Income Taxes

The provision for income taxes consists of the following:



	Year Ended December 31,
	2015			2014			2013
	(Dollars in millions)
Current
Federal income tax	$	0.7		$	3.2		$	2.2
State and local income tax	4.9			8.2			5.2
Foreign income tax	27.4			54.1			44.0
Subtotal	33.0			65.5			51.4
Deferred
Federal income tax	(36.7		)	(5.2		)	(1.5		)
State and local income tax	(2.6		)	2.9			8.7
Foreign income tax	8.4			13.6			37.6
Subtotal	(30.9		)	11.3			44.8
Total provision for income taxes	$	2.1		$	76.8		$	96.2

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,
	2015			2014
	(Dollars in millions)
Deferred tax assets
Federal foreign tax credit	$	7.7		$	3.8
State net operating loss carry forwards	0.5			3.6
Tax basis goodwill and intangibles	154.1			99.4
Depreciation and amortization	58.2			38.6
Deferred restricted common unit compensation	12.9			12.6
Accrued compensation	28.3			37.6
Other	5.2			0.6
Deferred tax assets before valuation allowance	266.9			196.2
Valuation allowance	(14.1		)	(29.7		)
Total deferred tax assets	$	252.8		$	166.5
Deferred tax liabilities ⁽¹⁾
Intangible assets	$	7.8		$	19.4
Unrealized appreciation on investments	126.3			126.3
Other	2.8			2.0
Total deferred tax liabilities	$	136.9		$	147.7
Net deferred tax assets (liabilities)	$	115.9		$	18.8


(1)	As of December 31, 2015 and 2014, $33.4 million and $35.5 million, respectively, of deferred tax liabilities were offset and presented as a single deferred tax asset amount on the Partnership’s balance sheet.

As of December 31, 2015, the Company has cumulative net operating loss carry forwards of approximately $47.8 million for separate state tax jurisdictions, which will be available to offset future taxable income. If not used, a portion of these carry forwards will expire in 2033 and years forward. As of December 31, 2015, the Company had a federal foreign tax credit (“FTC”) carryforward of $7.7 million. The FTCs are related to taxes paid in various foreign jurisdictions and if not utilized a portion will expire in 2025 and years forward.

The Partnership had $219.4 million and $131.0 million in deferred tax assets as of December 31, 2015 and 2014, respectively. These deferred tax assets resulted primarily from future amortization of tax basis intangible assets generated from exchanges covered by the Tax Receivable Agreement (see Note 2) and acquisitions by the Partnership 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.

The Partnership evaluated various evidence in determining the ultimate realizability of its deferred tax assets including the character and timing of projected future taxable income. During 2015 and 2014, a Partnership entity subject to entity level income tax in certain states incurred a significant tax loss. Management evaluated specific factors associated with the realizability of its net operating losses and the entity’s deferred tax assets and determined that it is more likely than not that the Partnership will not realize these tax assets. Additionally, the Partnership determined that a portion of the US federal FTC carryforward earned in 2014 and 2015 will not ultimately be realized due to federal limitations on FTC utilization. As of December 31, 2015 and 2014, the Partnership has established a valuation allowance of $14.1 million and $29.7 million, respectively, for these items. For all other deferred tax assets, the Partnership has concluded it is more likely than not that they will be realized and that a valuation allowance is not needed at December 31, 2015.

The Partnership had deferred tax liabilities of $103.5 million and $112.2 million at December 31, 2015 and 2014, respectively, which primarily relate to unrealized appreciation on the Partnership’s investments in the U.S. and in the Netherlands. 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 Partnership’s income tax expense was $2.1 million, $76.8 million and $96.2 million for the years ended December 31, 2015, 2014 and 2013, respectively. The following table reconciles the provision for income taxes to the U.S. Federal statutory tax rate:



	Year Ended December 31,
	2015		2014		2013
Statutory U.S. federal income tax rate	35.00	%	35.00	%	35.00	%
Income passed through to common unitholders and non-controlling interest holders⁽¹⁾	(37.24	)%	(28.56	)%	(29.23	)%
Unvested Carlyle Holdings partnership units	1.87	%	2.92	%	2.03	%
Foreign income taxes	(1.78	)%	(1.90	)%	(1.88	)%
State and local income taxes	4.13	%	0.25	%	0.17	%
Valuation allowance establishment impacting provision for income taxes	(3.88	)%	0.43	%	1.50	%
Other adjustments	2.42	%	(0.40	)%	(0.93	)%
Effective income tax rate⁽²⁾	0.52	%	7.74	%	6.66	%


(1)	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.


(2)	The effective income tax rate is calculated on income before provision for income 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 $20.3 million and $18.7 million as of December 31, 2015 and 2014, respectively, which is reflected in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. These balances include $7.1 million and $4.9 million as of December 31, 2015 and 2014, related to interest and penalties associated with uncertain tax positions. If recognized, $16.9 million of uncertain tax positions would be recorded as a reduction in the provision for income taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of penalties and interest, is as follows:



	As of December 31,
	2015			2014
	(Dollars in millions)
Balance at January 1	$	13.8		$	9.3
Additions based on tax positions related to current year	—			3.7
(Reductions) additions for tax positions of prior years	(0.6		)	3.3
Reductions due to lapse of statute of limitations	—			(2.5		)
Balance at December 31	$	13.2		$	13.8

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, 2015, the Partnership’s U.S. federal income tax returns for the years 2012 through 2014 are open under the normal three years statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2011 to 2014. Foreign tax returns are generally subject to audit from 2008 to 2014. Certain of the Partnership’s affiliates are currently under audit by federal, state and 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.