Income Taxes

Upon completion of the Mergers, the Company became subject to U.S. corporate income taxes. The Company and its subsidiaries file a consolidated federal income tax return as well as combined state income tax returns in certain jurisdictions. In other jurisdictions, the Company and its subsidiaries will file separate company state and local income tax returns.

Prior to the Mergers, GETCO and the majority of its subsidiaries were treated as partnerships or disregarded entities for U.S. income tax purposes and, accordingly, were not subject to federal income taxes. Instead, former GETCO members were liable for federal income taxes on their proportionate share of taxable income; however, certain subsidiaries were subject to corporate income taxes related to the taxable income generated by their operations.

As described in Footnote 2 “Merger of GETCO and Knight”, following the Mergers on July 1, 2013 the Company recorded $65.5 million of deferred tax assets as a result of recording Knight’s assets and liabilities under the purchase method of accounting as well as recording the value of Knight’s NOLs and tax credit carryforwards as described below.

As a result of the Company becoming subject to U.S. corporate income taxes, the Company also recorded, upon the closing of the Mergers on July 1, 2013, a nonrecurring $103.5 million deferred tax benefit and corresponding deferred tax asset relating to GETCO's existing tax attributes. This deferred tax asset primarily relates to differences between GETCO’s book and tax bases in its intangible assets and its strategic investments.

The provision (benefit) for income taxes from continuing operations consists of (in thousands):



	For the year ended December 31,
	2014			2013			2012
Current:
U.S. federal	$	709		$	(194	)	$	(627	)
U.S. state and local	4,081			2,902			618
Non U.S.	(828		)	3,773			8,708
	$	3,962		$	6,481		$	8,699
Deferred:
U.S. federal	$	30,331		(106,996		)	1,771
U.S. state and local	(10,997		)	—			1,046
Non U.S.	(543		)	(599		)	(1,240		)
	$	18,791		$	(107,595	)	$	1,577

Provision (benefit) for income taxes	$	22,753		$	(101,114	)	$	10,276

The following table reconciles the U.S. federal statutory income tax to the Company's actual income tax from continuing operations (in thousands):



	For the year ended December 31,
	2014			2013			2014

U.S. federal statutory income tax expense	$	29,815		$	8,742		$	9,249
Income not subject to U.S. corporate income tax	—			(15,583		)	(7,095		)
U.S. state and local income taxes, net of U.S. federal income tax effect	(4,495		)	1,881			772
Deferred tax benefit resulting from the Company becoming subject to U.S. corporate income taxes	—			(103,499		)	—
Nondeductible expenses ⁽¹⁾	230			3,627			200
Foreign taxes	(1,371		)	3,603			7,468
Federal research & development tax credits	(1,241		)	—			—
Other, net	(185		)	115			(318		)
Income tax expense (benefit)	$	22,753		$	(101,114	)	$	10,276

⁽¹⁾Nondeductible expenses include nondeductible compensation and meals and entertainment.

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances recorded on the balance sheet dates are necessary in cases where management believes that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company’s net deferred tax assets are reported as Deferred tax asset, net on the Consolidated Statements of Financial Condition. At December 31, 2014, and December 31, 2013, the Company’s net deferred tax assets were $154.8 million and $175.6 million, respectively, and comprised the following:



	For the year ended December 31,
	2014			2013
Deferred tax assets:
Employee compensation and benefit plans	$	24,587		$	16,629
Fixed assets and other amortizable assets	82,882			90,130
Reserves	2,668			5,589
Valuation of investments	32,962			30,073
Net operating loss carryforwards, net	94,770			127,637
Less: Valuation allowance on net operating loss carryforwards	(15,238		)	(36,043		)
Total deferred tax assets	$	222,631		$	234,015

Deferred tax liabilities
Employee compensation and benefit plans	$	—		$	—
Fixed assets and other amortizable assets	26,244			29,077
Reserves	2,226			—
Valuation of investments	19,912			10,414
Reduction in foreign tax credit for Non-U.S. NOL carryforwards	19,490			18,885
Total deferred tax liabilities	67,872			58,376
Net deferred tax assets	$	154,759		$	175,639

Based on the weight of the positive and negative evidence considered, management believes that it is more likely than not that the Company will be able to realize its federal deferred tax assets in the future. With the exception of certain NOLs discussed below, the Company has not recorded any valuation allowance with respect to its federal deferred tax assets at December 31, 2014 or December 31, 2013. Management believes that positive evidence including the Company's history of sustainable profitability and its forecasts of future profitability outweighs the negative evidence. The Company has also recorded a partial valuation allowance against state and local deferred tax assets as it is more likely than not that the benefit of such items will not be realized due to limitations on utilization in the particular jurisdictions in which the Company operates.

