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 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,
	2015			2014			2013
Current:
U.S. federal	$	106,700		$	709		$	(194	)
U.S. state and local	19,665			4,081			2,902
Non U.S.	958			(828		)	3,773
	$	127,323		$	3,962		$	6,481
Deferred:
U.S. federal	$	25,221		30,331			(106,996		)
U.S. state and local	(16,803		)	(10,997		)	—
Non U.S.	(4,883		)	(543		)	(599		)
	$	3,535		$	18,791		$	(107,595	)

Provision (benefit) for income taxes	$	130,858		$	22,753		$	(101,114	)

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,
	2015			2014			2013
U.S. federal income tax expense at statutory rate	$	132,987		$	29,815		$	8,742
Income not subject to U.S. corporate income tax	—			—			(15,583		)
U.S. state and local income tax expense (benefit), net of U.S. federal income tax effect	18,101			(4,495		)	1,881
Recognition of state deferred tax assets and net operating losses, net of U.S. federal income tax effect	(16,242		)	—			—
Deferred tax benefit resulting from the Company becoming subject to U.S. corporate income taxes	—			—			(103,499		)
Nondeductible expenses ⁽¹⁾	3,223			230			3,627
Federal research & development tax credits	(3,753		)	(1,241		)	—
Foreign taxes	(3,927		)	(1,371		)	3,603
Other, net	469			(185		)	115
Income tax expense (benefit)	$	130,858		$	22,753		$	(101,114	)

⁽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, 2015, and December 31, 2014, the Company’s net deferred tax assets were $151.2 million and $154.8 million, respectively, and comprised the following:



	December 31, 2015			December 31, 2014
Deferred tax assets:
Employee compensation and benefit plans	$	41,447		$	24,587
Fixed assets and other amortizable assets	79,765			82,882
Reserves	7,875			2,668
Valuation of investments	13,590			32,962
Net operating loss carryforwards and tax credits, net	43,419			94,770
Less: Valuation allowance on net operating loss carryforwards	(9,715		)	(15,238		)
Total deferred tax assets	$	176,381		$	222,631

Deferred tax liabilities:
Fixed assets and other amortizable assets	243			26,244
Reserves	—			2,226
Valuation of investments	280			19,912
Reduction in foreign tax credit for Non-U.S. NOL carryforwards	24,633			19,490
Total deferred tax liabilities	25,156			67,872
Net deferred tax assets	$	151,225		$	154,759

A valuation allowance is established when management determines that it is more likely than not that the Company will be able to realize its deferred tax assets in the future. With the exception of certain NOLs and state and local deferred tax assets as discussed below, the Company has not recorded any valuation allowance with respect to its deferred tax assets at December 31, 2015 or December 31, 2014.

At December 31, 2015, the Company had U.S. federal NOL carryforwards of $27.7 million which are subject to annual limitations pursuant to Section 382 of the Internal Revenue Code. The Company recorded a deferred income tax asset related to these federal NOLs of $9.7 million and a partial valuation allowance of $6.5 million at December 31, 2015, which represents the portion of these net operating loss carryforwards that are considered more likely than not to expire unutilized.

At December 31, 2014, the Company had U.S. federal NOL carryforwards of $133.5 million of which $28.5 million were subject to annual limitations pursuant to Section 382 of the Internal Revenue Code. The Company recorded a deferred income tax asset related to these federal NOLs of $46.7 million and a partial valuation allowance of $6.8 million at December 31, 2014, which represents the portion of these net operating loss carryforwards that are considered more likely than not to expire unutilized.

At December 31, 2015, the Company recorded deferred income tax assets related to state and local NOLs of $8.8 million and a partial valuation allowance of $12 thousand, which represents the portion of these NOLs that are considered more likely than not to expire unutilized. At December 31, 2014, the Company recorded deferred income tax assets related to state and local NOLs of $18.5 million and a partial valuation allowance of $8.1 million, which represents the portion of these NOLs that are considered more likely than not to expire unutilized. Certain of these carryforwards are subject to annual limitations on utilization and these NOLs will begin to expire in 2019.

Prior to 2015, the Company had recorded a partial valuation allowance against certain of its state and local NOLs and other deferred tax assets as it was more likely than not that the benefit of such items would not be realized. During 2015, the Company undertook an internal restructuring which resulted in profits of certain subsidiaries flowing into a formerly unprofitable subsidiary for U.S. corporate income tax purposes, and as a result the Company reversed this partial valuation allowance as these loss carryforwards and other state and local deferred tax assets are now expected to be utilized.

At December 31, 2015, the Company had non-U.S. NOL carryforwards of $114.6 million. The Company recorded a foreign deferred income tax asset of $24.6 million for these NOL carryforwards as of December 31, 2015 along with an offsetting U.S. federal deferred tax liability of $24.6 million, for the expected future reduction in U.S. foreign tax credits associated with the use of the non-U.S. loss carryforwards. At December 31, 2014, the Company had non-U.S. NOL carryforwards of $90.6 million. The Company recorded a foreign deferred income tax asset of $19.5 million for these NOL carryforwards as of December 31, 2014 along with an offsetting U.S. federal deferred tax liability of $19.5 million, for the expected future reduction in U.S. foreign tax credits associated with the use of the non-U.S. loss carryforwards. The Company’s non-U.S. net operating losses may be carried forward indefinitely.

At December 31, 2015, and December 31, 2014, the Company had unrecognized tax benefits, respectively, of $3.6 million and $2.2 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):



	December 31, 2015		December 31, 2014
Balance at beginning of period	$	2,312	$	1,464
Increases based on tax positions related to prior periods	1,332		1,843
Decreases based on tax positions related to prior periods	—		(995		)
Balance at the end of the period	$	3,644	$	2,312

As of December 31, 2015, the Company is subject to U.S. Federal income tax examinations for the tax years 2012 through 2014, and to non U.S. income tax examinations for the tax years 2007 through 2014. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2007 through 2014. 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.