16.	INCOME TAXES

Lazard Ltd, through its subsidiaries, is subject to U.S. federal income taxes on all of its U.S. operating income, as well as on the portion of non-U.S. income attributable to its U.S. subsidiaries. In addition, Lazard Ltd, through its subsidiaries, is subject to state and local taxes on its income apportioned to various state and local jurisdictions. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes in foreign jurisdictions. Lazard Group is also subject to UBT attributable to its operations apportioned to New York City.

Substantially all of Lazard’s operations outside the U.S. are conducted in “pass-through” entities for U.S. income tax purposes. The Company provides for U.S. income taxes on a current basis for those earnings. The repatriation of prior earnings attributable to “non-pass-through” entities would not result in the recognition of a material amount of additional U.S. income taxes.

The components of the Company’s provision (benefit) for income taxes for the years ended December 31, 2016, 2015 and 2014, and a reconciliation of the U.S. federal statutory income tax rate to the Company’s effective tax rates for such years, are shown below.

	Year Ended December 31,
	2016		2015			2014
Current:
Federal	$	1,766	$	8,177		$	3,112
Foreign		54,253		78,086			61,143
State and local (primarily UBT)		4,090		4,970			5,519
Total current		60,109		91,233			69,774
Deferred:
Federal		50,602		(988,900	)		2,766
Foreign		1,354		(3,960	)		9,239
State and local		11,704		(107,925	)		3,623
Total deferred		63,660		(1,100,785	)		15,628
Total	$	123,769	$	(1,009,552	)	$	85,402

	Year Ended December 31,
	2016			2015			2014
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Income of noncontrolling interests		(0.3	)		13.8			(0.5	)
Foreign source income not subject to U.S. income tax		(9.3	)		419.4			(12.4	)
Foreign taxes		(0.1	)		(361.6	)		8.2
State and local taxes		3.0			522.2			1.8
Change in U.S. federal valuation allowance		(3.6	)		5477.0			(18.7	)
Other, net		(0.8	)		(31.5	)		3.0
Effective income tax rate (a)		23.9	%		6074.3	%		16.4	%

(a)

For the year ended December 31, 2015, the effective tax rate on “operating income (loss)” includes (i) the significant effect of the release of substantially all of our valuation allowance on deferred tax assets and the recognition of deferred tax assets associated with the recording of the tax receivable agreement obligation, as described below, and (ii) the negative impact on “operating income (loss)” as a result of the provision pursuant to the tax receivable agreement.

See Note 20 regarding “operating income (loss)” by geographic region.

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated statements of financial condition. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are as follows:

	December 31,
	2016			2015
Deferred Tax Assets:
Basis adjustments (a)	$	692,430		$	727,696
Compensation and benefits		197,750			204,780
Net operating loss and tax credit carryforwards		285,694			309,811
Depreciation and amortization		850			840
Other		53,895			36,154
Gross deferred tax assets		1,230,619			1,279,281
Valuation allowance		(69,593	)		(89,251	)
Deferred tax assets (net of valuation allowance)		1,161,026			1,190,030
Deferred Tax Liabilities:
Depreciation and amortization		26,539			17,629
Compensation and benefits		5,447			9,332
Goodwill		27,932			15,208
Other		34,499			28,370
Deferred tax liabilities		94,417			70,539
Net deferred tax assets	$	1,066,609		$	1,119,491

(a)	The basis adjustments recorded as of December 31, 2016 and 2015 are primarily the result of additional basis from acquisitions of interests, including the impact of recording the tax receivable agreement obligation during the year ended December 31, 2015.

As of December 31, 2014, the Company had a valuation allowance on substantially all of our deferred tax assets at that time. Certain of our tax-paying entities at which we have historically recorded significant valuation allowances were profitable on a cumulative basis for the three year period ended June 30, 2015. In assessing our valuation allowance as of June 30, 2015, we considered all available information, including the magnitude of recent and current operating results, the relatively long duration of statutory carryforward periods, our historical experience utilizing tax attributes prior to their expiration dates, the historical volatility of operating results of these entities and our assessment regarding the sustainability of their profitability. At that time, we concluded that there was a sufficient history of sustained profitability at these entities that it was more likely than not that these entities would be able to realize deferred tax assets. Accordingly, during the period ended June 30, 2015, we released substantially all of the valuation allowance against the deferred tax assets held by these entities.

