Note 7-Income Taxes

The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. Neither it nor the Company's other consolidated subsidiaries have made a provision for federal or state income taxes because it is the individual responsibility of each of these entities' members (including the Company) to separately report their proportionate share of the respective entity's taxable income or loss. The operating company has made a provision for New York City UBT. The Company, as a "C" corporation under the Internal Revenue Code, is liable for federal, state and local taxes on the income derived from its economic interest in its operating company, which is net of UBT. Correspondingly, in its consolidated financial statements, the Company reports both the operating company's provision for UBT, as well as its provision for federal, state and local corporate taxes.

The components of the income tax expense are as follows:

	For the Three						For the Six
	Months Ended June 30,						Months Ended June 30,
	2012			2011			2012			2011
	(in thousands)

Current Provision:
Unincorporated Business Taxes	$	578		$	737		$	1,169		$	1,505
Local Corporate Tax		-			-			-			-
State Corporate Tax		-			-			-			-
Federal Corporate Tax		-			-			-			-
Total Current Provision	$	578		$	737		$	1,169		$	1,505

Deferred Provision:
Unincorporated Business Taxes	$	(27	)	$	(38	)	$	15		$	(39	)
Local Corporate Tax		62			87			139			164
State Corporate Tax		110			153			246			289
Federal Corporate Tax		365			525			834			993
Total Deferred Provision	$	510		$	727		$	1,234		$	1,407

Change in Valuation Allowance		446			(1,980	)		(623	)		(2,845	)

Total Income Tax Expense/(Benefit)	$	1,534		$	(516	)	$	1,780		$	67

The Income Taxes Topic of the FASB ASC establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax return positions in financial statements. It is the Company's policy to recognize accrued interest, and penalties associated with uncertain tax positions in Income Tax Expense/(Benefit) on the consolidated statement of operations. For the three and six months ended June 30, 2012 and 2011, no such expenses were recognized. As of June 30, 2012 and December 31, 2011, no such accruals were recorded.

The Company and the operating company are generally no longer subject to U.S. federal or state and local income tax examinations by tax authorities for any year prior to 2008. All tax years subsequent to, and including, 2008 are considered open and subject to examination by tax authorities.

The acquisition of the operating company Class B units, noted below, has allowed the Company to make an election under Section 754 of the Internal Revenue Code ("Section 754") to step up its tax basis in the net assets acquired. This step up is deductible for tax purposes over a 15-year period. Based on the net proceeds of the initial public offering and tax basis of the operating company, this election gave rise to an initial deferred tax asset of approximately $68.7 million.

Pursuant to a tax receivable agreement signed between the members of the operating company and the Company, 85% of the cash savings generated by this election will be distributed to the selling and converting shareholders upon the realization of this benefit.

If the Company exercises its right to terminate the tax receivable agreement early, the Company will be obligated to make an early termination payment to the selling and converting shareholders, based upon the net present value (based upon certain assumptions and deemed events set forth in the tax receivable agreement) of all payments that would be required to be paid by the Company under the tax receivable agreement. If certain change of control events were to occur, the Company would be obligated to make an early termination payment.

As discussed further in Note 11, Shareholders' Equity, below, on March 28, 2011, certain of the operating company's members exchanged an aggregate of 536,528 of their Class B units for an equivalent number of shares of Company Class A common stock. The Company elected to step up its tax basis in the incremental assets acquired in accordance with Section 754. Based on the exchange-date fair values of the Company's common stock and the tax basis of the operating company, this election gave rise to a $2.4 million deferred tax asset associated with this exchange and a corresponding $2.0 million liability to selling and converting shareholders on March 28, 2011. The Company assessed the realizability of the deferred tax asset with this exchange and determined that a portion of its benefits would go unutilized. Consequently, the Company established a $2.1 million valuation allowance on March 28, 2011 to reduce the deferred tax asset to an amount more likely than not to be realized. This deferred tax asset remains available to the Company and can be used to reduce taxable income in future years. The Company similarly reduced the associated liability to selling and converting shareholders by $1.8 million at March 28, 2011, to reflect this change in the estimated realization of these assets. As required by the Income Taxes Topic of the FASB ASC, the Company recorded the effects of these transactions in equity.

