Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of the income tax expense (benefit) for continuing operations are as follows (in thousands):
  Year Ended December 31,
  2020 2019 2018
Current expense (benefit):
Federal $ 10,889  $ 89,471  $ — 
State 589  3,103  424 
Foreign 23  (66) (158)
11,501  92,508  266 
Deferred expense (benefit):
Federal (15,672) 74,627  29,928 
State (3,382) 202  (185)
$ (7,553) $ 167,337  $ 30,009 

A reconciliation of income tax expense (benefit) from continuing operations to the amount computed by applying the statutory federal income tax rate to the net income (loss) from continuing operations is summarized as follows (in thousands):
 
  Year Ended December 31,
  2020 2019 2018
Tax at federal statutory rate $ (2,213) $ 167,294  $ 36,400 
State, net of federal benefit (1,456) 2,466  1,635 
Contingent liabilities (278) 18  948 
Share-based compensation (362) (819) (8,131)
FDII (1,652) (402) — 
Research and development credits (699) (879) (2,758)
Change in uncertain tax positions (650) 441  858 
Rate change for changes in federal or state law (173) (210) 178 
Provision to return adjustments (4,803) (184) (150)
Foreign tax differential on income/loss of foreign subsidiaries (3,839) 57  (14)
Change in valuation allowance (121,876) (1,193) (4,225)
Sale of Vernalis R&D 127,372  —  — 
Expired NOLs and credits —  —  3,054 
Change in derivatives —  —  615 
Other 3,076  748  1,599 
$ (7,553) $ 167,337  $ 30,009 
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. Significant components of our deferred tax assets and liabilities as of December 31, 2020 and 2019 are shown below. We assess the positive and negative evidence to determine if sufficient future taxable income will be generated to use the existing deferred tax assets. Our evaluation of evidence resulted in management concluding that the majority of our deferred tax assets will be realized. However, we maintain a valuation allowance to offset certain net deferred tax assets as management believes realization of such assets are uncertain as of December 31, 2020, 2019 and 2018. The valuation allowance decreased $116.5 million in 2020, increased $136.9 million in 2019 and decreased $2.5 million in 2018.

We offset all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and present them on our consolidated balance sheet as a non-current deferred income tax asset or liability (as applicable). Deferred tax assets (liabilities) are comprised of the following:
  December 31,
  2020 2019
  (in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 64,147  $ 150,727 
Research credit carryforwards 19,623  14,843 
Stock Compensation 11,994  9,544 
Other 13,120  10,602 
108,884  185,716 
Valuation allowance for deferred tax assets (24,858) (141,338)
Net deferred tax assets $ 84,026  $ 44,378 
Deferred tax liabilities:
Identified intangibles (119,381) (40,768)
     Other (4,923) (10,939)
Net deferred tax liabilities $ (124,304) $ (51,707)
Deferred income taxes, net $ (40,278) $ (7,329)

As of December 31, 2020, we had federal net operating loss carryforwards set to expire through 2037 of $162.4 million and $129.3 million of state net operating loss carryforwards that begin to expire in 2031. We also have $9.2 million of federal research and development credit carryforwards, which expire through 2040. We have $23.1 million of California research and development credit carryforwards that have no expiration date. In addition, we have approximately $110.1 million of non-U.S. net operating loss carryovers and approximately $17.6 million of non-U.S. capital loss carryovers that have no expiration date. At December 31, 2019 we had approximately $713.8 million of non-U.S. net operating loss carryovers and approximately $14.6 million of non-U.S. capital loss carryovers. The year over year decrease in non-U.S. deferred tax assets was attributable to the sale of Vernalis in December 2020. The remaining non-U.S. deferred tax assets as of December 31, 2020 were attributable to the portion of the Vernalis business that we did not sell. We have a full valuation allowance against these non-U.S. tax attributes. See detail in “Note (2), Sale of Vernalis R&D and Promacta License."
  
Pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. The deferred tax assets as of December 31, 2020 are net of any previous limitations due to Section 382 and 383.
We account for income taxes by evaluating a probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Our remaining liabilities for uncertain tax positions are presented net of the deferred tax asset balances on the accompanying consolidated balance sheet.
A reconciliation of the amount of unrecognized tax benefits at December 31, 2020, 2019 and 2018 is as follows (in thousands):
December 31,
2020 2019 2018
Balance at beginning of year $ 28,736  $ 30,289  $ 29,363 
     Additions based on tax positions related to the current year 3,911  543  1,247 
     Additions for tax positions of prior years 179  —  336 
     Reductions for tax positions of prior years (955) (2,096) (657)
Balance at end of year $ 31,871  $ 28,736  $ 30,289 

Included in the balance of unrecognized tax benefits at December 31, 2020 is $30.2 million of tax benefits that, if recognized would impact the effective rate. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2020 and December 31, 2019, we recognized an immaterial amount of interest and penalties. We file income tax returns in the United States, various state jurisdictions, United Kingdom, and Canada with varying statutes of limitations. The federal statute of limitation remains open for the 2017 tax year to the present. The state income tax returns generally remain open for the 2016 tax year through the present. Net operating loss and research credit carryforwards arising prior to these years are also open to examination if and when utilized.

We are subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, as of December 31, 2020, we are no longer subject to state, local or foreign examinations by tax authorities for tax years before 2016 and we are no longer subject to U.S. federal income or payroll tax examinations for tax years before 2017. No tax returns are currently under examination by any tax authorities. Net operating loss and research credit carryforwards arising prior to these years are also open to examination if and when utilized. We believe our reserve for unrecognized tax benefits and contingent tax issues is adequate with respect to all open years.