transaction costs and other post-combination expenses. Our state income tax provision can fluctuate as a result of changing state apportionment factors and state tax rates. The 2021 Successor Period resulted in a state tax benefit before valuation allowance. The shift of our state profile towards a higher overall state tax rate as a consequence of the Vine Acquisition caused an increase to our state deferred tax assets. Such increase was offset in full by an increase to our valuation allowance. The Marcellus Acquisition during the 2022 Successor Period resulted in a similar, but lessened effect. Deferred income taxes are provided to reflect temporary differences in the tax basis of assets and liabilities and their reported amounts in the financial statements. The tax-effected temporary differences, net operating loss (“NOL”) carryforwards and excess business interest expense carryforwards that comprise our deferred income taxes are as follows:
|  | Successor
|  | December 31, 2022 |  | December 31, 2021
Deferred tax liabilities: |  |  |  |
Property, plant and equipment |  | $ | (253) |  |  | $ | — |
Other |  | (5) |  |  | (3) |
Deferred tax liabilities |  | (258) |  |  | (3) |
Deferred tax assets: |  |  |  |
Property, plant and equipment |  | — |  |  | 340 |
Net operating loss carryforwards |  | 870 |  |  | 784 |
Carrying value of debt |  | 29 |  |  | 31 |
Excess business interest expense carryforward |  | 665 |  |  | 684 |
Asset retirement obligations |  | 91 |  |  | 86 |
Investments |  | 11 |  |  | 66 |
Accrued liabilities |  | 21 |  |  | 38 |
Derivative instruments |  | 137 |  |  | 289 |
Other |  | 130 |  |  | 68 |
Deferred tax assets |  | 1,954 |  |  | 2,386 |
Valuation allowance |  | (345) |  |  | (2,383) |
Deferred tax assets after valuation allowance |  | 1,609 |  |  | 3 |
Net deferred tax asset |  | $ | 1,351 |  |  | $ | — |
As of December 31, 2022, and 2021, we had deferred tax assets of $1.954 billion and $2.386 billion, respectively, upon which we had a valuation allowance of $345 million and $2.383 billion, respectively. Of the net change in the valuation allowance of $2.038 billion, $1.351 billion was attributable to the valuation allowance release during the fourth quarter of 2022 and $687 million was associated primarily with pre-tax income for the year. A valuation allowance against deferred tax assets, including NOL carryforwards and disallowed business interest carryforwards, is recognized when it is more likely than not that all or some portion of the benefit from the deferred tax assets will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of existing taxable temporary differences, tax planning strategies, as well as the current and forecasted business economics of our industry. Management assesses all available evidence, both positive and negative, to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. For the years ended December 31, 2021 and 2020, we maintained a full valuation allowance against our deferred tax assets based upon the conclusion that it was more likely than not that the deferred tax assets would not be realized. An item of negative evidence consisted of the cumulative pre-tax book losses over rolling three-year periods, primarily due to recurring operational losses and $8.446 billion of impairments of proved natural gas and oil properties recorded in the quarter ended March 31, 2020 (see Note 19). For the cumulative three-year period ended December 31, 2022, we are in a cumulative loss position, but given the magnitude of the 2020 losses rolling off relative to the 2021 and 2022 positive pre-tax book income, we anticipate a return to cumulative pre-tax income during 2023. The expectation of future earnings along with reversals of existing taxable timing differences provide us with sufficient positive evidence to conclude that $1.351 billion of our federal and state deferred tax assets are more likely than not to be realized. Accordingly, we have released the valuation allowance for this amount during 2022. We continue to maintain a partial valuation allowance of $345 million against the portion of our federal and state deferred tax assets such as NOLs, credit carryovers, and capital losses, which may expire before we are able to utilize those due to the application of the limitations under Section 382 and the ordering in which such attributes may be applied. Our ability to utilize NOL carryforwards, disallowed business interest carryforwards, tax credits and possibly other tax attributes to reduce future taxable income and federal income tax is subject to various limitations under Section 382 of the Code. The utilization of such attributes may be subject to an annual limitation under Section 382 of the Code should transactions involving our equity result in a cumulative shift of more than 50% in the beneficial ownership