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Income Taxes
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9 Months Ended |
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Sep. 30, 2014
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| Income Tax Disclosure [Abstract] | |
| Income Taxes |
Income Taxes
The Company is subject to income taxes in the U.S. and numerous state and foreign jurisdictions in which it operates. The Company computes its annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining the Company's tax expense and in evaluating its tax positions including evaluating uncertainties.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
Income tax expense for the three months ended September 30, 2014 and 2013 was $1.5 million and $1.2 million respectively. For the nine months ended September 30, 2014 and 2013, income tax expense was $3.6 million and $1.8 million, respectively.
As of September 30, 2014 and December 31, 2013 the Company has recorded a valuation allowance of $59.1 million and $50.8 million against its domestic and foreign deferred tax assets, respectively, due to the uncertainties over its ability to realize future taxable income in those jurisdictions. As of September 30, 2014, the valuation allowance on domestic and foreign deferred tax assets were $57.4 million and $1.7 million, respectively.
In connection with the acquisitions of AIA and IFES, the Company recorded net deferred tax liabilities of $22.2 million and $6.0 million, respectively.
As of September 30, 2014 and December 31, 2013, the Company had federal net operating loss carry-forwards ("NOLs") of $119.5 million and $102.2 million, respectively, and state net operating loss carry-forwards of $55.4 million and $58.9 million, respectively, which losses will begin to expire during the fiscal years ending in December 31, 2028 and 2018, respectively. These NOLs may be used to offset future taxable income, to the extent the Company generates any taxable income, and thereby reduce or eliminate future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation's ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three year period. In the event that an ownership change has occurred, or were to occur, utilization of the Company's NOLs would be subject to an annual limitation under Section 382 as determined by multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. The Company could experience an ownership change under Section 382 as a result of events in the past in combination with events in the future. If so, the use of the Company's NOLs, or a portion thereof, against future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of the NOLs before utilization. Therefore, the Company could be liable for income taxes sooner than otherwise would be true if the Company were not subject to Section 382 limitations. The Company plans to perform a study to determine the extent of the limitation, if any. Any carry-forwards that expire prior to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a corresponding reduction of the valuation allowance. Currently, the Company expects the utilization of our net operating loss and tax credit carry-forwards in the near term to be affected by certain limitations placed on these carry-forwards as a result of our previous ownership changes with PAR Capital.
As of September 30, 2014, the Company intends to reinvest the foreign earnings of its subsidiaries on an indefinite basis. As a result, deferred taxes have not been established for unremitted earnings of foreign subsidiaries.
The Company is subject to the accounting guidance for uncertain income tax positions. The Company's policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income tax expense. The Company assumed and recorded approximately $3.2 million of liabilities for uncertain tax position including related interest and penalties as a result of Business Combination in 2013. Included in the $3.2 million liability at December 31, 2013 is an estimate for potential claims by the Canadian Revenue Agency (the “CRA”), which is currently investigating one of AIA’s Canadian subsidiaries for the tax years 2008 through 2012. The CRA is questioning the taxability and presence of the subsidiary’s locations in Dubai, United Arab Emirates, and whether income derived from Dubai would have constituted taxable earnings subject to Canadian income tax for the tax year ended December 31, 2008.
On November 4, 2014, the Company received an assessment notice comprising tax, interest and penalties from the Canadian Revenue Agency (CRA) for the tax years 2009 through 2011. Management is reviewing the assessment to determine if the underlying position proposed by the CRA has merit. As of September 30, 2014, the Company has not accrued tax expense with regard to the amount of this assessment. Although management believes the technical merit of the tax positions taken on the tax returns filed with the CRA for 2009 through 2011 meet a more-likely-than-not standard, any additional facts, circumstances and information provided for in the assessment may give rise to a material charge to the Company’s income tax provision and corresponding financial statements during the three months ending December 31, 2014 and beyond.
The Company does not expect its uncertain tax position to materially change through the end of 2014. As of September 30, 2014, the Company has recorded a $1.7 million cumulative liability for uncertain income tax positions including accumulated interest and penalties of $0.7 million.
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