Income Taxes

12 Months Ended

Dec. 31, 2019

The income before provision for income taxes and provision for income taxes are as follows:



	Years Ended December 31,
(in thousands)	2019			2018			2017
Income before provision for income taxes - U.S. ⁽¹⁾	$	171,497		$	132,838		$	149,338
Income before provision for income taxes - Non-U.S.	16,052			10,941			11,062
Total income before provision for income taxes	$	187,549		$	143,779		$	160,400
_________________________ (1) Included income of $12.4 million, loss of $4.4 million and income of $547,000 attributable to third-party interests for the years ended December 31, 2019, 2018 and 2017, respectively.

Current tax expense:
U.S. federal	$	30,818		$	26,223		$	58,082
State and local	7,627			7,378			8,155
Non-U.S.	2,024			2,029			1,991
	40,469			35,630			68,228
Deferred tax (benefit) expense:
U.S. federal	(133		)	(748		)	(428		)
State and local	(74		)	(281		)	(412		)
Non-U.S.	303			(344		)	526
	96			(1,373		)	(314		)
Provision for income taxes	$	40,565		$	34,257		$	67,914

In connection with the enactment of the Tax Cuts and Jobs Act (the Tax Act), the Company recorded a provisional transition tax of $8.4 million at December 31, 2017, which reflected a one-time tax on deemed repatriated accumulated earnings and profits of the Company’s foreign subsidiaries. Based on refinement of the calculation, the Company adjusted its transition tax liability from $8.4 million at December 31, 2017 to $8.3 million during the second quarter of 2018. The transition tax, which is payable over eight years on an interest-free basis, was included as part of income tax payable on the Company's consolidated statements of financial condition at December 31, 2019 and December 31, 2018.

The transition tax liability is as follows:



Year Ending December 31,	Transition Tax Liability
2020	$	192
2021	665
2022	665
2023	1,246
2024	1,662
2025	2,077
	$	6,507

In addition to the transition tax, the Tax Act requires certain income earned by foreign subsidiaries, referred to as global intangible low-taxed income (GILTI), be included in the U.S. taxable income of the parent company. GILTI requires an accounting policy election to either (1) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred or (2) factor such amounts into the measurement of deferred taxes. The Company has made an accounting policy election to account for any additional tax resulting from the GILTI provisions in the year in which it is incurred. Based upon its calculation, the Company was not required to record any additional income tax expense attributable to the GILTI provisions for the year ended December 31, 2019.

Deferred income taxes represent the tax effects of the temporary differences between book and tax bases and are measured using enacted tax rates that will be in effect when such items are expected to reverse. The Company records a valuation allowance, when necessary, to reduce deferred tax assets to an amount that more likely than not will be realized.

Significant components of the Company’s net deferred income tax asset consist of the following:



	At December 31,
(in thousands)	2019			2018
Deferred income tax assets (liabilities):
Stock-based compensation	$	5,310		$	4,915
Realized losses on investments	4,218			1,539
Dividend equivalents on unvested restricted stock units	1,725			1,734
Net unrealized (gains) losses on investments	(1,632		)	2,512
Deferred compensation	290			78
Deferred rent	1,205			1,452
Other	(824		)	(760		)
Subtotal	10,292			11,470
Less: valuation allowance	(3,201		)	(4,270		)
Deferred income tax asset—net	$	7,091		$	7,200

The Company had capital loss carryforwards of approximately $17,027,000 and $6,181,000 for the years ended December 31, 2019 and 2018 which, if unused, will expire in years 2020 to 2024. The valuation allowance on the net deferred income tax asset decreased by approximately $1,069,000 during the year ended December 31, 2019.

At December 31, 2019, the Company had approximately $12,880,000 of total gross unrecognized tax benefits. Of this total, approximately $9,830,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the Company’s effective tax rate in future periods. The Company believes it is reasonably possible that it will reduce its net unrecognized tax benefits by $5,974,000 within the next twelve months due to the expected conclusion of jurisdictional reviews and the lapse of the statute of limitations on certain positions.

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



(in thousands)	Liability for Unrecognized Tax Benefits
Gross unrecognized tax benefits balance at January 1, 2017	$	7,852
Addition for tax positions of current year	1,724
Addition for tax positions of prior years	6,624
Reduction of tax positions from prior years	(3,794		)
Gross unrecognized tax benefits balance at December 31, 2017	$	12,406
Addition for tax positions of current year	2,233
Reduction of tax positions from prior years	(2,602		)
Gross unrecognized tax benefits balance at December 31, 2018	$	12,037
Addition for tax positions of current year	2,430
Addition for tax positions of prior years	133
Reduction of tax positions from prior years	(1,720		)
Gross unrecognized tax benefits balance at December 31, 2019	$	12,880

The Company records potential interest and penalties related to uncertain tax positions in the provision for income taxes. At December 31, 2019 and 2017, the Company had approximately $3,179,000 and $2,519,000, respectively, in potential interest and penalties associated with uncertain tax positions.

The tax years 2013 through 2019 remain open to examination by various taxing jurisdictions.

A reconciliation of the Company’s statutory federal income tax rate and the effective tax rate is as follows:



	Years Ended December 31,
	2019		2018		2017
U.S. statutory tax rate	21.0	%	21.0	%	35.0	%
State and local income taxes, net of federal income taxes	3.4	%	3.8	%	3.1	%
Unrecognized tax benefit adjustments	(1.0	)%	(1.0	)%	(1.9	)%
Foreign operations tax differential	(0.5	)%	0.3	%	(1.4	)%
Non-deductible (gains) losses on investments	(1.6	)%	0.2	%	0.2	%
Non-taxable (gains) losses on investments	0.9	%	0.1	%	(0.2	)%
Tax Act	—	%	(0.1	)%	8.0	%
Other	1.0	%	(1.2	)%	(0.3	)%
Effective income tax rate	23.2	%	23.1	%	42.5	%