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.

We determined reasonable estimates for certain effects of the Tax Cuts and Jobs Act (“2017 Tax Act”) enacted on December 22, 2017 and recorded those estimates as provisional amounts in our 2017 financial statements. In accordance with SEC Staff Accounting Bulletin No. 118 (“SAB 118”), the adjustments to deferred tax assets and liabilities and the liability related to the transition tax are provisional amounts estimated based on information available as of December 31, 2017. These amounts are subject to change as we obtain information necessary to complete the calculations. We will recognize any changes to the provisional amounts as we refine our estimates and as the tax authorities issue further guidance and interpretations of the 2017 Tax Act.

The major provisions of the 2017 Tax Act that had, or could have, a significant impact on our income tax balance sheet and income statement accounts are as follows:


•	We recorded an approximate $22.5 million charge to our 2017 income tax expense to account for deemed repatriation of foreign earnings. The determination of the transition tax requires further analysis regarding the amount and composition of our historical foreign earnings.


•	We recorded an approximate $3.3 million charge to our 2017 income tax expense to reduce our deferred tax assets due to lower future corporate tax rates. We will recognize any changes to the provisional amounts as we refine our estimates of our cumulative temporary differences.

Earnings before income taxes and income tax expense consist of:



	Years Ended December 31,
	2017		2016			2015
	(in thousands)
Earnings before income taxes:
United States	$	634,515	$	614,261		$	520,282
Foreign	139,395		108,904			110,817
Total	$	773,910	$	723,165		$	631,099
Income tax expense:
Partnership UBT	$	2,986	$	5,363		$	8,027
Corporate subsidiaries:
Federal	18,079		291			7,957
State and local	803		1,064			661
Foreign	29,365		28,158			26,822
Current tax expense	51,233		34,876			43,467
Deferred tax (benefit)	1,877		(6,557		)	1,330
Income tax expense	$	53,110	$	28,319		$	44,797

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,
	2017					2016					2015
	(in thousands)
UBT statutory rate	$	30,956		4.0	%	$	28,927		4.0	%	$	25,244		4.0	%
Corporate subsidiaries’ federal, state, local and foreign income taxes	22,162			2.9		17,907			2.5		31,223			4.9
2017 federal tax reform enactment	25,846			3.3		—			—		—			—
Effect of ASC 740 adjustments, miscellaneous taxes, and other	(5,155		)	(0.7	)	(1,070		)	(0.2	)	2,965			0.5
Income not taxable resulting from use of UBT business apportionment factors	(20,699		)	(2.6	)	(17,445		)	(2.4	)	(14,635		)	(2.3	)
Income tax expense and effective tax rate	$	53,110		6.9		$	28,319		3.9		$	44,797		7.1

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 on its technical merits and their applicability to the facts and circumstances of the tax position. 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,
	2017			2016		2015
	(in thousands)
Balance as of beginning of period	$	12,596		$	12,004	$	11,311
Additions for prior year tax positions	—			—		—
Reductions for prior year tax positions	(1,849		)	—		—
Additions for current year tax positions	—			592		693
Reductions for current year tax positions	—			—		—
Reductions related to closed years/settlements with tax authorities	(2,269		)	—		—
Balance as of end of period	$	8,478		$	12,596	$	12,004

The amount of unrecognized tax benefits as of December 31, 2017, 2016 and 2015, 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 2017, 2016 and 2015 was $0.3 million, $0.7 million and $0.4 million, respectively. The total amount of accrued interest recorded on the consolidated statements of financial condition as of December 31, 2017, 2016 and 2015 is $0.7 million, $1.7 million and $1.0 million, respectively. There were no accrued penalties as of December 31, 2017, 2016 or 2015.

As of December 31, 2017 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.

As a result of the settlement of the New York City UBT tax audit for the years 2010 - 2012, the gross unrecognized tax benefit was reduced by approximately $2.3 million. The company also reduced the amount of accrued interest by $0.4 million.

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, 2017, it is reasonably possible that $5.1 million of our unrecognized tax benefits will change within the next twelve months due to the expiration of the statute of limitations.

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,
	2017			2016
	(in thousands)
Deferred tax asset:
Differences between book and tax basis:
Benefits from net operating loss carryforwards	$	3,405		$	4,441
Long-term incentive compensation plans	21,204			25,263
Investment basis differences/net unrealized losses	6,079			2,750
Depreciation and amortization	2,026			2,222
Other, primarily accrued expenses deductible when paid	3,378			3,588
	36,092			38,264
Less: valuation allowance	(497		)	(462		)
Deferred tax asset	35,595			37,802
Deferred tax liability:
Differences between book and tax basis:
Intangible assets	6,103			6,302
Other	891			1,960
Deferred tax liability	6,994			8,262
Net deferred tax asset	$	28,601		$	29,540

Valuation allowances of $0.5 million were established as of December 31, 2017 and 2016, 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, 2017 of approximately $38.7 million in certain foreign locations with an indefinite expiration period. As of December 31, 2016, we had NOL carryforwards of approximately $43.1 million in certain foreign locations with an indefinite expiration period.

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

In accordance with the recently enacted 2017 Tax Act, we provided a $22.5 million provisional charge to our 2017 income tax expense on the deemed repatriation of earnings associated with non-U.S. corporate subsidiaries. Therefore, we are no longer asserting permanent reinvestment of earnings overseas. Per SAB 118, we are still evaluating the remaining income tax effects on the reversal of the indefinite reinvestment assertion as a result of the 2017 Tax Act. We will recognize any changes to the provisional amounts of income taxes recorded in 2017 as the effects are quantified.