9. INCOME TAXES

The provision for income taxes consists of the following:

	Year Ended December 31,
	2012			2011			2010
Current provision (benefit):
Federal	$	—		$	(7,001	)	$	5,501
Foreign	11,119			13,935			22,256
State and local	579			579			759
Total current provision	11,698			7,513			28,516
Deferred (benefit) provision:
Federal	1,158			(3,681		)	(20,505		)
Foreign	(4,469		)	(1,749		)	1,987
State and local	—			564			(4,114		)
Total deferred (benefit)	(3,311		)	(4,866		)	(22,632		)
Total provision for income taxes	$	8,387		$	2,647		$	5,884

The Company had pre-tax income from foreign operations of $31,571, $37,589 and $81,768 for the years ended December 31, 2012, 2011 and 2010, respectively. Pre-tax (loss) from domestic operations was $(32,828), $(37,507) and $(49,965) for the years ended December 31, 2012, 2011 and 2010, respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and 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 gross deferred tax assets and liabilities are set forth below:

	December 31,
	2012			2011
Deferred tax assets:
Share-based compensation	$	16,718		$	19,246
Net operating loss carryforwards	43,631			40,391
Foreign deferred items	1,791			3,398
Capitalized R&D expenses	8,561			—
Foreign tax credits	10,944			1,192
General business credit	3,485			3,020
Accrued reserve	3,337			5,274
Prepaid expenses	496			4,076
Unrealized loss on investment(1)	6,626			969
Other, net(1)	1,829			1,715
Valuation allowance	(29,435		)	(15,677		)
Total deferred tax assets	$	67,983		$	63,604
Deferred tax liabilities:
Depreciation and amortization	$	(13,247	)	$	(10,009	)
Intangible amortization	(21,113		)	(20,940		)
Total deferred tax liabilities	$	(34,360	)	$	(30,949	)
Net deferred tax assets	$	33,623		$	32,655

(1) Balances as of December 31, 2011 have been reclassified for comparative presentation.

As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2012 and 2011 that arose directly from tax deductions related to equity compensation in excess of compensation expense recognized for financial reporting purposes. Stockholders’ Equity will be increased by $2,213 when such deferred tax assets are ultimately realized. The Company uses tax law ordering when determining when excess tax benefits have been realized.

Cumulative undistributed earnings of foreign subsidiaries were approximately $330,108 at December 31, 2012. U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. To the extent these earnings are repatriated, the Company does not expect a material U.S. tax charge to arise. The Company considers the historic undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. Management has concluded that certain earnings commencing from January 1, 2013 will ultimately be repatriated and will provide U.S. tax on those amounts.

The deferred tax assets relating to foreign deferred items listed above consist primarily of depreciation and amortization, and deferred compensation. The valuation allowance relates primarily to the inability to utilize net operating losses and foreign tax credits in various tax jurisdictions. At December 31, 2012, the Company established a valuation allowance for the current year’s state and local net operating loss, to the extent that it is more likely than not unrealizable. The Company had U.S. federal net operating loss carryforwards of $57,341, U.S. state and local net operating loss carryforwards of $95,587 and foreign net operating loss carryforwards of $52,314. The U.S. amounts are subject to annual limitations on utilization and will begin to expire in 2018. The foreign amounts are subject to annual limitations on utilization and will generally begin to expire in 2013. Further, the Company has $10,944 of foreign tax credit carryforwards at December 31, 2012 that will begin to expire in 2013. The Company continues to monitor the realizability of these losses and believes it is more likely than not that the tax benefits associated with these losses will be realized to the extent a valuation allowance has not been established. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized and, when necessary, a valuation allowance is established. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

· future reversals of existing taxable temporary differences;

· future taxable income exclusive of reversing temporary differences and carryforwards;

· taxable income in prior carryback years; and

· tax planning strategies.

The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence, including, but not limited to, the following:

· the nature, frequency, and severity of any recent losses;

· the duration of statutory carryforward periods;

· historical experience with tax attributes expiring unused; and

· the Company’s estimated near- and medium-term financial outlook.