At December 31, 2014 and December 31, 2013, the Company had total U.S. federal NOL carryforwards of $133.5 million and $194.5 million, respectively, of which $28.5 million and $89.0 million, respectively, resulted from the acquisition of Knight. The Company recorded a related deferred income tax asset related to these federal NOLs of $46.7 million and $68.1 million at December 31, 2014 and December 31, 2013, respectively, and a partially offsetting valuation allowance of $6.8 million at each December 31, 2014 and December 31, 2013, which represents the portion of these net operating loss carryforwards that are considered more likely than not to expire unutilized.

In accordance with Section 382 of the Internal Revenue Code, a change in equity ownership of greater than 50% of a corporation within a three-year period results in an annual limitation on the corporation’s ability to utilize its NOL carryforwards that were created during tax periods prior to the change in ownership. As a result of the Mergers as well as prior ownership changes, Knight experienced ownership changes under Section 382 and as a result, the rate of utilization of NOL carryforwards generated by Knight may be limited. The Company does not believe these limitations will have a significant effect on the Company's ability to utilize its anticipated federal NOL carryforward. The Company's U.S. federal NOL carryforwards will begin to expire in 2019.

At December 31, 2014 and December 31, 2013, the Company had, in multiple jurisdictions, aggregate state and local NOL carryforwards of $1.28 billion and $1.66 billion, respectively, all of which resulted from the acquisition of Knight. The Company recorded deferred income tax assets related to these NOLs of $18.5 million and $25.8 million as of December 31, 2014 and December 31, 2013, respectively, and offsetting valuation allowances of $8.1 million and $25.8 million, respectively, which represents the portion of these NOLs that are considered more likely than not to expire unutilized. In 2014 the Company reversed $10.8 million of the valuation related to its state and local NOLs as a portion of such loss carryforwards are now expected to be utilized based upon the expected profitability of certain of the Company’s subsidiaries. Certain of these carryforwards are subject to annual limitations on utilization and these NOLs will begin to expire in 2019.

At December 31, 2014 and December 31, 2013, the Company had non-U.S. NOL carryforwards of $90.6 million and $86.4 million, respectively, of which $62.4 million and $65.7 million, respectively, were generated by Knight in periods prior to the Mergers. The Company recorded a foreign deferred income tax asset of $19.5 million and $18.9 million for these NOL carryforwards as of December 31, 2014 and December 31, 2013, respectively, along with an offsetting U.S. federal deferred tax liability of $19.5 million and $18.9 million, respectively, for the expected future reduction in U.S. foreign tax credits associated with the use of the non-U.S. loss carryforwards. These non-U.S. net operating losses may be carried forward indefinitely. The Company had tax credit carryforwards comprising general business credit carryforwards of $4.4 million and $2.5 million, at December 31, 2014 and December 31, 2013, respectively, and alternative minimum tax credit carryforwards $6.8 million at each December 31, 2014 and December 31, 2013.

At December 31, 2014, and December 31, 2013, the Company had unrecognized tax benefits, respectively, of $2.2 million and $1.5 million, all of which would affect the Company's effective tax rate if recognized.

The following table reconciles the beginning and ending amount of unrecognized tax benefits (in thousands):



	For the year ended December 31,
	2014			2013
Balance at beginning of period	$	1,464		$	—
Increases based on tax positions related to prior periods	1,843			1,464
Decreases based on tax positions related to prior periods	(995		)	—
Decreases related to settlements with taxing authorities	—			—
Balance at the end of the period	$	2,312		$	1,464

As of December 31, 2014, the Company is subject to U.S. Federal income tax examinations for the tax years 2009 through 2013, and to non U.S. income tax examinations for the tax years 2007 through 2013. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2007 through 2013. The final outcome of these examinations is not yet determinable, however, the Company does not anticipate that any adjustments would result in a material change to its results of operations or financial condition.

The Company's policy for recording interest and penalties associated with audits is to record such items as a component of income or loss from continuing operations before income taxes. Penalties, if any, are recorded in Other expenses and interest paid or received is recorded in Debt interest expense and Interest, net, on the Consolidated Statements of Operations.