Income Taxes

12 Months Ended

Dec. 31, 2017

On December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide the Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”) (previously known as “The Tax Cuts and Jobs Act”). As a result, we are required to re-measure our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The effect of this re-measurement is recorded to income tax expense in the year the tax law is enacted. For the year ended December 31, 2017, the re-measurement of our net deferred tax asset resulted in additional income tax benefit of $0.1 million. Concurrent with the enactment of the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows companies to recognize the cumulative impact of the income tax effects triggered by the enactment of the Act over a period of up to twelve months in the reporting period in which the adjustment is identified. We applied SAB 118 effective December 22, 2017, and will continue to refine the measurement of the net deferred tax balance during the preparation of our 2017 tax return as additional guidance and information becomes available.

The Corporation is required to file federal and applicable state corporate income tax returns and recognizes income taxes on its pre-tax income, which historically has consisted primarily of its share of JGW LLC's pre-tax income. JGW LLC is organized as a limited liability company which is treated as a "flow-through" entity for income tax purposes and therefore is not subject to income taxes. As a result, the Company's consolidated financial statements do not reflect a benefit or provision for income taxes on the pre-tax income or loss attributable to the non-controlling interests in JGW LLC.

The Company's (benefit) provision for income taxes for the years ended December 31, 2017, 2016 and 2015, respectively, consists of the following:



	For the Year Ended December 31,
	2017		2016			2015
	(In thousands)
Current:
Federal	$	81	$	183		$	(234	)
State	20		42			(71		)
	101		225			(305		)

Deferred:
Federal	353		(12,910		)	(15,062		)
State	9,191		(2,655		)	(2,849		)
	9,544		(15,565		)	(17,911		)
Income tax (benefit) provision	$	9,645	$	(15,340	)	$	(18,216	)

The difference between the Company's effective income tax rate and the United States statutory rate is reconciled below:



	For the Year Ended December 31,
	2017		2016		2015
Federal	35.0	%	35.0	%	35.0	%
Income passed through to non-corporate members	(2.9	)	(15.6	)	(15.9	)
Permanent items	(0.5	)	(2.1	)	(11.1	)
State income tax	6.1		3.0		1.4
Deferred rate change	(13.8	)	—		—
Valuation allowance	(29.5	)	(10.5	)	(1.9	)
Other	0.8		3.7		1.0
Effective tax rate	(4.8	)%	13.5	%	8.5	%

The change in the Company's effective tax rate for the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily the result of: (i) the differences in the projected book and taxable income for the respective years as of the balance sheet dates; (ii) the impact of permanent differences between book and taxable income; (iii) a greater share of the Company's pre-tax book income (loss) being attributable to entities that are taxed as corporations, of which most record a full valuation allowance; (iv) the recording of additional valuation allowance as a result of legislative changes during the fourth quarter in Pennsylvania that caused more of our deferred tax assets to not be more likely than not to be realized; and (v) the increase in state income tax liabilities for the additional states relating to the mortgage company activity that does not have historical NOLs to offset future taxable income. The difference in effective tax rates between the two legal entities arises because JGW LLC is treated as a "flow-through" entity for income tax purposes and therefore is not subject to corporate-level income taxes.

It should be noted, the reconciliation above includes an item for deferred rate change associated with the 2017 Tax Act. This deferred rate change is offset with the related change to valuation allowance. The rate change has minimal impact on tax expense.

The change in the Company's effective tax rate for the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily the result of: (i) the differences in the projected book and taxable income for the respective years as of the balance sheet dates; (ii) the impact of permanent differences between book and taxable income; (iii) a greater share of the Company's pre-tax book income (loss) being attributable to separate subsidiary entities that are taxed as corporations, of which most record a full valuation allowance; (iv) the recording of the valuation allowance discussed above; and (v) the increase in state income tax liabilities for the additional states relating to the mortgage company activity that does not have historical NOLs to offset future taxable income. The difference in effective tax rates between the two legal entities arises because JGW LLC is treated as a "flow-through" entity for income tax purposes and therefore is not subject to corporate-level income taxes.

Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the enacted tax rates for the year in which the differences are expected to reverse. A summary of the components of deferred tax assets and deferred tax liabilities follows:



	December 31, 2017			December 31, 2016
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	61,119		$	63,127
Disallowed TRA obligations settlement accrual	46,789			—
Other deferred assets	1,001			—
Lottery winnings	574			880
Total deferred tax assets	109,483			64,007
Valuation allowance	(74,224		)	(14,893		)
Total deferred tax assets, net	35,259			49,114

Deferred tax liabilities:
Basis difference in partnership	45,210			48,101
Lottery winnings fair value adjustments	—			2,023
Other deferred liabilities	603			—
Total deferred tax liabilities	45,813			50,124
Deferred tax liabilities, net	$	(10,554	)	$	(1,010	)

As of December 31, 2017 and 2016, the Company had federal income tax net operating loss carry forwards of $210.8 million and $152.3 million, and state income tax net operating loss carry forwards of $222.8 million and $151.1 million, respectively, which will expire at various dates from 2033 through 2037.

Future realization of tax benefits depends on the expectation of taxable income within a period of time that the tax benefits will reverse. The Company assesses available positive and negative evidence to determine if it is more likely than not that it will be able to realize its deferred tax assets prior to expiration. In accordance with ASC 740-10-30-18, the Company’s assessment involves analyzing the four possible sources of taxable income that may be available under tax law to realize a tax benefit for deductible temporary differences and carryforwards: (i) future taxable income exclusive of reversing temporary differences and carryforwards; (ii) future reversals of existing taxable temporary differences; (iii) taxable income in prior carryback period(s) if carryback is permitted by tax law; and (iv) tax planning strategies that would, if necessary, be implemented.

Since its inception in 2013 and through December 31, 2017, the Company has been in a cumulative loss position from both a book and tax perspective. As such, the Company is not relying on future taxable income exclusive of reversing temporary differences or taxable income in carryback periods. Additionally, the Company has not identified any tax planning strategies it could implement to realize the gross deferred tax assets. As a result, the Company is relying exclusively on the future reversal of existing deferred tax liabilities to support the realization of the deferred tax assets. The deferred tax liability primarily relates to the difference in the accretion of the Company's assets for book and tax purposes. The Company scheduled out the reversal of the deferred tax liability and concluded the future taxable income from the existing deferred tax liabilities would be sufficient to realize the deferred tax assets for NOLs. As such, the company has established a valuation allowance for any deferred tax assets in excess of these reversing deferred tax liabilities. Further, as a result of certain restructuring activities and taxable income limitations associated with the utilization of existing deferred tax assets, the Company is recording deferred tax liabilities associated with certain state jurisdictions.

The Tax Reform Act of 1986 (the "Act") provides for a limitation on the annual use of net operating loss and tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit the Company's ability to utilize these carryforwards. Generally, under Section 382 of the Internal Revenue Code, a change in ownership of a company of greater than 50% within a three-year period results in an annual limitation on that company’s ability to utilize its carryforwards from the tax periods prior to the ownership change. The Company completed a Section 382 study and determined that no limitation has been applied to its NOLs as of December 31, 2017. The Company will continue to monitor any changes in its ownership.

As of December 31, 2017 and 2016, the Company recorded valuation allowances in the amount of $74.2 million and $14.9 million, respectively, against the portion of its federal and state deferred tax assets that it has determined are not more likely than not of being realized.

As of December 31, 2017 and 2016, the Company had no gross unrecognized tax benefits. The Company does not expect any material increase or decrease in its gross unrecognized tax benefits during the next twelve months. If and when the Company does record unrecognized tax benefits in the future, any interest and penalties related to these unrecognized tax benefits will be recorded in the income tax expense line in the applicable statements of operations.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company may be subject to examination by federal and certain state and local tax authorities. As of December 31, 2017, the Company and its subsidiaries' U.S. federal income tax returns for the years 2014 through 2017 are open under the normal three-year statute of limitations from when the returns were filed and therefore subject to examination. State and local tax returns are generally subject to audit from 2013 through 2017. Currently, no tax authorities are auditing the Company on any income tax matters.

J.G. Wentworth Co 10-K