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Income Taxes | 9 Months Ended
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Sep. 30, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | 15. Income Taxes The components of income tax expense (benefit) on continuing operations were as follows:
| Successor |  |  | Predecessor
| For the Period August 1 - September 30, 2018 |  |  | For the Period July 1 - July 31, 2018 |  | Three Months Ended September 30, 2017 |  | For the Period January 1 - July 31, 2018 |  | Nine Months Ended September 30, 2017
Income tax (benefit) expense | $ | (979 | ) |  |  | $ | (19 | ) |  | $ | 5 |  |  | $ | 48 |  |  | $ | (4 | )
Effective tax rate | (2,377.1 | )% |  |  | 23.1 | % |  | 37.1 | % |  | 23.8 | % |  | 29.1 | %
In the predecessor period, the effective tax rate differed from the statutory federal rate of 21% primarily due to state tax provision, adjustments in connection with the remediation of the Company’s uncertain tax position and various permanent differences, including nondeductible transaction costs in connection with the Merger. For the two months ended September 30, 2018, the effective tax rate differed from the statutory federal rate of 21% primarily due to the reversal of the valuation allowance associated with the net operating loss ("NOL") carryforwards of WMIH, permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m) and nondeductible meals and entertainment expenses. Prior to the Merger, WMIH had a full valuation allowance established against its federal net operating losses due to cumulative losses in previous years. On the contrary, the Predecessor determined that it would be able to fully realize its federal and state net operating losses, with the exception of a portion of its NOLs that would more-likely-than-not expire unused due to limitations of Internal Revenue Code (“IRC”) Section 382. Other deferred tax assets and liabilities for WMIH and the Predecessor are not significant to the valuation allowance analysis. As a result of the Merger, the Successor re-evaluated its valuation allowance. In the assessment of whether a valuation allowance was required against WMIH’s NOLs subsequent to the Merger, the Successor considered the four sources of taxable income, as follows, under ASC 740-10-30-18:
1. | Taxable income in prior carryback year(s) if carryback is permitted under the tax law;
2. | Future reversals of existing taxable temporary differences;
3. | Tax-planning strategies; and
4. | Future taxable income exclusive of reversing temporary differences and carryforwards.
The Successor noted that the NOL carryback period in source 1 of taxable income is no longer available to offset taxable income in prior years as modified as part of the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). Also, the Successor did not identify any tax planning strategies available that would support realization of the WMIH NOL deferred tax asset under ASC 740. Thus, in determining the appropriate deferred tax asset valuation allowance subsequent to the Merger, the Successor relied upon (1) reversals of existing deferred tax liabilities and (2) future taxable income excluding reversing differences, with the latter item accounting for most of the change. In estimating future taxable income from the fourth source listed above, the Successor considered all available evidence and applied judgment in determining the effect of positive and negative evidence based on its ability to objectively verify it. In that regard, the Successor further noted that under ASC 740-10-30-21, “Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Other examples of negative evidence include, but are not limited to, the following:
1. | A history of operating loss or tax credit carryforwards expiring unused
2. | Losses expected in early future years (by a presently profitable entity)
3. | Unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years
4. | A carryback, carryforward period that is so brief it would limit realization of tax benefits if a significant deductible temporary difference is expected to reverse in a single year or the entity operates in a traditionally cyclical business.”
The Successor noted none of the negative items listed above from the perspective of the post-transaction operations. The Predecessor, which accounts for almost all of the post-merger operations, has been profitable over the last several years and expects to grow in profitability in the future. Accordingly, it was deemed appropriate and reasonable to conclude under ASC 740 that a significant portion of the WMIH NOL deferred tax asset, previously subject to a full valuation allowance, would be realizable at a more-likely-than-not (“MLTN”) level subsequent to the Merger. While WMIH experienced a history of cumulative losses in previous years, the Predecessor has demonstrated a history of strong sustainable pre-tax income and taxable income in previous years. The Successor believes that WMIH and the Predecessor as a combined company will generate enough future pre-tax income to utilize a significant portion of WMIH’s NOL carryforwards. In determining the amount of the valuation allowance to release, the Successor considered (1) internal forecasts of the Successor’s future pre-tax income exclusive of reversing temporary differences and carryforwards, (2) the nature and timing of future reversals of existing deferred tax assets and liabilities, (3) future originating temporary and permanent differences, and (4) NOL carryforward expiration dates. For purposes of the analysis, the Successor concluded that it should start with using an average of WMIH and the Predecessor’s combined historical pre-tax income to project future taxable income adjusted for non-recurring expenses. The Successor also removed any existing intangible amortization expense and interest expense from the 3-year historical average and incorporated post-Merger costs expected to be incurred, including additional interest expense from new debt assumed and additional amortization expense resulting from the intangibles recorded as part of purchase price accounting. For purposes of analyzing the realization of the deferred tax assets in accordance with ASC 740, the Company assumed a steady state of operations that would generate cash flows and liquidity sufficient to maintain current operations and pay down corporate debt resulting in a reduction in interest expense in future periods. The Successor considered other factors in its determination of future taxable income that was demonstrated by historical performance. As a result of the above considerations and analysis, the Successor released $990 of the valuation allowance related to WMIH's net operating loss carryforwards and other deferred tax assets. In assessing the appropriateness of the federal valuation allowance as of the Merger date, the Successor considered the significant cumulative earnings in recent years of WMIH and the Predecessor as well as consistent historical taxable income of both companies’ federal combined operations. Additionally, the Successor considered its ability to utilize net operating loss carryforwards to offset future taxable income generated by its combined operations. The Successor does not expect any tax loss limitations under IRC §382 that would impact its utilization of WMIH’s pre-Merger federal NOL carryforwards in the future. The Successor projects that it will have sufficient combined pre-tax earnings to realize $990 of the deferred tax asset related to net operating loss carryforwards within the expiration period. For the three months ended September 30, 2017, the effective tax rate differed slightly from the statutory federal rate of 35% due to recurring items, such as state tax benefit offset by excess tax deficiency related to restricted share-based compensation recognized within income rather than shareholder’s equity under Accounting Standards Update No. 2016-09. Impact of Tax Reform On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted which significantly revised the U.S. corporate income tax regime by lowering the U.S. corporate tax rate from 35% to 21%, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, creating new taxes on certain foreign sourced earnings, as well as other changes. In the year ended December 31, 2017, the Company recorded a net tax benefit in connection with the Tax Reform Act and related matters primarily due to the remeasurement of deferred tax balances. During the two months ended September 30, 2018, no adjustments were made to the amounts recorded in the year ended 2017 related to the Tax Reform Act, including the remeasurement of existing deferred tax balances, the transition tax, uncertain tax positions, valuation allowance, and reassessment of permanently reinvested earnings, among others. The Company has not recorded any adjustments related to the new Global Intangible Low-Taxed Income (“GILTI”) tax and has not adopted an accounting policy regarding whether to record deferred tax on GILTI. However, the Company has included an estimate of the 2018 current GILTI impact on the tax provision for the period ended September 30, 2018. The Company will continue to refine its calculations as additional analysis is completed. These estimates may be adjusted as the Company continues to gain further clarification and guidance regarding tax accounting methods, state tax conformity to federal tax changes, impact of GILTI provisions, among others.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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