19. Income Taxes

AllianceBernstein is a private partnership for federal income tax purposes and, accordingly, is not subject to federal or state corporate income taxes. However, AllianceBernstein is subject to a 4.0% New York City unincorporated business tax (“UBT”). Domestic corporate subsidiaries of AllianceBernstein, which are subject to federal, state and local income taxes, are generally 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 AllianceBernstein's status as a private partnership for federal income tax purposes, AllianceBernstein Units must not be considered publicly traded. The AllianceBernstein Partnership Agreement provides that all transfers of AllianceBernstein Units must be approved by 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 AllianceBernstein Units were considered readily tradable, AllianceBernstein's net income would be subject to federal and state corporate income tax reducing its quarterly distribution to Holding. Furthermore, should AllianceBernstein enter into a substantial new line of business, Holding, by virtue of its ownership of AllianceBernstein, would lose its status as a “grandfathered” publicly-traded partnership and would become subject to corporate income tax, which would reduce materially Holding's net income and its quarterly distributions to Holding unitholders.

(Loss) earnings before income taxes and income tax expense consist of:

	Years Ended December 31,
	2011			2010			2009
	(in thousands)

(Loss) earnings before income taxes:
United States	$	(120,159	)	$	382,463		$	539,002
Foreign		(88,310	)		83,159			85,483
Total	$	(208,469	)	$	465,622		$	624,485
Income tax expense:
Partnership UBT	$	8,737		$	10,363		$	2,420
Corporate subsidiaries:
Federal		10,600			2,570			5,550
State and local		1,772			1,401			632
Foreign		11,411			25,144			32,001
Current tax expense		32,520			39,478			40,603
Deferred tax (benefit) expense		(29,422	)		(955	)		5,374
Income tax expense	$	3,098		$	38,523		$	45,977

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,
	2011						2010						2009
	(in thousands)

UBT statutory rate		$	(8,339	)	4.0	%		$	18,625		4.0	%		$	24,979		4.0	%
Corporate subsidiaries' federal, state, local and foreign income taxes			2,998		(1.4	)			25,544		5.5				32,585		5.2
Effect of ASC 740 adjustments, miscellaneous taxes, and other			2,560		(1.3	)			1,445		0.3				(1,988	)	(0.3	)
Income not taxable resulting from use of UBT business apportionment factors and effect of deferred compensation charge			5,879		(2.8	)			(7,091	)	(1.5	)			(9,599	)	(1.5	)
Income tax expense and effective tax rate		$	3,098		(1.5	)		$	38,523		8.3			$	45,977		7.4

Income tax expenses decreased $35.4 million, or 92.0%, in 2011 compared to 2010. Prior to the fourth quarter 2011 deferred compensation charge of $587.1 million, our estimate of our full year 2011 effective tax rate was 7.1%. As a result of the deferred compensation charge, as well as the immediate recognition of the 2011 deferred compensation incentive awards, we had a fourth quarter 2011 effective tax rate of 3.8% (pre-tax loss of $540.2 million and income tax benefit of $20.3 million that resulted in a full-year 2011 pre-tax loss of $208.5 million and income tax expense of $3.1 million). The deferred compensation charge resulted in a one-time change to the historical mix of business between AllianceBernstein, which incurs a 4.0% UBT, and its corporate subsidiaries that incur corporate level income taxes. In addition, the recorded tax benefit associated with the future deliveries of vested Holding Units was based on the current market value in most jurisdictions, which was lower than the grant price of the awards included in the deferred compensation charge. Both contributed to us incurring tax expense of $3.1 million rather than a benefit at the full year estimated effective tax rate of 7.1%. Income tax expenses decreased $7.5 million, or 16.2%, in 2010 compared to 2009. The decrease was primarily the result of lower pre-tax earnings, partially offset by a higher effective tax rate due to a higher proportion of pre-tax earnings from our foreign subsidiaries where tax rates are generally higher.

