Note 14 — Income Taxes

The Company is subject to U.S. federal, foreign, state and local corporate income taxes.

The components of the provision for income taxes reflected on the consolidated statements of income are set forth below:



	For The Years Ended December 31,
	2014		2013			2012
	(in thousands)
Current taxes:
U.S. federal	$	12,256	$	19,782		$	34,752
State and local	2,415		1,709			4,747
Foreign	5,778		10,743			7,116
Total current tax expense	20,449		32,234			46,615
Deferred taxes:
U.S. federal	1,454		(8,711		)	(15,119		)
State and local	493		(265		)	(796		)
Foreign	1,686		1,266			(2,317		)
Total deferred tax (benefit) expense	3,633		(7,710		)	(18,232		)
Total tax expense	$	24,082	$	24,524		$	28,383

During 2014, the Company reevaluated its assertion under ASC 740 regarding its non-U.S. subsidiary earnings, and, effective October 1, 2014, the Company intends to indefinitely reinvest its non-U.S. subsidiary earnings outside of the United States and to no longer provide residual U.S. tax on these earnings. Prior to this change, the Company had excess foreign tax credits to offset residual U.S. tax on its non-U.S. subsidiary earnings, consequently this change in policy does not result in any significant tax benefit related to residual U.S. tax provided on non-U.S. subsidiary earnings prior to this change.

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities as well as operating loss carryforwards. Deferred income taxes are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company's net deferred tax assets and liabilities are set forth below:



	As of December 31,
	2014			2013
	(in thousands)
Deferred tax assets:
Compensation and benefits	$	31,677		$	39,991
Depreciation and amortization	2,699			3,077
Unrealized loss on investments	—			205
Cumulative translation adjustment	10,942			5,266
Operating loss carryforwards	4,594			3,447
Capital loss carryforwards	2,581			2,845
Foreign tax credit carryforwards	351			4,252
Other financial accruals	332			57
Valuation allowances	(2,932		)	(4,938		)
Total deferred tax assets	50,244			54,202
Deferred tax liabilities:
Unrealized gain on investments	362			—
Repatriation of foreign earnings	—			2,159
Other financial accruals	—			186
Total deferred tax liabilities	362			2,345
Net deferred tax asset	$	49,882		$	51,857

Based on the Company's historical taxable income and its expectation for taxable income in the future, management expects that its largest deferred tax asset, which relates principally to compensation expense deducted for book purposes but not yet deducted for tax purposes, will be realized as offsets to future taxable income.

The Company’s deferred taxes for operating loss carryforwards relate to losses incurred in foreign jurisdictions. With the exception of newly established foreign offices, the foreign jurisdictions with operating loss carryforwards were profitable in prior years or were profitable in the current year. When assessing the need for a valuation allowance, management evaluates each foreign jurisdiction separately and considers items such as estimated future taxable income, cost bases, and other various factors. Based on all available information, the Company has determined that it is more likely than not that it will realize the benefit of these operating loss carryforwards in future periods; therefore, a valuation allowance has not been established for these deferred tax assets. At December 31, 2014, the Company had operating foreign loss carryforwards, which in aggregate totaled $14.7 million. Operating foreign loss carryforwards of $1.5 million may be carried forward for six to eight years and the remaining $13.2 million may be carried forward for sixteen years and longer.

Due to the Company’s operating loss carryforward position, tax benefits related to share-based payments generally booked through equity accounts may not be recorded until such time as the benefit is realized as a reduction in the Company’s actual taxes paid. As of December 31, 2014, the current taxes payable would have been decreased by $0.6 million if the Company had been able to realize these benefits in its filed tax returns.

As of December 31, 2014, the Company's subsidiary in the United Kingdom has a capital loss carryforward related to the sales of investments in prior years. This capital loss may be carried forward indefinitely, but the Company must realize capital gains in the United Kingdom in order to realize the benefit of this capital loss. Since the Company has no remaining investments in the United Kingdom to generate capital gains, it is more likely than not that the Company will not generate capital gains in this jurisdiction to offset these capital losses. As such, the Company has established a full valuation allowance against the deferred tax asset related to its capital loss in the United Kingdom until such time as it determines it is more likely than not that the tax benefit of this deferred tax asset will be realized. This deferred tax asset and offsetting valuation allowance was $2.6 million and $2.8 million for the tax years ending December 31, 2014 and 2013, respectively.

The Company has U.S. foreign tax credit carryforwards of $0.4 million and $4.3 million as of December 31, 2014 and 2013, respectively, which can be utilized against the repatriation of earnings from foreign jurisdictions. These foreign tax credit carryforwards will expire in various years through 2022 if not utilized. However, due to the change in policy related to the indefinite reinvestment of non-U.S. subsidiary earnings effective October 1, 2014, the Company does not plan to utilize its remaining foreign tax credit carryforwards at December 31, 2014 and has established a full valuation reserve. If the Company were to repatriate all non-U.S. subsidiary earnings as of December 31, 2014, it would result in $1.8 million of additional federal tax, including the utilization of the remaining foreign tax credit carryforwards.

Any gain or loss resulting from the translation of deferred taxes for foreign affiliates has been included in the foreign currency translation adjustment incorporated as a component of other comprehensive income, net of tax, in the consolidated statements of changes in equity. Income taxes receivable of $3.8 million of $1.5 million as of December 31, 2014 and 2013, respectively, were included in other receivables in the consolidated statements of financial condition. Included in current income taxes payable in the consolidated statements of financial condition were current taxes payable of $10.0 million and $15.3 million as of December 31, 2014 and 2013, respectively.

The Company is subject to the income tax laws of the United States, its states and municipalities, and those of the foreign jurisdictions in which the Company operates. These laws are complex, and the manner which they apply to the taxpayer's facts is sometimes open to interpretation. Management must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. In the normal course of business, the Company may be under audit in one or more of its jurisdictions in an open tax year for that particular jurisdiction. As of December 31, 2014, the Company does not expect any material changes in its tax provision related to any outstanding current or future audits.

The Company recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. The Company performed a tax analysis as of December 31, 2014, and determined that there was no requirement to accrue any material additional liabilities. Also, when present as part of the tax provision calculation, interest and penalties have been reported as interest expense and other operating expenses in the consolidated statements of income.

A reconciliation of the statutory U.S. federal income tax rate of 35.0% to the Company’s effective income tax rate is set forth below:



	For the Years Ended December 31,
	2014		2013		2012
U.S. statutory tax rate	35.0	%	35.0	%	35.0	%
Increase related to state and local taxes, net of U.S. income tax benefit	3.3		1.3		3.6
Benefits and taxes related to foreign operations	(3.3	)	(4.1	)	(1.4	)
Valuation allowances	—		1.5		2.7
Sale of merchant banking business	(0.1	)	(0.1	)	(0.1	)
Other	0.8		0.8		0.5
Effective income tax rate	35.7	%	34.4	%	40.3	%