Income Taxes

The Company is 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 file separate company state and local income tax returns.

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



	For the years ended December 31,
	2016			2015			2014
Current:
U.S. federal	$	101,443		$	106,700		$	709
U.S. state and local	(2,245		)	19,665			4,081
Non U.S.	471			958			(828		)
	$	99,669		$	127,323		$	3,962
Deferred:
U.S. federal	$	32,635		25,221			30,331
U.S. state and local	13,673			(16,803		)	(10,997		)
Non U.S.	(5,246		)	(4,883		)	(543		)
	$	41,062		$	3,535		$	18,791

Provision for income taxes	$	140,731		$	130,858		$	22,753

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 years ended December 31,
	2016			2015			2014
U.S. federal income tax expense at statutory rate	$	138,750		$	132,987		$	29,815
U.S. state and local income tax expense (benefit), net of U.S. federal income tax effect	7,428			18,101			(4,495		)
Recognition of state deferred tax assets and net operating losses, net of U.S. federal income tax effect	—			(16,242		)	—
Nondeductible expenses ⁽¹⁾	2,980			3,223			230
Federal research & development tax credits	(2,153		)	(3,753		)	(1,241		)
Deduction for domestic production activities	(5,525		)	—			—
Foreign taxes	471			(3,927		)	(1,371		)
Other, net	(1,220		)	469			(185		)
Income tax expense	$	140,731		$	130,858		$	22,753

⁽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, 2016, and December 31, 2015, the Company’s net deferred tax assets were $109.9 million and $151.2 million, respectively, and comprised the following (in thousands):



	December 31, 2016			December 31, 2015
Deferred tax assets:
Employee compensation and benefit plans	$	32,719		$	41,447
Fixed assets and other amortizable assets	52,206			79,765
Accrued expenses and other	16,140			7,875
Valuation of investments	8,108			13,590
Net operating loss carryforwards and tax credits	42,476			43,419
Less: Valuation allowance on net operating loss carryforwards and tax credits	(9,715		)	(9,715		)
Total deferred tax assets	$	141,934		$	176,381

Deferred tax liabilities:
Fixed assets and other amortizable assets	$	2,191		$	243
Valuation of investments	—			280
Reduction in foreign tax credit for Non-U.S. NOL carryforwards	29,882			24,633
Total deferred tax liabilities	32,073			25,156
Net deferred tax assets	$	109,861		$	151,225

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 tax credits, the Company has not recorded any valuation allowance with respect to its deferred tax assets at December 31, 2016 or December 31, 2015.

At December 31, 2016 and December 31, 2015, the Company had U.S. federal NOL carryforwards of $26.7 million and $27.7 million, respectively, which are subject to annual limitations pursuant to Section 382 of the Internal Revenue Code. At December 31, 2016 and December 31, 2015, the Company recorded a deferred income tax asset related to these federal NOLs of $9.4 million and $9.7 million, respectively, and a partial valuation allowance of $6.5 million for both years which represents the portion of these net operating loss carryforwards that are considered more likely than not to expire unutilized.

At December 31, 2016, the Company recorded deferred income tax assets related to state and local NOLs of $12 thousand and a full 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, 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. 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, 2016, the Company had non-U.S. NOL carryforwards of $150.5 million. The Company recorded a foreign deferred income tax asset of $29.9 million for these NOL carryforwards as of December 31, 2016 along with an offsetting U.S. federal deferred tax liability of $29.9 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, 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. The Company’s non-U.S. net operating losses may be carried forward indefinitely.

At December 31, 2016, and December 31, 2015, the Company had unrecognized tax benefits of $5.1 million and $3.6 million, respectively, 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, 2016			December 31, 2015
Balance at beginning of period	$	3,644		$	2,312
Increases based on tax positions related to prior periods	1,751			1,332
Decreases based on tax positions related to prior periods	(1,217		)	—
Increases based on tax positions related to current periods	917			—
Balance at the end of the period	$	5,095		$	3,644

As of December 31, 2016, the Company is subject to U.S. Federal income tax examinations for the tax years 2013 through 2015, and to non U.S. income tax examinations for the tax years 2008 through 2016. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2007 through 2015. 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.