Income Taxes

The Company had Federal net operating loss (“NOL”) carryforwards that expired in the year ended July 31, 2008 and were limited in deductibility each year under Section 382 of the Internal Revenue Code. The Company had only been able to use these NOL carryforwards to the extent of approximately $8.0 million per year through December 31, 2007 (the “Section 382 Amount”). However, during the year ended July 31, 2005, the Company amended previously filed tax returns (for tax years 1997-2002) in an effort to remove the restrictions under Section 382 of the Internal Revenue Code on approximately $73.8 million of NOL carryforwards to reduce future taxable income. As a result, the Company requested a refund related to the amended returns in the amount of $6.2 million and have reduced its federal tax liability in the amount of $19.6 million in subsequent returns. These NOL carryforwards relate to fresh start accounting from the Company’s reorganization in 1992. During the year ended July 31, 2006, the Internal Revenue Service (“IRS”) completed its examination of the Company’s filing position in these amended returns and disallowed the Company’s request for refund and its position to remove the restrictions under Section 382 of the Internal Revenue Code. The Company appealed the examiner’s disallowance of these NOL carryforwards to the Office of Appeals. In December 2008, the Office of Appeals denied the Company’s appeal, as well as a request for mediation. The Company disagreed with the IRS interpretation disallowing the utilization of the NOL’s and in August 2009, the Company filed a complaint in the United States District Court for the District of Colorado against the United States of America seeking a refund of approximately $6.2 million in Federal income taxes paid, plus interest. On July 1, 2011, the District Court granted the Company summary judgment, concluding that the IRS’s decision disallowing the utilization of the NOLs was inappropriate. The IRS is entitled to appeal the decision of the District Court to grant the motion for summary judgment and the Company does not know whether the IRS will do so or, if it does appeal, whether the appeal would be successful. However, at this point, the District Court proceedings have been stayed pending on-going settlement discussions between the parties. The Company is also a party to two related tax proceedings in the United States Tax Court regarding calculation of NOL carryover deductions for tax years 2006, 2007 and 2008. The two proceedings involve substantially the same issues as the litigation in the District Court wherein the Company disagrees with the IRS as to the utilization of NOLs. However, the Company is uncertain whether and how the potential resolution of the District Court case may affect these tax court proceedings. The trial date for Tax Court proceedings has been continued pending on-going settlement discussions between the parties.

Since the legal proceeding surrounding the utilization of the NOLs have not been fully resolved, including a determination of the amount of refund and the possibility that the District Court’s ruling may be appealed by the IRS, there remains considerable uncertainty of what portion, if any, of the NOLs will be realized, and as such, the Company has not reflected any of the benefits of the utilization of the restricted NOLs within its financial statements. However, the range of potential reversal of other long-term liabilities and accrued interest and penalties that would be recorded as a benefit to the Company’s income tax provision is between zero and $27.6 million.

The Company has state (primarily California) and foreign NOL carryforwards totaling $35.3 million of which the state NOL carryforwards expire by the year ending July 31, 2031. As of July 31, 2014, the Company has recorded a valuation allowance on $30.4 million of state and foreign NOL carryforwards as the Company has determined that it is more likely than not that these NOL carryforwards will not be realized.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Significant components of the Company’s deferred tax liabilities and assets are as follows (in thousands):



	July 31,
	2014			2013
Deferred income tax liabilities:
Fixed assets	$	154,874		$	150,697
Intangible assets	46,980			40,992
Real estate and other investments	—			—
Total	201,854			191,689
Deferred income tax assets:
Canyons obligation	18,481			17,614
Deferred membership revenue	19,643			19,383
Real estate and other investments	7,130			5,470
Deferred compensation and other accrued benefits	11,180			9,872
Stock-based compensation	15,309			14,199
Unfavorable lease obligation, net	12,995			14,189
Net operating loss carryforwards and other tax credits	3,984			3,565
Other, net	16,836			17,390
Total	105,558			101,682
Valuation allowance for deferred income taxes	(3,017		)	(3,062		)
Deferred income tax assets, net of valuation allowance	102,541			98,620
Net deferred income tax liability	$	99,313		$	93,069

The net current and non-current components of deferred income taxes recognized in the Consolidated Balance Sheets are as follows (in thousands):



	July 31,
	2014		2013
Net current deferred income tax asset	$	29,249	$	25,190
Net non-current deferred income tax asset	—		—
Net non-current deferred income tax liability	128,562		118,259
Net deferred income tax liability	$	99,313	$	93,069

The Company recorded a measurement period adjustment to its Canyons preliminary purchase price allocation of $32.9 million which resulted in an increase to the net deferred income tax liability and has reflected this as a retrospective adjustment as of July 31, 2013.

