Income Taxes

Components of the provision for income taxes consist of the following:



	Year Ended
	December 31, 2012			December 31, 2011			December 31, 2010
Current
Federal	$	10,508		$	4,142		$	6,502
Foreign	1,228			1,122			1,701
State and local	2,145			1,443			1,704
Total current expense	13,881			6,707			9,907

Deferred expense/(benefit)
Federal	5,598			7,169			3,864
Foreign	(628		)	(1,313		)	(952		)
State and local	1,171			1,278			684
Total deferred expense/(benefit)	6,141			7,134			3,596

Provision for income tax expense	$	20,022		$	13,841		$	13,503

Prior to its IPO, the Company had not been subject to U.S. federal income taxes as the predecessor entity was an LLC, but had been subject to the New York City Unincorporated Business Tax and certain other state and local taxes, including certain non-income tax fees in other jurisdictions where the Company had registered offices and conducted business. As a result of the IPO, the operating business entities of the Company were restructured and a portion of the Company's income is subject to U.S. federal, state, local and foreign income taxes and taxed at the prevailing corporate tax rates.

D&P Acquisitions complies with the requirements of the Internal Revenue Code that are applicable to limited liability companies (“LLCs”) that have elected to be treated as partnerships, which allow for the complete pass-through of taxable income or losses to D&P Acquisitions' unitholders, who are individually responsible for any federal tax consequences. Therefore, no federal tax provision is required in the D&P Acquisitions' consolidated financial statements in the periods prior to October 3, 2007. D&P Acquisitions is subject to certain state and local taxes, and its international subsidiaries are subject to tax in their jurisdictions.

A reconciliation of the U.S. statutory income tax rate to the Company's effective tax rate is as follows:



	Year Ended
	December 31, 2012		December 31, 2011		December 31, 2010
U.S. statutory tax rate	35.0	%	35.0	%	35.0	%
Increase due to state and local taxes	6.5	%	5.3	%	5.7	%
Foreign taxes	3.5	%	1.0	%	1.9	%
Effect of permanent differences	3.2	%	0.7	%	1.6	%
Rate benefit as an LLC	(4.2	)%	(9.3	)%	(11.0	)%
Prior year provision to actual adjustment	0.1	%	(0.6	)%	(1.7	)%
U.S. benefit on foreign deferred taxes	(0.9	)%	—	%	—	%
Reversal of valuation allowance	—	%	(0.3	)%	—	%
Effective tax rate	43.2	%	31.8	%	31.5	%

The Company's effective tax rate includes a rate benefit attributable to the fact that the Company's subsidiaries operate as a series of limited liability companies and other flow-through entities which are not subject to federal income tax. Accordingly, a portion of the Company's earnings are not subject to corporate level taxes. This favorable impact is partially offset by the impact of certain permanent items, primarily attributable to certain acquisition and corporate development expenses related to the pending merger in the year ended December 31, 2012 that are not deductible for tax purposes and certain compensation related expenses in the year ended December 31, 2011 that are not deductible for tax purposes. During the year ended December 31, 2010, the Company recorded discrete items that resulted in a benefit to income tax expense, including (i) an immaterial adjustment to correct the purchase accounting of a prior acquisition and (ii) provision to actual adjustments.

We consider the cumulative unremitted earnings of foreign subsidiaries to be indefinitely invested outside the United States. Of the total cash and cash equivalents at December 31, 2012, approximately $2,183 was generated from operations in foreign tax jurisdictions and is intended for use in our foreign operations. We do not rely on these unremitted earnings as a source of funds for our domestic business as we expect to have sufficient cash flow in the U.S. to fund our U.S. operational and strategic needs. Consequently, we have not provided for U.S. federal or state income taxes on these undistributed foreign earnings. While we do not anticipate changing our intention regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.

Income taxes payable were $2,688 and $5,473 at December 31, 2012 and 2011, respectively.

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 balance sheets. These temporary differences result in taxable or deductible amounts in future years. Details of the Company's deferred tax assets and liabilities are summarized as follows:



	December 31, 2012			December 31, 2011
Current deferred tax assets
Compensation and benefits	$	1,285		$	1,935
Accrued lease termination	1,582			1,313
Other	754			753
Total current deferred tax assets	3,621			4,001

Current deferred tax liabilities
Prepaid expenses	(1,740		)	(1,392		)
Compensation and benefits	(62		)	(64		)
Total current deferred tax liabilities	(1,802		)	(1,456		)
Net current deferred tax assets	1,819			2,545

Long-term deferred tax assets
Goodwill and other intangibles	147,968			108,122
Compensation and benefits	33,254			22,031
Foreign net operating losses	3,798			3,003
Deferred rent	2,572			1,930
Foreign tax credits	1,950			1,761
Other	2,446			1,501
Valuation allowance	(5,536		)	(4,349		)
Total long-term deferred tax assets	186,452			133,999

Long-term deferred tax liabilities
Goodwill and other intangibles	(21,330		)	(17,190		)
Property and equipment	(3,690		)	(611		)
Other	(93		)	(372		)
Total long-term deferred tax liabilities	(25,113		)	(18,173		)
Net long-term deferred tax assets	161,339			115,826

Total deferred tax assets and liabilities	$	163,158		$	118,371

The Company recognized net deferred tax assets related to differences between the financial reporting basis and the tax basis of the net assets of the Company. The valuation allowance primarily represents the tax benefits of certain foreign net operating loss carry forwards and other foreign deferred tax assets which may not be realized in future years. These losses are available on the carry forward basis in varying time frames in each jurisdiction ranging from five years to indefinitely. In addition, certain credit carry forwards will commence to expire in four to ten years unless utilized.

Based on the Company's historical taxable income and its expected future earnings, management has evaluated the uncertainty associated with booking tax benefits and has determined that the deferred tax assets, other than those offset by valuation allowances, will be realized as offsets to deferred tax liabilities and future taxable income.

The Company accounts for uncertainties in income tax positions in accordance with FASB ASC 740, Income Taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefit is summarized as follows:



Balance as of December 31, 2009	$	548
Additional based on tax positions related to the current year	115
Lapse of statute of limitations	(128		)
Balance as of December 31, 2010	535
Additional based on tax positions related to the current year	43
Lapse of statute of limitations	(155		)
Balance as of December 31, 2011	423
Reduction based on tax positions related to the current year	(19		)
Lapse of statute of limitations	(161		)
Balance as of December 31, 2012	$	243

The $243 of unrecognized tax benefit at December 31, 2012 would impact the effective tax rate if realized. The Company recognizes accrued interest related to unrecognized tax benefits in interest expense. The Company recognizes interest income and expense related to income taxes as a component of interest expense and penalties as a component of selling, general and administrative expenses.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. Duff & Phelps, LLC and D&P Acquisitions are open for federal income tax purposes from 2009 forward. These entities are not subject to federal income taxes as they are flow-through entities. The Company is open for federal income tax purposes beginning in 2009. With respect to state and local jurisdictions and countries outside of the United States, the Company and its subsidiaries are typically subject to examination for four to five years after the income tax returns have been filed. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to state, local or foreign audits.