Income Taxes

The Company’s income tax provision (benefit) consisted of the following components for the years ended December 31, 2013, 2012 and 2011 (in thousands):



	Year Ended December 31,
	2013		2012			2011
Current
Federal	$	3,842	$	(72	)	$	618
State	1,842		(2		)	551
	5,684		(74		)	1,169
Deferred
Federal	—		(97,410		)	(6,447		)
State	—		(2,878		)	(539		)
	—		(100,288		)	(6,986		)
Total provision (benefit)	5,684		(100,362		)	(5,817		)
Less: income tax provision attributable to noncontrolling interest	308		304			109
Total provision (benefit) attributable to SandRidge Energy, Inc.	$	5,376	$	(100,666	)	$	(5,926	)

A reconciliation of the provision (benefit) for income taxes at the statutory federal tax rate to the Company’s actual income tax benefit is as follows for the years ended December 31, 2013, 2012 and 2011 (in thousands):



	2013			2012			2011
Computed at federal statutory rate	$	(178,078	)	$	51,173		$	54,800
State taxes, net of federal benefit	(886		)	8,913			5,231
Non-deductible expenses	2,589			7,247			6,394
Stock-based compensation	7,611			7,172			8,229
Net effects of consolidating the non-controlling interests’ tax provisions	(13,901		)	(37,047		)	(19,120		)
Bargain purchase gain	—			(42,944		)	—
Impairment of non-deductible goodwill	—			71,885			—
Change in valuation allowance	188,599			(66,429		)	(51,631		)
Valuation allowance release	—			(100,288		)	(5,290		)
Other	(558		)	(348		)	(4,539		)
Total provision (benefit) attributable to SandRidge Energy, Inc.	$	5,376		$	(100,666	)	$	(5,926	)

Deferred income taxes are provided to reflect the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets are reduced by a valuation allowance when a determination is made that it is more likely than not that some or all of the deferred assets will not be realized based on the weight of all available evidence. As of December 31, 2008, the Company determined it was appropriate to record a full valuation allowance against its net deferred tax asset. During the year ended December 31, 2012, the Company recorded a net deferred tax liability of $100.3 million associated with the Dynamic Acquisition and released a corresponding portion of the previously recorded valuation allowance. In the second quarter of 2011, the Company completed its valuation of assets acquired and liabilities assumed related to the acquisition of Arena in order to finalize the purchase price allocation. In connection therewith, the Company adjusted the previously recorded net deferred tax liability associated with the acquisition of Arena by recording an additional net deferred tax liability of $7.0 million and released a corresponding portion of its previously recorded valuation allowance. The partial releases of the valuation allowance in 2012 and 2011 were based on management’s assessment that it is more likely than not that the Company will realize a benefit from more of its existing deferred tax assets as the Dynamic and Arena deferred tax liabilities are available to offset the reversal of the Company’s deferred tax assets. Although the Company had a full valuation allowance against its net deferred tax asset at each year December 31, 2013, 2012 and 2011, the partial releases of the valuation allowance resulted in a deferred tax benefit in 2012 and 2011. The Company continues to closely monitor all available evidence in making its determination for the need to maintain a valuation allowance against its net deferred tax asset.

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	December 31,
	2013			2012
Deferred tax liabilities
Investments(1)	$	301,447		$	334,331
Property, plant and equipment	180,140			198,424
Derivative contracts	—			24,819
Total deferred tax liabilities	481,587			557,574
Deferred tax assets
Derivative contracts	3,692			—
Allowance for doubtful accounts	20,358			17,713
Net operating loss carryforwards	973,675			859,328
Litigation settlement	355			7,200
Compensation and benefits	24,895			13,935
Alternative minimum tax credits and other carryforwards	46,624			42,242
Asset retirement obligations	147,626			172,229
Under-delivery obligation	15,012			—
Other	2,801			2,193
Total deferred tax assets	1,235,038			1,114,840
Valuation allowance	(753,451		)	(557,266		)
Net deferred tax liability	$	—		$	—

____________________


(1)	Includes the Company’s deferred tax liability resulting from its investment in the Royalty Trusts. See Note 4 for further discussion of the Royalty Trusts.

As of December 31, 2013, the Company had approximately $13.1 million of alternative minimum tax credits available that do not expire. In addition, the Company had approximately $2.6 billion of federal net operating loss carryovers that expire during the years 2023 through 2033. Excess tax benefits of approximately $16.3 million associated with the vesting of restricted stock awards are included in the federal net operating loss carryovers, but will not be recognized as a tax benefit recorded to additional paid-in capital until realized.

Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company experienced an ownership change within the meaning of IRC Section 382 on December 31, 2008. The ownership change subjected certain of the Company’s tax attributes, including $298.4 million of federal net operating loss carryforwards, to the IRC Section 382 limitation. The Company experienced a subsequent ownership change within the meaning of IRC Section 382 on July 16, 2010 as a result of the acquisition of Arena. The subsequent ownership change resulted in a more restrictive limitation on certain of the Company’s tax attributes than with the December 31, 2008 ownership change. The more restrictive limitation applies not only to the $298.4 million of federal net operating loss carryforwards and certain other tax attributes existing at December 31, 2008, but also to net operating losses of approximately $629.8 million and certain other tax attributes generated in periods following the December 31, 2008 ownership change. The subsequent limitation could result in a material amount of existing loss carryforwards expiring unused. Arena also experienced an ownership change on July 16, 2010 as a result of its acquisition by the Company. This ownership change resulted in a limitation on Arena’s net operating loss carryforwards of $119.9 million available to the Company. None of the limitations discussed above resulted in a current federal tax liability at December 31, 2013 or 2012.

At December 31, 2013 and 2012, respectively, the Company had a liability of approximately $1.4 million and $1.3 million for unrecognized tax benefits. If recognized, approximately $0.9 million, net of federal tax expense, would be recorded as a reduction of income tax expense and would affect the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	December 31,
	2013			2012
Unrecognized tax benefit at January 1	$	1,330		$	1,758
Changes to unrecognized tax benefits related to the current year	262			—
Changes to unrecognized tax benefits related to a prior year	(210		)	(428		)
Unrecognized tax benefit at December 31	$	1,382		$	1,330

Consistent with its policy to record interest and penalties on income taxes as a component of the income tax provision, the Company has included approximately $(0.1) million, $0.03 million and $0.1 million of accrued gross interest with respect to unrecognized tax benefits in its accompanying consolidated statements of operations during the years ended December 31, 2013, 2012 and 2011, respectively. The Company had a corresponding accrued liability of $0.1 million and $0.2 million for interest and penalties relating to uncertain tax positions at December 31, 2013 and 2012, respectively.

The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2010 to present remain open for federal examination. Additionally, various tax years remain open beginning with tax year 2003 due to federal net operating loss carryforwards. The number of years open for state tax audits varies, depending on the state, but are generally from three to five years. Currently, several examinations are in progress. The Company does not anticipate that any federal or state audits will have a significant impact on the Company’s results of operations or financial position. As a result of ongoing negotiations pertaining to the Company’s current state audits, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may decrease within the next twelve months by approximately $0.8 million.