The Sculptor Operating Partnerships are partnerships for U.S. federal income tax purposes. The Registrant was a partnership for U.S. federal income tax purposes until the Corporate Classification Change on April 1, 2019. Prior to the Corporate Classification Change, only a portion of the income the Company earned has been subject to corporate-level income taxes in the United States and foreign jurisdictions.

As a result of the Corporate Classification Change, the Company recognized an initial $5.6 million of additional tax expense during the second quarter of 2019. Had the Company been treated as a corporation in prior periods presented herein, there would not have been a material change in income tax expense. Following the Corporate Classification Change, generally all of the income the Registrant earns will be subject to corporate-level income taxes in the United States allowing us to realize a portion of our deferred tax assets on an accelerated basis as compared to under our prior structure.

The amount of incentive income the Company earns in a given year, the resultant flow of revenues and expenses through the Company’s legal entity structure, the effect that changes in the Class A Share price may have on the ultimate deduction the Company is able to take related to the settlement of RSUs, and any change in future enacted income tax rates may have a significant impact on the Company’s income tax provision and effective income tax rate.

The Company’s income tax provision and related income tax assets and liabilities are based on, among other things, an estimate of the impact of the Corporate Classification Change, inclusive of an analysis of tax basis and state tax implications of certain partnerships and their underlying assets and liabilities as of April 1, 2019. The Company’s estimate is based on the most recent information available; however, the impact of the conversion cannot be finally determined until the Company’s 2019 tax returns have been finalized. The Company does not currently expect such information to become available until 2020. The tax basis and state impact of the partnerships and their underlying assets and liabilities are based on estimates subject to finalization of the Company’s tax returns, and the impact of the Corporate Classification Change may differ, possibly materially, from the current estimates described herein.

On December 22, 2017, the Tax Cuts and Jobs Act (“the TCJA”) was signed into law. The TCJA includes a broad range of tax reforms including a reduction in the corporate income tax rate to 21% from 35% effective January 1, 2018. The Company recognized the tax effects of the TCJA during the three months ended December 31, 2017, and recorded $280.8 million in deferred tax expense related solely to the impact of the TCJA. The $280.8 million in deferred tax expense recorded in 2017 related to the TCJA was comprised of $190.4 million of deferred tax expense due to the remeasurement of deferred tax assets at the 21% tax rate, and $90.4 million of additional tax expense related to the change in the tax receivable agreement liability as a result of the reduction in the corporate tax rate. Accounting for the TCJA was completed as of December 31, 2018, there were no material adjustments recorded in 2018 related to the original impact recorded for the TCJA in 2017.


	Year Ended December 31,
	2019		2018		2017

	(dollars in thousands)
Current:
Federal income taxes	$	(370)	$	1	$	103
State and local income taxes	1,702		1,165		2,172
Foreign income taxes	5,845		2,735		2,520
	7,177		3,901		4,795
Deferred:
Federal income taxes	16,621		3,304		322,162
State and local income taxes	10,272		5,736		(9,828)
Foreign income taxes	42		(441)		430
	26,935		8,599		312,764
Total Provision for Income Taxes	$	34,112	$	12,500	$	317,559

The foreign income tax provision was calculated on $17.7 million, $8.2 million and $21.3 million of pre-tax income generated in foreign jurisdictions for the years ended December 31, 2019, 2018 and 2017, respectively.

The following table presents the Company’s deferred income tax assets and liabilities before the impact of offsetting deferred income tax assets and liabilities within the same legal entity and tax jurisdiction:


	December 31, 2019		December 31, 2018

	(dollars in thousands)
Deferred Income Tax Assets:
Tax goodwill	$	176,244	$	234,437
Net operating loss	86,644		96,524
Investments in partnerships	41,865		19,607
Tax credit carryforwards	15,160		15,550
Employee compensation	1,183		1,027
Other	1,624		869
	322,720		368,014
Valuation allowance	(11,083)		(11,959)
Total Deferred Income Tax Assets	$	311,637	$	356,055