During the three months ended June 30, 2012, the Company's valuation allowance was increased by approximately $0.4 million, due to revised estimates of future taxable income. For the six months ended June 30, 2012, the Company's valuation allowance was reduced by approximately $0.6 million due to revised estimates of future taxable income. To reflect this change in the estimated realization of the asset and its liability for future payments, the Company decreased its liability to selling and converting shareholders by $0.3 million for the three months ended June 30, 2012, and, increased its liability to selling and converting shareholders by $0.7 million for the six months ended June 30, 2012. During the three and six months ended June 30, 2011, after giving effect to the exchange discussed earlier, the Company's valuation allowance was reduced by approximately $2.0 million and $2.8 million, respectively, due to revised estimates of future taxable income. To reflect this change in the estimated realization of the asset, the Company correspondingly increased its liability to selling and converting shareholders by $2.1 million and $2.3 million, respectively for the three and six months ended June 30, 2011. The effects of these changes to the deferred tax asset and liability to selling and converting shareholders were recorded as a component of the income tax expense and other expense, respectively, on the consolidated statements of operations. As of June 30, 2012 and December 31, 2011, the net values of all deferred tax assets were approximately $8.3 million and $8.8 million, respectively.

The change in the Company's deferred tax assets, net of valuation allowance, for the three and six months ended June 30, 2012 is summarized as follows:

						Valuation
	Section 754			Other		Allowance			Total
	(in thousands)

Balance at December 31, 2011	$	66,224		$	3,661	$	(61,050	)	$	8,835
Deferred Tax Expense		(823	)		158		-			(665	)
Change in Valuation Allowance		-			-		1,069			1,069
Balance at March 31, 2012	$	65,401		$	3,819	$	(59,981	)	$	9,239
Deferred Tax Expense		(835	)		320		-			(515	)
Change in Valuation Allowance		-			-		(446	)		(446	)
Balance at June 30, 2012	$	64,566		$	4,139	$	(60,427	)	$	8,278

The change in the Company's deferred tax liabilities, which is included in other liabilities on the Company's consolidated statements of financial condition, for the three and six months ended June 30, 2012, is summarized as follows:

	Total
	(in thousands)

Balance at December 31, 2011	$	(13	)
Deferred Tax Expense		(59	)
Balance at March 31, 2012	$	(72	)
Deferred Tax Expense		5
Balance at June 30, 2012	$	(67	)

The change in the Company's deferred tax assets, net of valuation allowance, for the three and six months ended June 30, 2011 is summarized as follows:

						Valuation
	Section 754			Other		Allowance			Total
	(in thousands)

Balance at December 31, 2010	$	65,468		$	2,797	$	(59,431	)	$	8,834
Deferred Tax Expense		(777	)		96		-			(681	)
Unit Exchange		2,381			-		(2,075	)		306
Change in Valuation Allowance		-			-		865			865
Balance at March 31, 2011	$	67,072		$	2,893	$	(60,641	)	$	9,324
Deferred Tax Expense		(816	)		71		-			(745	)
Change in Valuation Allowance		-			-		1,980			1,980
Balance at June 30, 2011	$	66,256		$	2,964	$	(58,661	)	$	10,559

The change in the Company's deferred tax liabilities for the three and six months ended June 30, 2011 is summarized as follows:

	Total
	(in thousands)

Balance at December 31, 2010	$	(51	)
Deferred Tax Expense		1
Balance at March 31, 2011	$	(50	)
Deferred Tax Expense		19
Balance at June 30, 2011	$	(31	)

As of June 30, 2012 and December 31, 2011, the net values of the liability to selling and converting shareholders were approximately $9.8 million and $11.2 million, respectively.