12.Income Taxes

The following table summarizes the tax effects of temporary differences between the financial statement carrying value of assets and liabilities and their respective tax basis, which are recorded at the prevailing enacted tax rate that will be in effect when these differences are settled or realized. These temporary differences result in taxable or deductible amounts in future years. The Company assessed all available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of our existing deferred tax assets. In connection with the failed spin-off-leaseback, the Company continued to record real property assets and a financing obligation of $2.00 billion and $3.52 billion, respectively, on November 1, 2013, which resulted in a substantial increase to our net deferred tax assets of $599.9 million. ASC 740 suggests that additional scrutiny should be given to deferred taxes of an entity with cumulative pre-tax losses during the three most recent three years. Positive evidence of sufficient quantity and quality is required to overcome such significant negative evidence to conclude that a valuation allowance is not warranted. As with all key factors, a cumulative loss is simply one component and is not a bright line test that is in itself determinative of the need for a valuation allowance. Despite the fact we have experienced cumulative losses since the Spin-Off transaction, we returned to a near break-even three year cumulative pretax income position in the amount of $23.9 million as of December 31, 2016. As a result of evaluating all available evidence, the Company intends to continue to maintain a full valuation allowance on its net deferred tax assets, excluding the reversal of deferred tax liabilities related to indefinite-lived assets, until there is sufficient objectively verifiable positive evidence to support the realization of all or some portion of these deferred tax assets.

The components of the Company’s deferred tax assets and liabilities are as follows:


Year ended December 31,	2016		2015
	(in thousands)
Deferred tax assets:
Stock-based compensation expense	$	17,773	$	36,243
Accrued expenses		64,175		59,196
Intangibles		—		11,590
Financing obligation to GLPI		1,359,193		1,374,268
Unrecognized tax benefits		9,377		9,858
Net operating losses and tax credit carryforwards		78,021		81,109
Gross deferred tax assets		1,528,539		1,572,264
Less valuation allowance		(828,501)		(844,258)
Net deferred tax assets		700,038		728,006
Deferred tax liabilities:
Property, plant and equipment, non-master lease		(69,151)		(80,930)
Property, plant and equipment, master lease		(717,602)		(750,407)
Investments in unconsolidated affiliates		(1,383)		(3,024)
Accumulated other comprehensive gain		—		(1,566)
Undistributed foreign earnings		(8,596)		—
Intangibles		(30,230)		—
Net deferred tax liabilities		(826,962)		(835,927)
Noncurrent deferred tax liabilities, net	$	(126,924)	$	(107,921)

The realizability of the net deferred tax assets is evaluated quarterly by assessing the need for a valuation allowance and by adjusting the amount of the allowance, if necessary. The Company gives appropriate consideration to all available positive and negative evidence including projected future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The evaluation of both positive and negative evidence is a requirement pursuant to ASC 740 in determining the net deferred tax assets will be realized. In the event the Company determines that the deferred income tax assets would be realized in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded, which would reduce the provision for income taxes.

In September 2016, we accepted a settlement with the U.S. and Canada competent authorities resolving a transfer pricing issue that arose under audit of tax years 2004 – 2009 as well as the anticipated adjustments for tax years 2010 – 2014. In general, it’s the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. We consider the earnings of our Canadian subsidiary to be indefinitely re-invested outside the U.S. on the basis of our internal projections showing future domestic cash generation will be sufficient to meet future domestic cash needs. Separate from the earnings of our Canadian operations, due to a triggering event from the recent settlement, the Company has recorded a provision for the tax on the dividend and the Canadian withholding taxes of approximately $7.4 million and $0.8 million, respectively for the anticipated amount we intend to repatriate. Apart from this settlement, there were no other taxes calculated for those undistributed foreign earnings that are intended to be indefinitely reinvested outside the U.S. which totaled $21.5 million at December 31, 2016.