of our stock during any three-year testing period (an “Ownership Change”). As a result of emergence from bankruptcy on February 9, 2021, the Company did experience an Ownership Change. We did not qualify for the exception under Section 382(l)(5) of the Code, and therefore an annual limitation was determined under Section 382(l)(6) of the Code, which is based on the post-emergence value of our equity multiplied by the adjusted federal long-term rate in effect for the month in which the ownership change occurred. The amount of the annual limitation has been computed to be $54 million. The limitation applies to our NOL carryforwards, disallowed business interest carryforwards and general business credits until such attributes expire or are fully utilized. As we were in an overall net unrealized built-in loss position at the Effective Date, the limitation also applies to any recognized built-in losses incurred for a period of five years but only to the extent of the overall net unrealized built-in loss. Recognized built-in losses include a portion of our tax depreciation, depletion, and amortization deductions along with a portion of our realized hedging losses. We incurred sufficient recognized built-in losses during the 2021 tax year such that we have no further restriction on the company’s deduction for such items. Some states impose similar limitations on tax attribute utilization upon experiencing an Ownership Change. In Chapter 11 bankruptcy cases, the cancellation of debt income (“CODI”) realized upon emergence from bankruptcy is excludible from taxable income but results in a reduction of tax attributes in accordance with the attribute reduction and ordering rules of Section 108 of the Code. The amount of our CODI was $5 billion, all of which reduced our NOL carryforwards. As a result of the Section 382 limitation, $307 million of federal NOLs remaining after the CODI reduction were estimated to expire before they would become utilizable and, as such, were removed from our deferred tax assets. The states we operate in generally have similar rules for attribute reduction and Section 382 limitation which resulted in the reduction of certain of our state NOL carryforwards. On November 1, 2021, we completed the acquisition of Vine. For federal income tax purposes, the transaction qualified as a tax-free merger under Section 368 of the Code and, as a result, we acquired carryover tax basis in Vine’s assets and liabilities. In the 2021 Successor Period, we recorded a $49 million net deferred tax liability determined through business combination accounting. Upon the completion of Vine’s tax returns in the 2022 Successor Period, the net deferred tax liability was adjusted to $30 million. As a result of this adjustment to the deferred tax liability, we increased our valuation allowance and recorded $19 million of income tax expense in the 2022 Successor Period. Additionally, we acquired NOL and interest expense carryforwards which are subject to a base annual Section 382 limitation of approximately $2 million. The base annual limitation is estimated to be increased over the first five years for recognized built-in gains of approximately $12 million per year resulting in approximately $14 million per year of available utilization in those years. The Marcellus Acquisition during the 2022 Successor Period was treated as a taxable asset acquisition with no tax carryovers acquired. As of December 31, 2022, we have an income tax receivable of $168 million included in other current assets within our consolidated balance sheets. As of December 31, 2022, and after taking into account each of the foregoing matters, the federal NOLs and excess business interest attributes are as follows:
| Attributes subject to Section 382 base annual limitation |  |  | Attributes not subject to Section 382 limitation
| $54 million |  | $2 million |  |
Net operating losses, by year of expiration: |  |  |  |  |  |
2037 | $ | 814 |  |  | $ | 24 |  |  |  | $ | — |
Indefinitely lived | 2,265 |  |  | 102 |  |  |  | — |
Total federal net operating losses | $ | 3,079 |  |  | $ | 126 |  |  |  | $ | — |
Excess business interest expense (indefinitely lived) | $ | 1,435 |  |  | $ | 90 |  |  |  | $ | 1,368 |
