NOTE 12: INCOME TAXES

The components of income from continuing operations before income taxes are as follows (in thousands):


	Year Ended June 30,
	2019		2018		2017
U.S.	$	80,209	$	61,307	$	(15,046)
Foreign		89,972		137,376		146,305
Total	$	170,181	$	198,683	$	131,259

* Certain amounts have been reclassified in the table above to conform to current period classification.

The income tax provisions related to the above results are as follows (in thousands):


	Year Ended June 30,
	2019		2018		2017
Current Tax Provision (Benefit):
U.S. Federal	$	17,450	$	69,986	$	1,162
State and Local		1,788		(599)		(3,834)
Foreign		1,906		7,831		3,777
Total Current		21,144		77,218		1,105
Deferred Tax Provision (Benefit):
U.S. Federal		4,066		19,020		(2,745)
State and Local		9,029		(1,173)		6,155
Foreign		(82)		(10,963)		5,079
Total Deferred		13,013		6,884		8,489
Income Tax Provision	$	34,157	$	84,102	$	9,594

The income tax provisions differ from those that would be computed using the statutory U.S. federal rate as a result of the following items (in thousands):


	Year Ended June 30,
	2019				2018				2017
Income Tax at Statutory Rate	$	35,738	21.0	%	$	55,750	28.1	%	$	45,941	35.0	%
Lower Rates on Foreign Operations		(18,939)	(11.1)	%		(30,749)	(15.5)	%		(42,911)	(32.7)	%
State Income Taxes		5,825	3.4	%		3,648	1.8	%		1,348	1.0	%
Impact of Tax Cuts and Jobs Act		—	—	%		103,878	52.3	%		—	—	%
Loss on Investment in Subsidiary		1,797	1.1	%		(48,903)	(24.6)	%		—	—	%
Benefit on Foreign Intangibles		—	—	%		(8,813)	(4.5)	%		—	—	%
Permanent Non-Deductible Items		537	0.3	%		7,715	3.9	%		2,720	2.1	%
Foreign Tax Provisions Under GILTI		4,808	2.8	%		—	—	%		—	—	%
Other		4,391	2.6	%		1,576	0.8	%		2,496	1.9	%
Income Tax Provision	$	34,157	20.1	%	$	84,102	42.3	%	$	9,594	7.3	%

Deferred income tax assets (liabilities) result primarily from temporary differences in the recognition of various expenses for tax and financial statement purposes, and from the recognition of the tax benefits of net operating loss carryforwards.

These assets and liabilities are composed of the following (in thousands):


	June 30,
	2019		2018		2017
Employee Benefits	$	10,505	$	11,957	$	18,648
Stock-Based Compensation		6,549		7,577		18,130
Deferred Rent		7,736		9,841		17,588
Receivable Reserve		2,601		7,953		11,308
Restructuring Costs		6,017		8,704		17,148
Depreciation		—		3,380		—
Other Reserves		2,830		4,766		6,701
Loss and Credit Carryforwards, Net		36,259		37,340		37,569
Less: Valuation Allowance		(9,943)		(11,496)		(9,456)
Gross Deferred Tax Assets		62,554		80,022		117,636
Depreciation		(14)		—		(10,641)
Deferred Taxes on Unremitted Foreign Earnings		(3,146)		(2,346)		—
Amortization of Intangible Assets		(70,319)		(68,011)		(106,952)
Other Accruals		(187)		—		—
Gross Deferred Tax Liability		(73,666)		(70,357)		(117,593)
Net Deferred Tax (Liability) Asset	$	(11,112)	$	9,665	$	43

* Certain amounts have been reclassified in the table above to conform to current period classification.

As of June 30, 2019, Adtalem has $0.1 million of gross U.S. federal net operating loss carryforwards, $317.6 million of gross, post apportioned state net operating loss carryforwards, and $55.0 million of foreign net operating loss carryforwards in Brazil, St. Maarten and other jurisdictions.

Adtalem has the following tax net operating loss (tax effected), interest (tax effected), and credit carryforwards as of June 30, 2019 (in thousands):


	June 30,		Years of Expiration
	2019		Beginning	Ending
U.S. Net Operating Loss Carryforwards	$	24	2038	2038
U.S. Interest Expense Carryforwards		215	No Expiration
U.S. Credit Carryforwards		1,192	2027	2029
State Net Operating Loss Carryforwards		18,446	2022	2039
State Credit Carryforwards		1,152	2022	2024
Foreign Net Operating Loss Carryforwards		10,924	2021	2039
Foreign Net Operating Loss Carryforwards		4,306	No Expiration
Total Loss and Credit Carryforwards, Net	$	36,259

Four of Adtalem’s operating units benefit from local tax incentives: AUC, which operates in St. Maarten, RUSM, which operated in Dominica and beginning in January 2019 in Barbados, RUSVM, which operates in St. Kitts, and Adtalem Brazil, which operates in Brazil. AUC’s effective tax rate reflects benefits derived from investment incentives. RUSM and RUSVM each have agreements with their respective domestic governments that exempt them from local income taxation. With respect to Dominica, RUSM had an indefinite period of exemption. In January 2019, RUSM moved its operations from Dominica to Barbados. RUSM has negotiated an agreement with the Barbados government that exempts it from local income taxation until 2039. RUSVM has an exemption in St. Kitts until 2037. Adtalem Brazil’s effective tax rate reflects benefits derived from its participation in PROUNI, a Brazilian program for providing scholarships to a portion of its undergraduate students.