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,
	2011			2010			2009
	(in thousands)

Balance as of beginning of period	$	5,326		$	7,365		$	8,805
Additions for prior year tax positions		190			-			174
Reductions for prior year tax positions		-			-			-
Additions for current year tax positions		761			823			1,182
Reductions for current year tax positions		-			-			(52	)
Reductions related to closed years/settlements with tax authorities		(2,249	)		(2,862	)		(2,744	)
Balance as of end of period	$	4,028		$	5,326		$	7,365

The amount of unrecognized tax benefits as of December 31, 2011, 2010 and 2009 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 2011, 2010 and 2009 was $(0.2) million, $(0.1) million and $(0.1) million, respectively. The total amount of accrued interest recorded on the consolidated statements of financial condition as of December 31, 2011, 2010 and 2009 are $0.5 million, $0.7 million and $0.8 million, respectively. There were no accrued penalties as of December 31, 2011, 2010 or 2009.

The company is generally no longer subject to U.S. federal, or state and local income tax examinations by tax authorities for any year prior to 2008, except as set forth below.

The Internal Revenue Service initiated an examination of our domestic corporate subsidiaries' federal tax returns for 2009 in the fourth quarter of 2011. This examination is in the preliminary stages and we do not believe an increase in the reserve is necessary.

In addition, examinations of three of AllianceBernstein's domestic corporate subsidiaries were initiated in 2010 and 2011 by state and local taxing authorities. These examinations remain in progress and we do not believe an increase in the reserve is necessary. In addition, an assessment has been received resulting from a state and local examination of AllianceBernstein's corporate subsidiary tax returns for years 2001 through 2004. This matter remains in the appeal stage, however, we do not believe an increase in the existing reserve is necessary.

During 2010, the National Tax Agency notified us of an examination of AllianceBernstein's Japanese subsidiary tax returns for the years 2007 to 2009. The examination was completed in the first quarter of 2011, resulting in a tax payment of less than $0.1 million. The taxing authorities in France also completed their examination of AllianceBernstein's French subsidiary tax returns, resulting in no additional tax payments.

The Canadian Revenue Agency continues their examination of AllianceBernstein's Canadian subsidiary tax returns for the years 2005-2007. We have been advised verbally that there will be no change to the tax filing for the year 2005 but that no determination has yet been made with respect to years 2006 and 2007. We do not believe an increase to the reserve is necessary. Currently, there are no other income tax examinations at our significant non-U.S. subsidiaries except as noted above. Years that remain open and may be subject to examination vary under local law, and range from one to seven years.

The State of New York began an examination of AllianceBernstein's tax returns for the years 2005 and 2006 during 2009. The examinations were not completed and the statue of limitations has expired with respect to these years. During the third quarter of 2011, the City of New York notified us of an examination of AllianceBernstein's UBT returns for the years 2007 and 2008. The examination has yet to begin and we do not believe an increase in the reserve is necessary.

Subject to the results of the examinations for the tax year 2008, under our existing policy for determining whether a tax position is effectively settled for purposes of recognizing previously unrecognized tax benefits, there is the possibility that recognition of unrecognized tax benefits of approximately $1.3 million including accrued interest could occur over the next twelve months. Adjustment to the reserve could occur in light of changing facts and circumstances with respect to the aforementioned on-going examinations.

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,
	2011			2010
	(in thousands)
Deferred tax asset:
Differences between book and tax basis:
Benefits from net operating loss carryforwards	$	5,138		$	-
Deferred compensation plans		35,716			15,431
Other, primarily accrued expenses deductible when paid		14,398			7,183
		55,252			22,614
Less: valuation allowance		(5,138	)		-
Deferred tax asset		50,114			22,614
Deferred tax liability:
Differences between book and tax basis:
Intangible assets		14,325			14,575
Translation adjustment		9,413			8,303
Other, primarily undistributed earnings of certain foreign subsidiaries		330			2,979
Deferred tax liability		24,068			25,857
Net deferred tax asset (liability)	$	26,046		$	(3,243	)

A valuation allowance of $5.1 million has been established 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, 2011 of approximately $31.1 million in certain foreign locations with an indefinite expiration period.

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

The company provides 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, 2011, $573.8 million of accumulated undistributed earnings of non-U.S. corporate subsidiaries were permanently invested. At existing applicable income tax rates, additional taxes of approximately $20.1 million, net of foreign tax credits, would need to be provided if such earnings were remitted.