Tellurian Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Jun. 30, 2016

Note 10 - Income Taxes

The domestic and foreign components of our income (loss) from continuing operations are as follows for the fiscal years ended:



	June 30,
	2016			2015
	(In thousands)
United States	$	(4,454	)	$	(4,371	)
Australia	1,497			(16,146		)
United Kingdom	(371		)	(1,079		)
Net loss from continuing operations	$	(3,328	)	$	(21,596	)

The following reconciles the Company's effective tax rate from continuing operations to the federal statutory tax rate for the fiscal years ended:



	June 30,
	2016			2015
	(In thousands)
Tax provision computed per federal statutory rate	$	(1,131	)	$	(7,343	)
State taxes, net of federal benefit	(91		)	(153		)
Foreign rate differential	(8		)	908
Accounting Principles Board 23 adjustment	—			9,632
Change in valuation allowance	(668		)	(5,254		)
Foreign tax credit adjustment	—			(310		)
Net operating loss and capital loss adjustment	179			1,493
Impact of rate change	47			159
Foreign currency translation differential	838			1,255
Stock-based compensation forfeitures	621			545
Contingent consideration payable write-off	—			(630		)
Other items	213			(302		)
Consolidated income tax expense (benefit)	$	—		$	—

The following summarizes components of our income tax provision for the fiscal years ended:



	June 30,
	2016			2015
	(In thousands)
Consolidated current income tax provision	—			—
Consolidated deferred income tax provision	—			—
Consolidated income tax provision	$	—		$	—

The consolidated income tax provision is summarized as follows:
Continuing operations	$	—		$	—
Discontinued operations	$	—		$	—

Effective tax rate for continuing operations	—		%	—		%

Significant components of the Company's deferred tax assets and liabilities of continuing operations can be summarized as follows for the fiscal years ended:



	June 30,
	2016			2015
	(In thousands)
Deferred tax liabilities:
Land, buildings and equipment	$	—		$	—
Foreign investments	(10,851		)	(7,451		)
Other items	(72		)	(128		)
Total deferred tax liabilities	(10,923		)	(7,579		)

Deferred tax assets:
Land, buildings and equipment	(21		)	(5		)
Asset retirement obligations	—			—
Net operating losses, capital losses, and foreign tax credit carry forwards	21,408			18,521
United Kingdom exploration costs and net operating losses	3,109			3,639
Investments	111			100
Stock option compensation	1,810			2,184
Australian capitalized legal costs	112			116
Other items	286			141
Total deferred tax asset	26,815			24,696
Valuation allowance	(15,892		)	(17,117		)
Net long-term deferred tax asset	$	—		$	—

For the fiscal year ended June 30, 2016, the valuation allowance from continuing operations decreased by $1.2 million, primarily due to stock compensation forfeitures and the appreciation of the dollar reducing the value of the Australian and UK based deferred tax assets.

Subsequent to June 30, 2016, the Company exchanged the domestic oil and gas assets (see Note 2 - One Stone Exchange) and sold the central Weald assets held by MPUK (see Note 3 - Sale of Weald Basin Assets), which are reported on the accompanying consolidated balance sheets as assets held for sale and the operations related to these assets are reported as discontinued operations in the accompanying statements of operations (see Note 4 - Discontinued Operations).

Certain tax attributes will be subject to a limitation as a result of the consummation of the merger with Tellurian entered into subsequent to June 30, 2016, and expected to close in the fourth calendar quarter of 2016, which merger would constitute a change of ownership as defined under Internal Revenue Code Section 382.

The US gross deferred tax assets and liabilities from continuing operations as of June 30, 2016, and 2015, respectively, consist primarily of foreign tax credits and stock options. The US gross deferred tax asset related to property, plant and equipment is primarily related to the discontinued operations exchanged subsequent to June 30, 2016. The Australian deferred tax assets and liabilities as of June 30, 2016 consist primarily of capital loss and net operating loss carry forwards. The Australian capital loss and net operating losses are carried forward indefinitely. The UK deferred tax assets and liabilities as of June 30, 2016, and 2015, respectively, consist primarily of capital allowance carry forwards which are carried forward indefinitely.

During fiscal year 2015, the Company made a determination that it was no longer permanently invested in its foreign subsidiaries. As of June 30, 2016, the Company has estimated that it has an overall deferred tax asset of $7.0 million, net of a deferred tax liability related to the basis difference in its foreign subsidiaries of $11.6 million.

The Company has $22.2 million of net operating loss carryovers for federal income tax purposes as of June 30, 2016, of which $252 thousand is not benefited for financial statement purposes as it relates to tax deductions that deviate from compensation expense for financial statement purposes. The benefit of these excess tax deductions will not be recognized for financial statement purposes until the related deductions reduce taxes payable.

After reviewing all positive and negative evidence, a valuation allowance is recorded against all the net deferred tax assets in the US, Australia and the UK. As a result, the Company has recorded no deferred tax assets as of June 30, 2016, and there are no tax attributes included in assets held for sale or discontinued operations.

As of June 30, 2016, the Company remains subject to examination in the following major tax jurisdictions for the tax years indicated below:



Jurisdiction		Tax Years Subject to Examination:
US Federal		2013 - 2015
Colorado		2012 - 2015
Maine		2013 - 2015
Montana		2014 - 2015
Australia		2012 - 2015
United Kingdom		2012 - 2015

At June 30, 2016, the Company had net operating loss and foreign tax credit carry forwards for US federal and state income tax purposes, respectively, which are scheduled to expire periodically as follows:



	Federal Net Operating Losses		State Net Operating Losses		Federal Foreign Tax Credit
	(In thousands)
Expires:
2017	$	—	$	8	$	310
2018	—		4,659		—
2019	—		559		1,411
2020	—		2,212		624
2021	—		27		1,443
2022	—		7,848		3,655
2023 and thereafter	22,209		8,690		1,668
Total	$	22,209	$	24,003	$	9,111

There are no uncertain tax positions that would meet the more-likely-than-not recognition threshold for the fiscal years ended June 30, 2016, or 2015.