Income Taxes

AB is a private partnership for federal income tax purposes and, accordingly, is not subject to federal or state corporate income taxes. However, AB is subject to a 4.0% New York City unincorporated business tax (“UBT”). Domestic corporate subsidiaries of AB, which are subject to federal, state and local income taxes, generally are included in the filing of a consolidated federal income tax return with separate state and local income tax returns being filed. Foreign corporate subsidiaries are generally subject to taxes in the foreign jurisdictions where they are located.

In order to preserve AB’s status as a private partnership for federal income tax purposes, AB Units must not be considered publicly traded. The AB Partnership Agreement provides that all transfers of AB Units must be approved by AXA Equitable Life Insurance Company (a subsidiary of AXA, “AXA Equitable”) and the General Partner; AXA Equitable and the General Partner approve only those transfers permitted pursuant to one or more of the safe harbors contained in relevant treasury regulations. If AB Units were considered readily tradable, AB’s net income would be subject to federal and state corporate income tax, significantly reducing its quarterly distributions to AB Holding. Furthermore, should AB enter into a substantial new line of business, AB Holding, by virtue of its ownership of AB, would lose its status as a “grandfathered” publicly-traded partnership and would become subject to corporate income tax, which would reduce materially AB Holding’s net income and its quarterly distributions to AB Holding Unitholders.

Earnings before income taxes and income tax expense consist of:



	Years Ended December 31,
	2016			2015		2014
	(in thousands)
Earnings before income taxes:
United States	$	614,261		$	520,282	$	493,311
Foreign	108,904			110,817		115,310
Total	$	723,165		$	631,099	$	608,621
Income tax expense:
Partnership UBT	$	5,363		$	8,027	$	10,042
Corporate subsidiaries:
Federal	291			7,957		12,464
State and local	1,064			661		1,372
Foreign	28,158			26,822		31,273
Current tax expense	34,876			43,467		55,151
Deferred tax (benefit)	(6,557		)	1,330		(10,847		)
Income tax expense	$	28,319		$	44,797	$	44,304

The principal reasons for the difference between the effective tax rates and the UBT statutory tax rate of 4.0% are as follows:



	Years Ended December 31,
	2016					2015					2014
	(in thousands)
UBT statutory rate	$	28,927		4.0	%	$	25,244		4.0	%	$	24,345		4.0	%
Corporate subsidiaries’ federal, state, local and foreign income taxes	17,907			2.5		31,223			4.9		30,353			5.0
Effect of ASC 740 adjustments, miscellaneous taxes, and other	(1,070		)	(0.2	)	2,965			0.5		3,393			0.6
Income not taxable resulting from use of UBT business apportionment factors	(17,445		)	(2.4	)	(14,635		)	(2.3	)	(13,787		)	(2.3	)
Income tax expense and effective tax rate	$	28,319		3.9		$	44,797		7.1		$	44,304		7.3

We recognize the effects of a tax position in the financial statements only if, as of the reporting date, it is “more likely than not” to be sustained based solely on its technical merits. In making this assessment, we assume that the taxing authority will examine the tax position and have full knowledge of all relevant information.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Years Ended December 31,
	2016		2015		2014
	(in thousands)
Balance as of beginning of period	$	12,004	$	11,311	$	2,975
Additions for prior year tax positions	—		—		2,838
Reductions for prior year tax positions	—		—		—
Additions for current year tax positions	592		693		5,498
Reductions for current year tax positions	—		—		—
Reductions related to closed years/settlements with tax authorities	—		—		—
Balance as of end of period	$	12,596	$	12,004	$	11,311

The amount of unrecognized tax benefits as of December 31, 2016, 2015 and 2014, when recognized, is recorded as a reduction to income tax expense and reduces the company’s effective tax rate.

Interest and penalties, if any, relating to tax positions are recorded in income tax expense on the consolidated statements of income. The total amount of interest expense (credit) recorded in income tax expense during 2016, 2015 and 2014 was $0.7 million, $0.4 million and $0.4 million, respectively. The total cumulative amount of accrued interest payable recorded on the consolidated statements of financial condition as of December 31, 2016, 2015 and 2014 were $1.7 million, $1.0 million and $0.6 million, respectively. There were no accrued penalties as of December 31, 2016, 2015 or 2014.

Generally, the company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for any year prior to 2013, except that, during the third quarter of 2014, the City of New York notified us of an examination of AB’s UBT returns for the years 2010 and 2011. The examination is ongoing.

Currently, there are no income tax examinations at our significant non-U.S. subsidiaries. Years that remain open and may be subject to examination vary under local law, and range from one to seven years.

At December 31, 2016, it is reasonably possible that $6.6 million of our unrecognized tax benefits will change within the next twelve months due to completion of tax authority exams.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effect of significant items comprising the net deferred tax asset (liability) is as follows:



	December 31,
	2016			2015
	(in thousands)
Deferred tax asset:
Differences between book and tax basis:
Benefits from net operating loss carryforwards	$	6,066		$	18,887
Long-term incentive compensation plans	15,468			17,092
Other, primarily accrued expenses deductible when paid	16,730			18,490
	38,264			54,469
Less: valuation allowance	(462		)	(13,709		)
Deferred tax asset	37,802			40,760
Deferred tax liability:
Differences between book and tax basis:
Intangible assets	6,302			6,520
Translation adjustment	—			8,220
Other	1,960			766
Deferred tax liability	8,262			15,506
Net deferred tax asset	$	29,540		$	25,254

Valuation allowances of $0.5 million and $13.7 million are established as of December 31, 2016 and 2015, respectively, primarily due to the uncertainty of realizing certain net operating loss (“NOL”) carryforwards given the future losses expected to be incurred by the applicable subsidiaries. We had NOL carryforwards at December 31, 2016 of approximately $52.9 million in certain foreign locations with an indefinite expiration period. As of December 31, 2015, we had NOL carryforwards of approximately $80.9 million in certain foreign locations with an indefinite expiration period and $135.7 million in certain domestic locations with expiration periods between 15 and 20 years.

The deferred tax asset is included in other assets. Management has determined that realization of the net deferred tax asset is more likely than not based on anticipated future taxable income.

We provide income taxes on the undistributed earnings of non-U.S. corporate subsidiaries except to the extent that such earnings are permanently invested outside the United States. As of December 31, 2016, $683.0 million of accumulated undistributed earnings of non-U.S. corporate subsidiaries that has not been taxed in the U.S. were permanently invested outside the U.S. At existing applicable income tax rates, additional taxes of approximately $54.8 million, net of foreign tax credits, would need to be provided if such earnings were remitted.