We had state NOL carryforwards of approximately $3.901 billion. Several states adopt the federal NOL carryforward period such that our more recent state NOLs do not expire. The state NOL carryforwards are subject to apportioned amounts of the federal Section 382 limitations. On August 16, 2022, the President of the United States signed into law the Inflation Reduction Act of 2022 (“IRA”) which, among other things, includes provisions for a 15% corporate alternative minimum tax on book income for companies whose average book income exceeds $1 billion for any three consecutive years preceding the tax year and a 1% excise tax on stock buybacks. These changes are generally in effect for tax years beginning after December 31, 2022. Based on our book income in the past three years, we do not believe we will be subject to the corporate alternative minimum tax in 2023. However, we may become subject to the corporate alternative minimum tax in future years. It is our policy that we view the alternative minimum tax as an excess tax over regular income tax and therefore, our deferred tax assets will continue to be assessed for realizability on the basis of whether they reduce a regular tax liability. Should we pay alternative minimum tax in the future and thus acquire credit carryovers related thereto, such deferred tax assets on these will be separately evaluated for valuation allowance purposes. Accounting guidance for recognizing and measuring uncertain tax positions requires a more likely than not threshold condition be met on a tax position, based solely on the technical merits of being sustained, before any benefit of the tax position can be recognized in the financial statements. Guidance is also provided regarding recognition, classification and disclosure of uncertain tax positions. As of December 31, 2022, and 2021, the amount of unrecognized tax benefits related to NOL carryforwards, tax credit carryforwards, and tax liabilities associated with uncertain tax positions was $69 million and $74 million, respectively. As of December 31, 2022, $29 million is related to state tax receivables not expected to be recovered, $4 million is related to tax credit carryforwards, and the remainder is related to NOL carryforwards. As of December 31, 2021, $29 million is related to state tax receivables not expected to be recovered and the remainder is related to NOL carryforwards. If recognized, $33 million of the uncertain tax positions identified would have an effect on the effective tax rate. As of December 31, 2022, and 2021, we had no amounts accrued for interest related to these uncertain tax positions. We recognize interest related to uncertain tax positions as a component of interest expense. Penalties, if any, related to uncertain tax positions would be recorded in other expenses. $24 million of the state tax receivable relates to claims for refund of Pennsylvania income taxes. During the fourth quarter of 2021, a court case with similar claims as ours was decided in favor of the taxpayer. We considered this information and determined that we had no change to our assessment of the recognition and measurement of our position. Should the state exhaust its appeals so that the taxpayer ultimately prevails we may be successful in applying that precedent to our claims. As such, it is possible that we may reassess that refund claim in the next 12 months and ascertain it to be more likely than not to be sustained. Should this occur, we will record a current tax benefit and income tax receivable for the amount we determine we are likely to sustain. A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
|  | Successor |  |  | Predecessor
|  | Year Ended December 31, 2022 |  | Period from February 10, 2021 through December 31, 2021 |  |  | Period from January 1, 2021 through February 9, 2021 |  | Year Ended December 31, 2020
Unrecognized tax benefits at beginning of period |  | $ | 74 |  |  | $ | 74 |  |  |  | $ | 74 |  |  | $ | 74 |
Additions based on tax positions related to the current year |  | 2 |  |  | — |  |  |  | — |  |  | — |
Additions to tax positions of prior years |  | 2 |  |  | — |  |  |  | — |  |  | — |
Settlements |  | — |  |  | — |  |  |  | — |  |  | — |
Expiration of the applicable statute of limitations |  | — |  |  | — |  |  |  | — |  |  | — |
Reductions to tax positions of prior years |  | (9) |  |  | — |  |  |  | — |  |  | — |
Unrecognized tax benefits at end of period |  | $ | 69 |  |  | $ | 74 |  |  |  | $ | 74 |  |  | $ | 74 |
Our federal and state income tax returns are subject to examination by federal and state tax authorities. Our tax years 2019 through 2022 remain open for all purposes of examination by the IRS as do the WildHorse short period return for January 1, 2019, through February 1, 2019, the Vine 2019 and 2020 federal income tax returns and the Vine short period return for January 1, 2021 through November 1, 2021. However, certain earlier tax years remain open for adjustment to the extent of their NOL carryforwards available for future utilization. In addition, tax years 2019 through 2022 as well as certain earlier years remain open for examination by state tax authorities. Currently, several state examinations are in progress of various years. We do not anticipate that the outcome of any federal or state audit will have a significant impact on our financial position or results of operations.

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