Income Taxes

12 Months Ended

Dec. 31, 2019

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 EQH and the General Partner; EQH and the General Partner approve only those transfers permitted pursuant to one or more of the safe harbors contained in the 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,
	2019			2018			2017
	(in thousands)
Earnings before income taxes:
United States	$	697,501		$	672,221		$	634,515
Foreign	125,936			153,093			139,395
Total	$	823,437		$	825,314		$	773,910
Income tax expense:
Partnership UBT	$	9,196		$	5,251		$	2,986
Corporate subsidiaries:
Federal	(943		)	(4,030		)	18,079
State and local	975			2,888			803
Foreign	32,290			36,529			29,365
Current tax expense	41,518			40,638			51,233
Deferred tax	236			5,178			1,877
Income tax expense	$	41,754		$	45,816		$	53,110

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,
	2019					2018					2017
	(in thousands)
UBT statutory rate	$	32,937		4.0	%	$	33,012		4.0	%	$	30,956		4.0	%
Corporate subsidiaries' federal, state, and local	4,000			0.5		1,522			0.2		2,558			0.3
Foreign subsidiaries taxed at different rates	26,719			3.3		30,689			3.7		25,406			3.3
2017 Tax Act	—			—		1,155			0.1		25,846			3.3
FIN 48 reserve (release)	2,765			0.3		(5,177		)	(0.6	)	(3,318		)	(0.4	)
UBT business allocation percentage rate change	(79		)	—		2,657			0.3		—			—
Deferred tax and payable write-offs	314			—		2,932			0.4		(9,542		)	(1.2	)
Foreign outside basis difference	155			—		2,273			0.3		—			—
Amended 2017 return	(3,853		)	(0.5	)	—			—		—			—
Effect of ASC 740 adjustments, miscellaneous taxes, and other	2,305			0.3		(2,521		)	(0.3	)	1,903			0.2
Income not taxable resulting from use of UBT business apportionment factors and effect of compensation charge	(23,509		)	(2.8	)	(20,726		)	(2.5	)	(20,699		)	(2.6	)
Income tax expense and effective tax rate	$	41,754		5.1		$	45,816		5.6		$	53,110		6.9

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,
	2019		2018			2017
	(in thousands)
Balance as of beginning of period	$	3,893	$	8,478		$	12,596
Additions for prior year tax positions	1,813		—			—
Reductions for prior year tax positions	—		—			(1,849		)
Additions for current year tax positions	—		—			—
Reductions for current year tax positions	—		—			—
Reductions related to closed years/settlements with tax authorities	—		(4,585		)	(2,269		)
Balance as of end of period	$	5,706	$	3,893		$	8,478

The amount of unrecognized tax benefits as of December 31, 2019, 2018 and 2017, 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 recorded in income tax expense during 2019, 2018 and 2017 was $0.7 million, $0.1 million and $0.3 million, respectively. The total amount of accrued interest recorded on the consolidated statements of financial condition as of December 31, 2019, 2018 and 2017 was $1.1 million, $0.3 million and $0.7 million, respectively. There were $0.2 million of penalties accrued as of December 31, 2019. There were no accrued penalties as of December 31, 2018 or 2017.

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 2015, except as set forth below.

During the third quarter of 2018, the City of New York notified us of an examination of AB's UBT returns for the years 2013 through 2016. 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, 2019, it is reasonably possible that $4.2 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,
	2019			2018
	(in thousands)
Deferred tax asset:
Differences between book and tax basis:
Benefits from net operating loss carryforwards	$	5,551		$	2,518
Long-term incentive compensation plans	20,907			22,342
Investment basis differences	4,376			3,606
Depreciation and amortization	1,554			1,248
Lease liability	6,409			—
Other, primarily accrued expenses deductible when paid	3,106			3,903
	41,903			33,617
Less: valuation allowance	(2,026		)	(490		)
Deferred tax asset	39,877			33,127
Deferred tax liability:
Differences between book and tax basis:
Intangible assets	8,013			6,852
Investment in foreign subsidiaries	2,191			1,653
Right-of-use asset	5,191			—
Other	1,672			1,758
Deferred tax liability	17,067			10,263
Net deferred tax asset	$	22,810		$	22,864

Valuation allowances of $2.0 million and $0.5 million were established as of December 31, 2019 and 2018, respectively, primarily due to significant negative evidence that net operating loss ("NOL") carryforwards will not be utilized, given the future losses expected to be incurred by the applicable subsidiaries. We had NOL carryforwards at December 31, 2019 and 2018 of approximately $46.2 million and $32.4 million, respectively. The majority of our foreign NOL carryforwards have an indefinite expiration period.

The deferred tax asset is included in other assets in our consolidated statement of financial condition. Management believes there will be sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets recognized that are not subject to valuation allowances.

The company provides income taxes on the unremitted earnings of non-U.S. corporate subsidiaries except to the extent that such earnings are indefinitely reinvested outside the United States. As of December 31, 2019, $29.6 million of undistributed earnings of non-U.S. corporate subsidiaries were indefinitely invested outside the U.S. At existing applicable income tax rates, additional taxes of approximately $6.2 million would need to be paid if such earnings are remitted.