Total Deferred Income Tax Liabilities	$	1,080	$	1,030

The majority of the Company’s deferred income tax assets relate to tax goodwill in the United States that arose in connection with the Company’s initial public offering and concurrent private Class A Share offering in 2007 (collectively, the “2007 Offerings”), as well as subsequent exchanges of Group A Units for Class A Shares. These deferred income tax assets are derived from goodwill recognized for tax purposes that are subsequently amortized and result in future taxable deductions and cash savings to the Company. The Company entered into a tax receivable agreement to pay a portion of these tax savings to the

Company’s executive managing directors and the Ziffs (as defined in Note 18). The tax goodwill amounts presented above include the increases that these tax receivable agreement payments will have on future tax goodwill. See Note 19 for additional information regarding the tax receivable agreement.


	Year Ended December 31,
	2019		2018		2017

	(dollars in thousands)
Beginning balance	$	11,959	$	12,028	$	7,798
Additions charged to income taxes expense	—		497		6,592

Deductions	(876)		(566)		(2,362)
Ending Balance	$	11,083	$	11,959	$	12,028

The Company has determined that it may not realize certain foreign income tax credits within the limited carryforward period available. Accordingly, a valuation allowance has been established for these items. For the periods presented above, additions relate to changes to the Company’s forecasted realizability of existing foreign tax credits and deductions are a result of a reduction in available foreign income tax credits.

As of December 31, 2019, the Company had federal income tax credit carryforwards of approximately $14.7 million that, if not used, will expire between 2020 and 2026. As of December 31, 2019, the Company had $243.1 million of net operating losses available to offset future taxable income for federal income tax purposes that will expire between 2030 and 2037, and $71.4 million of net operating losses available to be carried forward without expiration. Additionally, $153.5 million of net operating losses are available to offset future taxable income for state income tax purposes and $149.7 million for local income tax purposes that will expire between 2035 and 2039.


	Year Ended December 31,
	2019		2018		2017
Statutory U.S. federal income tax rate	21.00	%	21.00	%	35.00	%
Income passed through to noncontrolling interests	-14.68	%	-15.92	%	-11.13	%
Nondeductible amortization of Partner Equity Units	108.30	%	-1.09	%	0.73	%
State and local income taxes	69.91	%	-16.53	%	4.42	%
RSU excess deferred income tax write-off	28.58	%	-11.33	%	0.50	%
Foreign income taxes	42.89	%	-6.32	%	0.63	%
Income not subject to entity level tax	-19.04	%	4.21	%	-4.54	%
Return-to-provision adjustment	-2.41	%	-3.57	%	-0.30	%
Tax effects of income recorded to equity in connection with the Recapitalization	-11.80	%	—	%	—	%
Nondeductible transaction costs	15.91	%	-3.52	%	—	%
Nondeductible interest expense	21.54	%	—	%	—	%
Foreign tax credits and deductions	-11.85	%	-0.77	%	1.88	%
Impact of federal tax reform	—	%	—	%	40.34	%
Other, net	0.15	%	-0.50	%	-0.24	%
Effective Income Tax Rate	248.50	%	-34.34	%	67.29	%

The Company files income tax returns with the U.S. federal government and various state and local jurisdictions, as well as foreign jurisdictions. The income tax years under examination vary by jurisdiction. In general, the Company has not been subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2014; however, certain subsidiaries have not been subject to income tax examinations for years prior to 2012 for state and local and 2007 for foreign jurisdictions.

The Company recognizes tax benefits for amounts that are “more likely than not” to be sustained upon examination by tax authorities. For uncertain tax positions in which the benefit to be realized does not meet the “more likely than not” threshold, the Company establishes a liability, which is included within other liabilities in the consolidated balance sheets.

The Company did not accrue interest or penalties related to uncertain tax positions. As of December 31, 2019, the Company does not believe that there will be a significant change to the uncertain tax positions during the next 12 months. The amount of the Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate was $4.8 million as of December 31, 2019.