14. Income Taxes

The provision for income taxes consists of the following:


	Year Ended December 31,
	2012			2011			2010
	(Dollars in millions)
Current
Federal income tax	$	5.1		$	—		$	—
State and local income tax		7.8			7.2			6.0
Foreign income tax		34.1			27.8			15.4

Subtotal		47.0			35.0			21.4
Deferred
Federal income tax		(8.3	)		—			—
State and local income tax		(3.6	)		(2.5	)		—
Foreign income tax		5.3			(4.0	)		(1.1	)

Subtotal		(6.6	)		(6.5	)		(1.1	)
Total provision for income taxes	$	40.4		$	28.5		$	20.3

Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates in effect for the year in which the differences are expected to reverse.

A summary of the tax effects of the temporary differences is as follows:


	As of December 31,
	2012		2011
	(Dollars in millions)
Deferred tax assets
Net operating loss carry forward	$	—	$	0.4
Tax basis goodwill and intangibles		39.7		—
Depreciation and amortization		10.3		3.0
Deferred restricted common unit compensation		9.2		—
Accrued compensation		13.1		10.3
Other		9.1		4.3

Total deferred tax assets	$	81.4	$	18.0

Deferred tax liabilities
Intangible assets^(a)	$	18.9	$	15.1
Unrealized appreciation on investments		54.4		33.0
Other		2.1		0.2

Total deferred tax liabilities	$	75.4	$	48.3

Net deferred tax assets (liabilities)	$	6.0	$	(30.3	)

(a)	As of December 31, 2012, $14.3 million of deferred tax liabilities were offset and presented as a single deferred tax asset amount on the Partnership’s balance sheet.

The Partnership had $67.1 million and $18.0 million in deferred tax assets as of December 31, 2012 and 2011, respectively. These deferred tax assets resulted primarily from the CalPERS exchange (see Note 1) and temporary differences between the financial statement and tax bases of depreciation on fixed assets and accrued compensation on lower-tier partnerships. The realization of the deferred tax assets is dependent on the Partnership’s future taxable income before deductions related to the establishment of its deferred tax assets. The deferred tax asset balance is comprised of a portion that would be realized in connection with future ordinary income and a portion that would be realized in connection with future capital gains. At this time, the Partnership’s historical and projected ordinary income and capital gains, in the form of guaranteed management contracts and the reversal of taxable temporary differences, indicate that it is more likely than not that the benefits from all deferred tax assets will be realized. Therefore, the Partnership has determined that no valuation allowance is needed at December 31, 2012.

The Partnership has recorded a significant deferred tax asset for the future amortization of tax basis intangible assets as a result of the CalPERS exchange. The amortization period for these tax basis intangibles is 15 years and accordingly, the related deferred tax assets will reverse over the same period. The Partnership considered the 15 year amortization period of the tax basis intangibles in evaluating whether it should establish a valuation allowance and also considered significant recurring U.S. GAAP expenses that do not provide a corresponding reduction in taxable income. The Partnership’s short-term and long-term projections anticipate positive U.S. GAAP income. In addition, the Partnership’s projection of future taxable income includes the effects of certain contracts in place which will result in taxable income and reversing taxable temporary differences. These differences will reverse substantially in the same period and jurisdiction and are of the same character as the temporary differences giving rise to the deferred tax asset. Based upon this positive evidence, the Partnership has concluded it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is needed at December 31, 2012.

The Partnership had deferred tax liabilities of $61.1 million and $48.3 million at December 31, 2012 and 2011, respectively, which primarily related to unrealized appreciation on the Partnership’s investments in the U.S. and in the Netherlands via the AlpInvest acquisition. Deferred tax liabilities related to unrealized appreciation were also recorded for outside tax basis differences as a result of the Partnership’s investment in Carlyle Holdings (see Note 1). The deferred tax liabilities related to intangible assets were recorded as part of the Partnership’s business acquisitions.

The following table reconciles the provision for income taxes to the U.S. Federal statutory tax rate:


	Year Ended December 31,
	2012			2011			2010
Statutory U.S. federal income tax rate		35.00	%		35.00	%		35.00	%
Income passed through to common unitholders and non-controlling interest holders^(b)		(34.58	%)		(32.72	%)		(33.89	%)
Unvested Carlyle Holdings partnership units		1.72	%		—			—
Foreign income taxes		(0.41	%)		(0.27	%)		(0.15	%)
State and local income taxes		0.20	%		0.40	%		0.41	%
Interest expense		(0.10	%)		—			—
Other adjustments		(0.17	%)		—			—

Effective income tax rate^(c)		1.66	%		2.41	%		1.37	%

(b)

The Partnership is organized as a series of pass through entities pursuant to the United States Internal Revenue Code. As such, the Partnership is not responsible for the tax liability due on certain income earned during the year. Such income is taxed at the unitholder and non-controlling interest holder level, and any income tax is the responsibility of the unitholders and is paid at that level.

(c)	The effective income tax rate is calculated on Income (Loss) Before Provision (Benefit) for Taxes.

Under U.S. GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Partnership has recorded a liability for uncertain tax positions of $17.5 million as of December 31, 2012 and 2011, which is reflected in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. These balances include $5.1 million and $3.9 million as of December 31, 2012 and 2011, related to interest and penalties associated with uncertain tax positions. If recognized, the entire amount of uncertain tax positions would be recorded as a reduction in the provision for income taxes. The total expense for interest and penalties related to unrecognized tax benefits amounted to $1.4 million, $1.3 million and $1.5 million for the years ended December 31, 2012, 2011 and 2010, respectively.

In the normal course of business, the Partnership is subject to examination by federal and certain state, local and foreign tax regulators. As of December 31, 2012, the Partnership’s U.S. federal income tax returns for the years 2009 through 2011 are open under the normal three-year statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2008 to 2011. Foreign tax returns are generally subject to audit from 2005 to 2011. Certain of the Partnership’s foreign subsidiaries are currently under audit by foreign tax authorities.

The Partnership does not believe that the outcome of these audits will require it to record reserves for uncertain tax positions or that the outcome will have a material impact on the consolidated financial statements. The Partnership does not believe that it has any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.