Following the ownership change of the Tropicana Las Vegas, the Company has a total federal net operating loss carry-forwards and general business credit carryforwards in the amount of $171.6 million for the year ended December 31, 2016, which will expire on various dates from 2029 through 2034. These tax attributes are subject to limitations under the Internal Revenue Code and underlying Treasury Regulations, however we believe it is more likely than not that the benefit from these tax attributes will not be realized. In the recognition of this risk, we have provided a full valuation allowance on the deferred tax assets related to these net operating and general business credit carryforwards. In the event our assumptions change, which allows the Company to realize these acquired tax attributes, the benefits related to any reversal of the valuation allowance on the deferred tax assets as of December 31, 2016, will be recognized as a reduction of income tax expense.

For state income tax reporting, the Company has gross state net operating loss carry-forwards aggregating approximately $220.9 million available to reduce future state income taxes, primarily for the Commonwealth of Pennsylvania and the States of Missouri, New Mexico, Maine and Ohio localities as of December 31, 2016. The tax benefit associated with these net operating loss carry-forwards is approximately $10.4 million. Due to statutorily limited operating loss carry-forwards and income and loss projections in the applicable jurisdictions, a full valuation allowance has been recorded to reflect the net operating losses which are not presently expected to be realized. If not used, substantially all the carry-forwards will expire at various dates from December 31, 2017 to December 31, 2036.

Also, certain subsidiaries have accumulated gross state and federal net operating loss carry-forwards aggregating approximately $1.5 billion for which no benefit has been recorded as they are attributable to uncertain tax positions and excess tax benefits from stock option deductions. The unrecognized tax benefits as of December 31, 2016 attributable to these net operating losses was approximately $86.1 million. Due to the uncertain tax position and excess tax benefits from stock option deductions, these net operating losses are not included as components of deferred tax assets as of December 31, 2016. In the event of any benefit from realization of these net operating losses, $13.9 million would be treated as an increase to equity, and the remainder would be treated as a reduction of tax expense. If not used, substantially all the carry-forwards will expire at various dates from December 31, 2017 to December 31, 2036.

Additionally, included in the Company’s full valuation allowance is $0.2 million for federal capital losses that will expire if not used via the realization of capital gains by December 31, 2018. Overall the Company’s valuation allowance at December 31, 2016 decreased from December 31, 2015 by a net amount of $15.8 million primarily due to the acquired deferred tax liabilities related to Rocket Speed of $10.3 million and other realized deferred tax assets during the year of $5.5 million.

The provision for income taxes charged to operations for the years ended December 31, 2016, 2015 and 2014 was as follows:


Year ended December 31,	2016		2015		2014
	(in thousands)
Current tax (benefit) expense
Federal	$	8,721	$	(5,158)	$	14,275
State		3,489		133		5,821
Foreign		(9,639)		3,713		7,515
Total current		2,571		(1,312)		27,611
Deferred tax expense
Federal		5,457		51,817		2,357
State		3,279		5,419		551
Total deferred		8,736		57,236		2,908
Total income tax provision	$	11,307	$	55,924	$	30,519

The following table reconciles the statutory federal income tax rate to the actual effective income tax rate for 2016, 2015 and 2014:


Year ended December 31,	2016		2015		2014
Percent of pretax income
Federal taxes	35.0	%	35.0	%	35.0	%
State and local income taxes	1.2	%	6.1	%	1.6	%
Permanent differences	(0.6)	%	5.8	%	(20.9)	%
Foreign	(8.5)	%	5.2	%	(2.2)	%
Valuation allowance	(17.1)	%	55.3	%	(31.1)	%
Other miscellaneous items	(0.6)	%	(8.6)	%	(2.3)	%
	9.4	%	98.8	%	(19.9)	%


Year ended December 31,	2016		2015		2014
	(in thousands)
Amount of pretax income
Federal taxes	$	42,216	$	19,814	$	(53,656)
State and local income taxes		1,498		3,435		(2,470)
Permanent differences		(690)		3,276		32,019
Foreign		(10,268)		2,955		3,337
Valuation allowance		(20,675)		31,288		47,703
Other miscellaneous items		(774)		(4,844)		3,586
	$	11,307	$	55,924	$	30,519