In making the determination of the realizability of these deferred tax assets the Company has identified certain prudent and feasible tax planning strategies that the Company will implement unless the need to do so is eliminated in the future. However, this determination is a judgment and could be impacted by further market fluctuations.

The corporate statutory U.S. federal tax rate was 35.0% for the three years presented. A reconciliation of the Company’s provision for income tax and the statutory tax rate is as follows:

	December 31,
	2012			2011			2010
Federal income tax provision (benefit) at statutory rate	$	(440	)	$	29		$	11,131
U.S. state and local income taxes, net of federal tax benefit	(1,616		)	(1,951		)	(2,353		)
U.S. valuation allowance (1)	4,344			3,094			—
Foreign operations (2)	(1,988		)	(992		)	(6,146		)
Non-deductible expenses	1,643			1,991			2,045
U.S. tax on foreign profits (3)	9,752			—			710
General business credit	(464		)	(464		)	(402		)
(Decreases) increases in unrecognized tax benefits, net	(2,230		)	(663		)	1,077
Net adjustment related to the reconciliation of income tax provision (benefit) accruals to tax returns	(614		)	1,428			(357		)
Other	—			175			179
Provision for income taxes	$	8,387		$	2,647		$	5,884

(1) Valuation allowance provided for deferred taxes related to state and local taxes, capital loss and charitable contribution carryforwards.

(2) Foreign rate differential adjusted for non-deductible expenses and valuation allowance.

(3) U.S. taxes associated with actual and deemed repatriations of earnings from our non-U.S. subsidiaries.

Income tax expense of approximately $2,213, $1,764 and $2,042 from the exercise of stock options and the vesting of RSUs was recorded directly to additional paid-in capital in 2012, 2011 and 2010, respectively.

Total unrecognized tax benefits (net of the federal benefit on state tax positions) as of December 31, 2012 were approximately $10,007, including interest of $1,050, all of which could affect the effective income tax rate in future periods. A reconciliation of the beginning and ending amount of unrecognized tax benefits, showing only items of movement, is as follows:

	Liability for Unrecognized Tax Benefits
Unrecognized tax benefits balance at December 31, 2009	$		10,773
Gross increases—current period tax positions	1,076
Lapse of statute of limitations	—
Unrecognized tax benefits balance at December 31, 2010	$	11,849
Gross increases—current period tax positions	—
Lapse of statute of limitations	(662			)
Unrecognized tax benefits balance at December 31, 2011	$	11,187
Gross increases—current period tax positions	—
Lapse of statute of limitations	(2,230			)
Unrecognized tax benefits balance at December 31, 2012	$	8,957

The Company is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as the U.K., and states in which the Company has significant business operations, such as New York. The Company is currently under examination by the IRS covering tax years 2004 — 2009. Also, the Company is currently at various levels of field examination with respect to audits with New York State and New York City for tax years 2006 — 2008. The Company has substantially concluded all U.S. federal, state and local income tax matters for years prior to 2004.

In the U.K., the Company is in discussion with tax authorities regarding whether certain compensation expenses were deductible by the Company in prior years. A portion of the compensation payment is held by a trustee and the Company may request, but not compel, the trustee to use the money to offset the cost to the Company of the potential tax liability, if any, arising from the disallowance of the deduction.

The Company believes that the resolution of tax matters will not have a material effect on the consolidated statements of financial condition of the Company, although a resolution could have a material impact on the Company’s consolidated statements of income for a particular future period and on the Company’s effective income tax rate for any period in which such resolution occurs. The Company has established a liability for unrecognized tax benefits that the Company believes is adequate in relation to the potential for additional assessments. Once established, the Company adjusts unrecognized tax benefits only when more information is available or when an event occurs necessitating a change.

The Company recognizes interest and penalties related to income tax matters in interest expense and other expense, respectively. As of December 31, 2012 and 2011, the Company had approximately $1,050 and $834, respectively, of accrued interest related to uncertain tax positions.