Significant components of the provision (benefit) for income taxes are as follows (in thousands):



	Year Ended July 31,
	2014		2013			2012
Current:
Federal	$	8,082	$	25,753		$	1,407
State	1,565		3,991			51
Total current	9,647		29,744			1,458
Deferred:
Federal	5,470		(7,175		)	7,682
State	749		(950		)	1,561
Total deferred	6,219		(8,125		)	9,243
Provision for income taxes	$	15,866	$	21,619		$	10,701

A reconciliation of the income tax provision from continuing operations and the amount computed by applying the United States Federal statutory income tax rate to income before income taxes is as follows:



	Year Ended July 31,
	2014		2013		2012
At U.S. Federal income tax rate	35.0	%	35.0	%	35.0	%
State income tax, net of Federal benefit	3.4	%	3.3	%	3.1	%
Nondeductible meals or entertainment	0.7	%	0.4	%	0.7	%
General business credits	(1.7	)%	(1.2	)%	(2.3	)%
Nondeductible compensation	—	%	—	%	2.2	%
Domestic production deduction	(1.4	)%	(1.2	)%	—	%
Other	—	%	0.2	%	0.8	%
	36.0	%	36.5	%	39.5	%

A reconciliation of the beginning and ending amount of unrecognized tax benefits associated with uncertain tax positions, excluding associated deferred tax benefits and accrued interest and penalties, if applicable, is as follows (in thousands):



	Unrecognized Tax Benefits
Balance as of August 1, 2011	$	26,573
Additions based on tax positions related to the current year	—
Additions for tax positions of prior years	—
Reductions for tax positions of prior years	—
Lapse of statute of limitations	(302		)
Settlements	—
Balance as of July 31, 2012	$	26,271
Additions based on tax positions related to the current year	—
Additions for tax positions of prior years	—
Reductions for tax positions of prior years	—
Lapse of statute of limitations	(66		)
Settlements	—
Balance as of July 31, 2013	$	26,205
Additions based on tax positions related to the current year	21,082
Additions for tax positions of prior years	—
Reductions for tax positions of prior years	—
Lapse of statute of limitations	(314		)
Settlements	—
Balance as of July 31, 2014	$	46,973

The Company's unrecognized tax benefits associated with uncertain tax positions primarily relate to utilization of Federal NOL carryforwards, as discussed above, and the treatment of the Talisker lease payments as payments of debt obligations and that the tax basis in Canyons goodwill is deductible.

The unrecognized tax benefits for the utilization of Federal NOL carry forwards recorded in other long-term liabilities, if recognized, would decrease the Company’s effective tax rate. In addition, the Company does not anticipate a significant change to its unrecognized tax benefits during the twelve months ending July 31, 2015, subject to resolution of the legal proceedings associated with the utilization of Federal NOL carryforwards as previously discussed. The Company’s policy is to accrue income tax related interest and penalties, if applicable, within income tax expense. As of July 31, 2014 and 2013, accrued interest and penalties, net of tax, was $1.9 million and $1.8 million, respectively. For the years ended July 31, 2014, 2013 and 2012, the Company recognized as income tax expense (benefit) $0.1 million, zero and $(0.1) million of interest expense (income) and penalties, net of tax, respectively.

The Company's major tax jurisdictions in which it files income tax returns is the U.S. federal and various state jurisdictions. The IRS has completed its examination of the Company’s tax returns for tax years 2001 through 2003 and has issued a report of its findings. As discussed above, the examiner’s primary finding is the disallowance of the Company’s position to remove the restrictions under Section 382 of the Internal Revenue Code of approximately $73.8 million of NOL carryforwards; however, the Company has filed a complaint in Federal court. With the exception of the utilization of federal NOL carryforwards as discussed above, the Company is no longer subject to U.S. Federal examinations for tax years prior to 2010. With few exceptions, the Company is no longer subject to examination by various state jurisdictions for tax years prior to 2006.