Income Taxes

12 Months Ended

Dec. 31, 2020

Income TaxesDeferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates.

The following is an analysis of the consolidated income tax provision (benefit):


	Predecessor		Successor
	For the Period from January 1, 2018 through August 13, 2018		For the Period from August 14, 2018 through December 31, 2018		Year Ended December 31, 2019		Year Ended December 31, 2020
	(In thousands)
Current - Federal	$	—	$	(1,349)	$	—	$	—
Current - State	13		82		(223)		(154)
Deferred - Federal	2,412		16,406		27,550		(12,037)
Deferred - State	(1,360)		3,805		476		2,981
	$	1,065	$	18,944	$	27,803	$	(9,210)

In recording deferred income tax assets, the Company considers whether it is more likely than not that its deferred income tax assets will be realized in the future. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. The Company believes that after considering all the available objective evidence, historical and prospective, with greater weight given to historical evidence, management is not able to determine that it is more likely than not that all of its deferred tax assets will be realized. As a result, the Company established valuation allowances for its deferred tax assets and U.S. federal and state net operating loss carryforwards that are not expected to be utilized due to the uncertainty of generating taxable income prior to the expiration of the carryforward periods. The Company will continue to assess the valuation allowances against deferred tax assets considering all available information obtained in future periods.

The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, reduced the corporate income tax rate effective January 1, 2018 from 35% to 21%. Among the other significant tax law changes that potentially affect the Company are the elimination of the corporate alternative minimum tax ("AMT"), changes that require operating losses incurred in 2018 and beyond be carried forward indefinitely with no carryback up to 80% of taxable income in a given year, and limitations on the deduction for interest expense incurred in 2018 or later of up to 30% of its adjusted taxable income (defined as taxable income before interest and net operating losses) for the taxable year. For the tax years beginning before January 1, 2022, the adjusted taxable income for these purposes is also adjusted to exclude the impact of depreciation, depletion and amortization. The Tax Cuts and Jobs Act preserved deductibility of intangible drilling costs for federal income tax purposes, which allows the Company to deduct a portion of drilling costs in the year incurred and minimizes current taxes payable in periods of taxable income. In December 31, 2018, the Company completed its accounting for the tax effects of enactment of the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act repealed the AMT for tax years beginning on or after January 1, 2018 and provides that existing AMT credit carryforwards can be utilized to offset federal taxes for any taxable year. Due to tax law enacted in 2020 with the Coronavirus Aid, Relief and Economic Security ("CARES") Act, the Company received $10.2 million in refunds for outstanding AMT carryforwards in 2020.

The tax effects of significant temporary differences representing the net deferred tax liability at December 31, 2019 and 2020 were as follows:


	2019		2020
	(In thousands)
Deferred tax assets:
Asset retirement obligation	$	3,812	$	4,061
Net operating loss carryforwards	51,656		59,335
Interest expense limitation	62,552		55,026
Unrealized hedging losses	—		10,452
Other	9,022		5,661
	127,042		134,535
Valuation allowance on deferred tax assets	(16,876)		(15,964)
Deferred tax assets	110,166		118,571
Deferred tax liabilities:
Property and equipment	(269,587)		(283,959)
Unrealized hedging income	(10,763)		—
Bond discount	(37,458)		(30,591)
Other	(4,130)		(4,604)
Deferred tax liabilities	(321,938)		(319,154)
Net deferred tax liability	$	(211,772)	$	(200,583)

The difference between the customary rate of 21% and the effective tax rate on income (losses) is due to the following:


	Predecessor		Successor
	For the Period from January 1, 2018 through August 13, 2018		For the Period from August 14, 2018 through December 31, 2018		Year Ended December 31, 2019		Year Ended December 31, 2020
	(In thousands)
Tax at statutory rate	$	(19,255)	$	17,444	$	26,185	$	(12,941)
Tax effect of:
Alternative minimum tax	—		(1,349)		—		—
Valuation allowance on deferred tax assets	22,053		(903)		(494)		(919)
State income taxes, net of federal benefit	(3,599)		3,863		(499)		3,746
Nondeductible transaction costs	—		—		1,417		—
Nondeductible stock-based compensation	668		(120)		886		1,109

Other	1,198		9		308		(205)
Total	$	1,065	$	18,944	$	27,803	$	(9,210)


	Predecessor		Successor
	For the Period from January 1, 2018 through August 13, 2018		For the Period from August 14, 2018 through December 31, 2018		Year Ended December 31, 2019		Year Ended December 31, 2020
Tax at statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
Tax effect of:
Alternative minimum tax	—		(1.6)		—		—
Valuation allowance on deferred tax assets	(24.1)		(1.1)		(0.4)		1.5
State income taxes, net of federal benefit	3.9		4.7		(0.4)		(6.1)
Nondeductible transaction costs	—		—		1.1		—
Nondeductible stock-based compensation	(0.7)		(0.1)		0.7		(1.8)

Other	(1.3)		—		0.3		0.3
Effective tax rate	(1.2)	%	22.9	%	22.3	%	14.9	%

At December 31, 2020, Comstock had the following carryforwards available to reduce future income taxes:


Types of Carryforward	Years of Expiration Carryforward	Amount
		(In thousands)
Net operating loss – U.S. federal	2021-2037	$	899,953
Net operating loss – U.S. federal	Unlimited	$	6,492
Net operating loss – state taxes	2021-2037	$	1,552,582
Interest expense – U.S. federal	Unlimited	$	262,069
Interest expense – state taxes	Unlimited	$	264,878

The shares of common stock issued as a result of the Jones Contribution triggered an ownership change under Section 382 of the Internal Revenue Code. As a result, the Company's ability to use net operating losses ("NOLs") generated before the change in control to reduce taxable income is generally limited to an annual amount based on the fair market value of its stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate. The Company's NOLs are estimated to be limited to $3.3 million a year as a result of this limitation. In addition to this limitation, IRC Section 382 provides that a corporation with a net unrealized built-in gain immediately before an ownership change may increase its limitation by the amount of built-in gain recognized during a recognition period, which is generally the five-year period immediately following an ownership change. Based on the fair market value of the Company's common stock immediately prior to the ownership change, Comstock believes that it has a net unrealized built-in gain which will increase the Section 382 limitation during the five-year recognition period.

NOLs that exceed the Section 382 limitation in any year continue to be allowed as carry forwards until they expire and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. NOLs incurred prior to 2018 generally have a 20-year life until they expire. NOLs generated in 2018 and after would be carried forward indefinitely. Comstock's use of new NOLs arising after the date of an ownership change would not be affected by the 382 limitation. If the Company does not generate a sufficient level of taxable income prior to the expiration of the pre-2018 NOL carry-forward periods, then it will lose the ability to apply those NOLs as offsets to future taxable income. The Company estimates that $844.6 million of the U.S. federal NOL carryforwards and $1.4 billion of the estimated state NOL carryforwards will expire unused.

The Company's federal income tax returns for the years subsequent to December 31, 2015 remain subject to examination. The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2017. The Company currently believes that its significant filing positions are highly certain and that all of its other significant income tax filing positions and deductions would be sustained upon audit or the final resolution would not have a material effect on the consolidated financial statements. Therefore, the Company has not established any significant reserves for uncertain tax positions.

- 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.

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