Valuation allowances are established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The valuation allowance on our deferred tax assets was $9.9 million and $11.5 million as of June 30, 2019 and 2018, respectively, for other foreign and state net operating loss and state tax credit carryforwards.

Based on Adtalem’s expectations for future taxable income, management believes that it is more likely than not that operating income in respective jurisdictions will be sufficient to recognize fully all deferred tax assets, except as explained above.

Prior to enactment of the Tax Cuts and Jobs Act of 2017, (the “Tax Act”), Adtalem did not record a U.S. federal or state tax provision for the undistributed earnings of its international subsidiaries. As a result of the Tax Act, Adtalem has revised its prior intent to indefinitely reinvest accumulated undistributed earnings and profits in foreign operations, and now only intends to maintain this assertion with respect to accumulated and future earnings in Brazil. As of June 30, 2019, the cumulative undistributed earnings attributable to operations in Brazil was approximately $88.8 million. We estimate the unrecognized deferred tax liability to be immaterial.

The effective tax rate on income from continuing operations was 20.1% for fiscal year 2019 compared to 42.3% in the prior year. Tax expense in fiscal year 2019 included a special item related to one-time impacts from the sale of DeVry University. Also, tax expense in fiscal year 2018 included a special item of $103.9 million related to the Tax Act. Also during fiscal year 2018, a net tax benefit special item of $48.9 million was recorded for Adtalem’s investment in Carrington and a net tax benefit special item of $8.8 million was recorded on foreign intangible assets following a restructuring in Brazil. The effective tax rates on income from continuing operations excluding special items were 19.0% and 19.1% for fiscal years 2019 and 2018, respectively.

The Tax Act includes significant changes to the U.S. corporate income tax system, which reduced the U.S. federal corporate tax rate from 35.0% to 21.0% as of January 1, 2018; shifts to a modified territorial tax regime, which requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred; and creates new taxes on certain foreign-sourced earnings. The new taxes on certain foreign-sourced earnings under the Tax Act became effective for Adtalem during the year ended June 30, 2019.

The impact on income taxes due to a change in legislation is required to be recognized in the period in which the law is enacted under the authoritative guidance of ASC 740. However, in conjunction with the Tax Act, on December 22, 2017, the SEC staff issued SAB 118, which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 allowed for recording provisional amounts during a one-year measurement period, similar to the measurement period used when accounting for business combinations. The measurement period ended no later than one year from the date of enactment of the Tax Act, which for Adtalem was in the second quarter of fiscal year 2019. As of June 30, 2018, we had not completed our accounting for the tax effects of the Tax Act. During the second quarter of fiscal year 2019, we completed our accounting and recorded the applicable adjustments to the SAB 118 provisional amounts for the income tax effects of the Tax Act recorded in fiscal year 2018.

The Tax Act includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes are imposed on foreign income in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed in general at a 10.5% tax rate. The GILTI provision of the Tax Act became effective for Adtalem for the year ended June 30, 2019. We have elected to account for GILTI as a period cost.

As of June 30, 2019, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $33.4 million, which if recognized, would impact the effective tax rate. As of June 30, 2018, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of benefits, was $34.4 million, which if recognized, would impact the effective tax rate.

We expect that our unrecognized tax benefits will decrease during the next 12 months due to the settlement of various audits and the lapsing of statutes of limitation. We estimate this decrease to be approximately $26.5 million. Adtalem classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The total amount of interest and penalties accrued as of June 30, 2019, 2018, and 2017 was $2.8 million, $2.6 million and $2.0 million, respectively. Interest and penalties recognized during the years ended June 30, 2019, 2018, and 2017 were $0.1 million, $0.6 million and $0.4 million, respectively. The changes in our unrecognized tax benefits were (in thousands):


	Year Ended June 30,
	2019		2018		2017
Balance at Beginning of Period	$	34,404	$	7,901	$	7,497
Increases from Positions Taken During Prior Periods		593		1,151		1,397
Decreases from Positions Taken During Prior Periods		(2,174)		(5,711)		(1,445)
Increases from Positions Taken During the Current Period		606		31,063		452
Balance at End of Period	$	33,429	$	34,404	$	7,901

Adtalem files tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. Adtalem remains generally subject to examination in the U.S. for years beginning on or after July 1, 2017; in various states for years beginning on or after July 1, 2014; and in our significant foreign jurisdictions for years beginning on or after July 1, 2013. Adtalem is currently under audit by the State of Illinois and the City of New York for various tax years between 2011 and 2016. The IRS has completed its examination of the Adtalem U.S. tax returns for the years ending June 30, 2014, 2015 and 2016. The IRS is currently conducting a limited scope review of the deduction related to the loss on subsidiary claimed for the tax year ending June 30, 2018. We expect this review to conclude during the first half of fiscal year 2020. Although we have recorded tax reserves for potential adjustments to tax liabilities for prior years, we cannot provide assurance that a material adjustment, either positive or negative, will not result when the audits are concluded.