Income Taxes

12 Months Ended

Sep. 30, 2017

9. INCOME TAXES

Federal and state income tax provisions for continuing operations are as follows:

		Years Ended September 30,
		2017		2016		2015
Federal:
	Current	$	(3,092)	$	762	$	417
	Deferred		6,384		(97,093)		(564)
State:
	Current		1,432		952		729
	Deferred		487		(1,738)		79
		$	5,211	$	(97,117)	$	661

Actual income tax expense differs from income tax expense computed by applying the U.S. federal statutory corporate rate of 35 percent to income (loss) before income taxes as follows:

		Years Ended September 30,
		2017		2016		2015
Provision (benefit) at the statutory rate		$	6,582	$	8,316	$	6,139
Increase resulting from:
	Alternative minimum tax		-		-		417
	Non-deductible expenses		966		1,557		753
	Long-lived assets		-		-		69
	State income taxes, net of federal deduction		1,003		1,105		937
	Change in valuation allowance		142
	Contingent tax liabilities		-		-		51
	Other		17		-		54
Decrease resulting from:
	Change in valuation allowance		-		(108,987)		(7,034)
	Valuation allowance adjustment - acquisitions		-		-		(725)
	Contingent tax liabilities		(3,499)		(96)		-
	Other		-		988		-
		$	5,211	$	(97,117)	$	661

Deferred income tax provisions result from temporary differences in the recognition of income and expenses for financial reporting purposes and for income tax purposes. The income tax effects of these temporary differences, representing deferred income tax assets and liabilities, result principally from the following:

		Years Ended September 30,
		2017		2016
Deferred income tax assets:
	Allowance for doubtful accounts	$	243	$	280
	Accrued expenses		12,915		10,729
	Net operating loss carryforward		77,497		86,280
	Various reserves		1,807		1,410
	Equity losses in affiliate		82		84
	Share-based compensation		1,570		1,012
	Capital loss carryforward		337		338
	Other		3,195		3,185
Subtotal			97,646		103,318
Less valuation allowance			2,366		2,224
Total deferred income tax assets		$	95,280	$	101,094
Deferred income tax liabilities:
	Property and equipment	$	2,019	$	1,517
	Intangible assets		6,548		5,629
	Other		502		399
Total deferred income tax liabilities			9,069		7,545
Net deferred income tax assets		$	86,211	$	93,549

In fiscal 2017, the valuation allowance on our deferred tax assets increased by $142, which is included in “Provision (benefits) for income taxes” in our Consolidated Comprehensive Income Statement.

In 2002, we adopted a tax accounting method change that allowed us to deduct goodwill for income tax purposes that had previously been classified as non-deductible. The accounting method change resulted in additional amortizable tax basis in goodwill. We believe the realization of the additional tax basis in goodwill is not more likely than not and have not recorded a deferred tax asset. Although a deferred tax asset has not been recorded through September 30, 2017, we have derived a cumulative cash tax reduction of $11,487 from the change in tax accounting method and the subsequent amortization of the additional tax goodwill. In addition, the amortization of the additional tax goodwill has resulted in additional federal net operating loss carry forwards of $142,052 and state net operating loss carry forwards of $6,188. We believe the realization of the additional net operating loss carry forwards is not more likely than not and have not recorded a deferred tax asset. We have a tax basis of $3,411 in additional tax goodwill that will be amortized during the year ended September 30, 2018.

As of September 30, 2017, we had available approximately $378,274 of federal net tax operating loss carry forward for federal income tax purposes, including $142,052 resulting from the additional amortization of tax goodwill. This carry forward, which may provide future tax benefits, will begin to expire in 2026. On May 12, 2006, we had a change in ownership as defined in Internal Revenue Code Section 382. As such, our utilization after the change in control date of our net operating loss in existence as of the change of control date was subject to Section 382 limitations for federal income taxes and some state income taxes. The annual limitation under Section 382 on the utilization of federal net operating losses was approximately $20,000 for the first five tax years subsequent to the change in ownership and $16,000 thereafter. Approximately $300,400 of federal net operating losses will not be subject to this limitation. Also, after applying the Section 382 limitation to available state net operating loss carry forwards, we had available approximately $77,373 state net tax operating loss carry forwards, including $6,188 resulting from the additional amortization of tax goodwill which begins to expire as of September 30, 2018. We have provided valuation allowances on all net operating losses where it is determined it is more likely than not that they will expire without being utilized.

In assessing the realizability of deferred tax assets at September 30, 2017, we considered whether it was more likely than not that some portion or all of the deferred tax assets will not be realized. Our realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. We believe that $6,347 and $427 of federal and state deferred tax assets, respectively, will be realized by offsetting reversing deferred tax liabilities. In addition, we have $587 of net state deferred tax assets that we expect will be realized, and therefore valuation allowances were not provided for these assets. As a result, we have recorded a net deferred tax asset of $86,211 on our Consolidated Balance Sheets. We will continue to evaluate the appropriateness of our remaining deferred tax assets and need for valuation allowances on a quarterly basis. Further, any future reduction in the federal statutory tax rate could result in a charge to reduce the book value of the net deferred tax assets recorded on our Consolidated Balance Sheet.

As a result of the reorganization and related adjustment to the book basis in goodwill, we have tax basis in excess of book basis in amortizable goodwill of approximately $24,012. The tax basis in amortizable goodwill in excess of book basis is not reflected as a deferred tax asset. To the extent the amortization of the excess tax basis results in a cash tax benefit, the benefit will first go to reduce goodwill, then other long-term intangible assets, and then tax expense.

GAAP requires financial statement reporting of the expected future tax consequences of uncertain tax return reporting positions on the presumption that all relevant tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but it prohibits discounting of any of the related tax effects for the time value of money. The evaluation of a tax position is a two-step process. The first step is the recognition process to determine if it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.

A reconciliation of the beginning and ending balances of unrecognized tax benefit is as follows:

	Years Ended September 30,
	2017		2016
Balance at October 1,	$	55,867	$	55,963
Additions for position related to current year		207		-
Additions for positions of prior years		-		-
Reduction resulting from the lapse of the applicable statutes of limitations		3,707		27
Reduction resulting from positions of prior years		399		69
Reduction resulting from settlement of positions of prior years		-		-
Balance at September 30,	$	51,968	$	55,867

As of September 30, 2017, and 2016, $51,968 and $55,867, respectively, of unrecognized tax benefits would result in a decrease in the provision for income tax expense, of which $50,180 and $50,581 for each of those years, respectively, relates to net operating loss from additional goodwill resulting from the tax accounting method change discussed above. We believe the realization of the net operating losses resulting from the tax accounting method change is not more likely than not and have not recorded a deferred tax asset. However, if we are partially or fully successful in defending our tax accounting method change we may realize a portion or all of the deferred tax asset related to this net operating loss. We anticipate that approximately $3,284 in liabilities for unrecognized tax benefits, including accrued interest, may be reversed in the next twelve months. The reversal is predominately due to the expiration of the statutes of limitation for unrecognized tax benefits.

We had approximately $14 and $11 accrued for the payment of interest and penalties at September 30, 2017, and 2016, respectively. We recognize interest and penalties related to unrecognized tax benefits as part of the provision for income taxes.

We are currently not under federal audit by the Internal Revenue Service. The tax years ended September 30, 2014, and forward are subject to federal audit as are tax years prior to September 30, 2014, to the extent of unutilized net operating losses generated in those years. The tax years ended September 30, 2013, and forward are subject to state audits as are tax years prior to September 30, 2013, to the extent of unutilized net operating losses generated in those years.