• Filing Date: 2020-07-09
  • Form Type: 10-Q
  • Description: Quarterly report
v3.20.2
Income Taxes
6 Months Ended
May 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes

The Company’s provision for income taxes from continuing operations is estimated to result in an effective tax rate of 12.40% as of May 31, 2020 and a total tax expense of approximately $2.4 million for the six months ended May 31, 2020. The Company’s effective tax rate is principally impacted by expected income inclusions under the GILTI tax regime, limitations imposed on the use of historical net operating losses, and interest expense limitations under IRC Sec. 264(a)(4) that apply when determining tested income for the GILTI inclusion. The GILTI inclusion is driven in large part by the Company’s allocable share of taxable income from the WE Investment. The Company coordinates with the manager of the WE Investment to obtain reasonable estimates of the Company’s share of taxable results. As the estimated allocable share of taxable income from the WE investment represents a significant portion of the Company’s expected taxable income, in accordance with ASC 740 principles, the Company’s tax provision recorded to date is based on actual results through May 31, 2020. The Company believes this approach most fairly represents its income tax provision as of May 31, 2020.

Based on the Company’s evaluation, a deferred tax valuation allowance was established against its net deferred tax assets. In its evaluation, management considers taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences, and available tax planning strategies that could be implemented, if required. Valuation allowances are established based on the consideration of all available evidence using a more likely than not standard. This valuation allowance was determined to be necessary as an offset to the full amount of the federal and state deferred tax asset. During the three months ended May 31, 2020, the Company does not expect that position to change and therefore is not recording any income tax benefit.

Impact of Tax Reform

Beginning with the tax year ended November 30, 2019, the Company became subject to the Global Intangible Lowed-Taxed Income regime (referred to as "GILTI"), which is a tax on certain foreign income earned in excess of a deemed return on tangible assets held by a controlled foreign corporation. The GILTI is included in U.S. taxable income on a current basis by its U.S. shareholders and can generally be offset by a deduction of up to 50% of the income inclusion (through the end of 2025, thereafter the deduction is reduced to 37.5%) subject to certain limitations. Based on the Company’s partnership interest in White Eagle that is held through Lamington (which represents its principal business asset), its allocable share of taxable income is subject to the GILTI regime. For ASC 740 purposes, the Company adopted an accounting policy to treat any future GILTI inclusion as a current-period expense instead of providing for U.S. deferred taxes on all temporary differences related to future GILTI items.

Palomino Transaction

On August 16, 2019, the WE Investment was consummated whereby White Eagle, an indirectly-owned entity of the Company, sold to Palomino a 72.5% limited partnership interest in White Eagle, consisting of newly issued and outstanding Class A and Class D interests. Pursuant to the agreement, Lamington retained 27.5% of the limited partnership interests of White Eagle, consisting of all of the newly issued and outstanding Class B interests. For U.S. income tax purposes, this transaction was treated as a contribution by White Eagle of its assets and liabilities to a newly-formed partnership in exchange for the 27.5% interest in White Eagle’s capital and profits. The Company recognized no gain or loss as a result of the transaction.

The Company and its subsidiary companies are subject to U.S. federal income tax, as well as to income tax in Florida and other states and foreign jurisdictions in which it operates.