A reconciliation of the beginning and ending amount for the liability for unrecognized tax benefits is as follows:


	Unrecognized
	tax benefits
	(in thousands)
Unrecognized tax benefits	$	44,477
Cumulative advance deposits on account		(37,441)
Balance at December 31, 2014	$	7,036
Additions based on current year positions		561
Additions based on prior year positions		6,371
Decreases due to settlements and/or reduction in reserves		(4,743)
Currency translation adjustments		(9,097)
Settlement payments		(4,000)
Unrecognized tax benefits		33,569
Cumulative advance deposits on account		(31,371)
Balance at December 31, 2015	$	2,198
Additions based on current year positions		-
Additions based on prior year positions		3,749
Decreases due to settlements and/or reduction in reserves		(9,091)
Currency translation adjustments		2,565
Settlement payments		(4,000)
Unrecognized tax benefits balance at December 31, 2016	$	26,792

The Company is required under ASC 740 to disclose its accounting policy for classifying interest and penalties, the amount of interest and penalties charged to expense each period, as well as the cumulative amounts recorded in the consolidated balance sheets. The Company will continue to classify any income tax‑related penalties and interest accrued related to unrecognized tax benefits in taxes on income within the consolidated statements of operations.

As previously mentioned, we reached a settlement with the U.S. and Canadian competent authorities resolving a transfer pricing item. This settlement resulted in a $10.3 million benefit to the tax provision due to the release of the uncertain tax position previously established for the treatment of the Casino Rama management fee received from our non-U.S. subsidiary. In addition, we estimate receiving within the next twelve months $12.0 million and $23.0 million cash refund from U.S. and Canada (inclusive of advances on account), respectively, which is classified in other current assets. As part of the settlement, tax years 2004 through 2014 are under review by both the Internal Revenue Service and Canada Revenue Agency for the sole purpose of processing the agreed upon refunds.

During the year ended December 31, 2016, the Company recorded no tax reserves and accrued interest related to current year uncertain tax positions. In regards to prior year tax positions, the Company recorded $3.7 million of tax reserves and accrued interest and reversed $4.9 million and $4.2 million of previously recorded tax reserves and accrued interest, respectively, for uncertain tax positions that have settled and/or closed. The unrecognized tax benefits of $26.8 million is classified in other noncurrent tax liabilities. Overall, the Company recorded a net tax benefit of $9.0 million in connection with its uncertain tax positions for the year ended December 31, 2016.

Included in the liability for unrecognized tax benefits at December 31, 2016 and 2015 were $9.4 million and $10.0 million, respectively, of tax positions that, if reversed, may not affect the effective tax rate as a result of the Company’s full valuation allowance.

Included in the liability for unrecognized tax benefits at December 31, 2016 and 2015 were $1.7 million and $3.0 million gain of currency translation related to foreign currency tax positions and the settlement receivable on account, respectively.

During the years ended December 31, 2016 and 2015, the Company recognized approximately $0.3 million and $1.4 million, respectively, of interest and penalties, net of deferred taxes. In addition, due to settlements and/or reductions in previously recorded liabilities, the Company had reductions in previously accrued interest and penalties of $3.5 million, net of deferred taxes. These accruals are included in noncurrent tax liabilities and prepaid expenses within the consolidated balance sheets at December 31, 2016 and 2015, respectively.

The Company is currently in various stages of the examination process in connection with its open audits. Generally, it is difficult to determine when these examinations will be closed, but the Company reasonably expects that its ASC 740 liabilities will not significantly change over the next twelve months.

As of December 31, 2016, the Company is subject to U.S. federal income tax examinations for the tax years 2013, 2014, and 2015. In addition, the Company is subject to state and local income tax examinations for various tax years in the taxing jurisdictions in which the Company operates.

At December 31, 2016 and 2015, prepaid expenses within the consolidated balance sheets included prepaid income taxes of $30.1 million and $48.9 million, respectively. The Company anticipates receiving federal income tax refunds of $26.9 million within the next twelve months as a result of a net operating loss carryback, general business credit carryback and a prior year overpayment.