As a result, during the year ended December 31, 2015, we recorded a deferred tax benefit of approximately $878,000. In addition, included in basis adjustments, we also recorded (i) a separate deferred tax benefit of approximately $378,000 that reflected the tax deductibility of payments under the tax receivable agreement and (ii) a deferred tax expense of approximately $161,000 relating to the reduction of a deferred tax asset as a result of the partial extinguishment of our tax receivable agreement obligation. See Note 18 for more information regarding our accrual under the tax receivable agreement in the second quarter of 2015 and the partial extinguishment of our tax receivable agreement obligation in the third quarter of 2015.

Certain of our tax-paying entities have individually experienced losses on a cumulative three year basis or have tax attributes that may expire unused. In addition, one of our tax paying entities has recorded a valuation allowance on substantially all of its deferred tax assets due to the combined effect of operating losses in certain subsidiaries of that entity as well as foreign taxes that together substantially offset any U.S. tax liability. Taking into account all available information, we cannot determine that it is more likely than not that deferred tax assets held by these entities will be realized. Consequently, we have recorded valuation allowances on $69,593 and $89,251 of deferred tax assets held by these entities as of December 31, 2016 and 2015, respectively.

Changes in the deferred tax assets valuation allowance for the years ended December 31, 2016, 2015 and 2014 was as follows:

	Year Ended December 31,
	2016			2015			2014
Beginning Balance	$	89,251		$	1,044,152		$	1,225,305
Credited to provision for income taxes		(15,981	)		(954,487	)		(203,051	)
Charged (credited) to other comprehensive income and other (a)		(3,677	)		(414	)		21,898
Ending Balance	$	69,593		$	89,251		$	1,044,152

(a)	2016 includes acquisition-related deferred tax assets offset by a valuation allowance in the amount of $2,271.

The Company had net operating loss and tax credit carryforwards for which related deferred tax assets of $285,694 were recorded at December 31, 2016 primarily relating to:

(i)

indefinite-lived carryforwards (subject to various limitations) of approximately $16,546, in Australia, Hong Kong, Singapore and Spain; and

(ii)

certain carryforwards of approximately $235,986 in the U.S., which begin expiring in 2029.

As a result of certain realization requirements regarding share-based incentive plan awards, certain deferred tax assets pertaining to tax deductions related to equity compensation in excess of compensation recognized for financial reporting that would otherwise have been recognized at December 31, 2016 and 2015 of $93,634 and $111,587, respectively, are not included in the deferred tax assets and liabilities table above. The impact of such excess tax deductions will be included in deferred tax assets upon adoption of new accounting guidance (see Note 3).

With few exceptions, the Company is no longer subject to income tax examination by foreign tax authorities and by U.S. federal, state and local tax authorities for years prior to 2012. While we are under examination in various tax jurisdictions with respect to certain open years, the Company does not expect that the result of any final determination related to these examinations will have a material impact on its financial statements. Developments with respect to such examinations are monitored on an ongoing basis and adjustments to tax liabilities are made as appropriate.

A reconciliation of the beginning to the ending amount of gross unrecognized tax benefits (excluding interest and penalties) for the years ended December 31, 2016, 2015 and 2014 is as follows:

	Year Ended December 31,
	2016			2015			2014
Balance, January 1 (excluding interest and penalties of $13,083, $13,004 and $12,200, respectively)	$	77,280		$	68,224		$	62,905
Increases in gross unrecognized tax benefits relating to tax positions taken during:
Prior years		5,891			-			2,837
Current year		18,438			22,212			18,698
Decreases in gross unrecognized tax benefits relating to:
Tax positions taken during prior years		(5,316	)		(621	)		(3,191	)
Settlements with tax authorities		(1,706	)		-			-
Lapse of the applicable statute of limitations		(16,191	)		(12,535	)		(13,025	)
Balance, December 31 (excluding interest and penalties of $15,392, $13,083 and $13,004, respectively)	$	78,396		$	77,280		$	68,224

Additional information with respect to unrecognized tax benefits is as follows:

	Year Ended December 31,
	2016		2015		2014
Unrecognized tax benefits at the end of the year that, if recognized, would favorably affect the effective tax rate (includes interest and penalties of $15,392, $13,083 and $13,004, respectively)	$	81,564	$	74,785	$	40,353
Unrecognized tax benefits that, if recognized, would not affect the effective tax rate	$	12,224	$	15,578	$	40,875
Interest and penalties recognized in current income tax expense (after giving effect to the reversal of interest and penalties of $3,143, $3,865 and $3,177, respectively)	$	2,309	$	79	$	804

The Company anticipates that it is reasonably possible that approximately $23,000 of unrecognized tax benefits, including interest and penalties recorded at December 31, 2016, may be recognized within 12 months as a result of the lapse of the statute of limitations in various tax jurisdictions.