3. Non-controlling Interest

RE/MAX Holdings is the sole managing member of RMCO and subsequent to the IPO, began to operate and control all of the business affairs of RMCO. RE/MAX Holdings owns a 58.43% and 58.33% economic interest in RMCO as of December 31, 2016 and 2015, respectively, and records a non-controlling interest for the remaining 41.57% and 41.67% economic interest in RMCO as of December 31, 2016 and 2015, respectively. RE/MAX Holdings’ economic interest in RMCO increased due to an increase in common units, which were issued concurrently with the issuance of shares of Class A common stock upon the exercise of 28,057 stock options and upon the vesting of 40,140 restricted stock units, net of shares withheld as discussed in Note 13, Equity-Based Compensation. RE/MAX Holdings’ only sources of cash flow from operations are distributions from RMCO and management fees received pursuant to the management services agreement between RE/MAX Holdings and RMCO. “Net income attributable to non-controlling interest” in the accompanying Consolidated Statements of Income represents the portion of earnings attributable to the economic interest in RMCO held by the non-controlling unitholders. “Non-controlling interest” in the accompanying Consolidated Balance Sheets is adjusted to reflect tax and other cash distributions made to, and the income allocated to, the non-controlling unitholders as well as any redemptions of Common Units in RMCO pursuant to the terms of RMCO’s fourth amended and restated limited liability company operating agreement (“the New RMCO, LLC Agreement”). The ownership of the common units in RMCO is summarized as follows:


	As of December 31,
	2016			2015
	Shares	Ownership %		Shares	Ownership %
Non-controlling unitholders ownership of common units in RMCO	12,559,600	41.57	%	12,559,600	41.67	%
RE/MAX Holdings, Inc. outstanding Class A common stock (equal to RE/MAX Holdings, Inc. common units in RMCO)	17,652,548	58.43	%	17,584,351	58.33	%
Total common units in RMCO	30,212,148	100.00	%	30,143,951	100.00	%

The weighted average ownership percentages for the applicable reporting periods are used to calculate the net income attributable to RE/MAX Holdings. RE/MAX Holdings’ weighted average ownership percentage in RMCO was 58.40%, 42.33% and 39.57% for the years ended December 31, 2016, 2015 and 2014. In 2015 RE/MAX Holdings’ economic interest in RMCO significantly increased due to the increase in common units from the issuance of shares of Class A common stock as a result of the Secondary Offering described in Note 1, Business and Organization. A reconciliation of “Income before provision for income taxes” to “Net income attributable to RE/MAX Holdings, Inc.” for the periods indicated is detailed as follows (in thousands, except percentages):


	Year Ended		Year Ended		Year Ended
	December 31, 2016		December 31, 2015		December 31, 2014
Income before provision for income taxes attributable to RE/MAX Holdings, Inc.	$	36,787	$	26,797	$	21,339
Provision for income taxes attributable to RE/MAX Holdings, Inc.		(14,050)		(10,142)		(7,903)
Net income attributable to RE/MAX Holdings, Inc.	$	22,737	$	16,655	$	13,436

A reconciliation of the “Provision for income taxes” in the accompanying Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands):


	Year Ended		Year Ended		Year Ended
	December 31, 2016		December 31, 2015		December 31, 2014
Provision for income taxes attributable to RE/MAX Holdings, Inc. (a)	$	(14,050)	$	(10,142)	$	(7,903)
Provision for income taxes attributable to entities other than RE/MAX Holdings, Inc. (b)		(1,223)		(1,888)		(2,045)
Provision for income taxes	$	(15,273)	$	(12,030)	$	(9,948)

(a)

The provision for income taxes attributable to RE/MAX Holdings includes all U.S. federal and state income taxes as well as RE/MAX Holdings’ proportionate share of the net assets of RMCO of the taxes imposed directly on RE/MAX, LLC, a wholly-owned subsidiary of RMCO, related to tax liabilities in certain foreign jurisdictions of approximately $1,676,000, $1,280,000 and $1,339,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

(b)

The provision for income taxes attributable to entities other than RE/MAX Holdings primarily represents taxes imposed directly on RE/MAX, LLC, a wholly-owned subsidiary of RMCO, related to tax liabilities in certain foreign jurisdictions that are allocated to the non-controlling interest.

Distributions and Other Payments to Non-controlling Unitholders

As authorized by the New RMCO, LLC Agreement, RMCO makes cash distributions to non-controlling unitholders. As a limited liability company (treated as a partnership for income tax purposes), RMCO does not incur significant domestic federal, state or local income taxes, as these taxes are primarily the obligations of its members. RMCO is generally required to distribute cash on a pro-rata basis to its members to the extent necessary to cover each member’s estimated tax liabilities, if any, with respect to their allocable share of RMCO earnings. In addition, other cash distributions may be made to non-controlling unitholders based on their ownership percentage in RMCO as determined in accordance with the RMCO, LLC Agreement. Upon completion of its tax returns with respect to the prior year, RMCO may make other true-up distributions to its members, if cash is available for such purposes, with respect to actual taxable income for the prior year.

In addition, RMCO pays other distributions on a quarterly basis equal to the dividend payments to the stockholders of the Company’s Class A common stock. The dividend distributions are discussed further in Note 4, Earnings Per Share and Dividends. The tax and other distributions are recorded in “Non-controlling interest” in the accompanying Consolidated Balance Sheets and Consolidated Statements of Stockholders’ Equity and the paid portion is reported in “Distributions paid to non-controlling unitholders” in the accompanying Consolidated Statements of Cash Flows.

On February 22, 2017, the Company declared a distribution to non-controlling unitholders of $2,261,000, which is payable on March 22, 2017.

The distributions paid or payable to or on behalf of non-controlling unitholders under the New RMCO, LLC Agreement are summarized as follows:


	Year Ended
	December 31,
	2016		2015
Tax and other distributions	$	10,391	$	7,358
Dividend distributions		7,536		35,469
Total distributions	$	17,927	$	42,827

Tax Receivable Agreements

At the time of the Company’s IPO, RE/MAX Holdings entered into separate tax receivable agreements (“TRAs”) with its historical owners, RIHI and Weston Presidio V, L.P. (“Weston Presidio”), that provide for the payment by RE/MAX Holdings to RIHI and Weston Presidio of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that RE/MAX Holdings actually realizes, or in some circumstances is deemed to realize, as a result of an increase in its share of tax basis in RMCO’s tangible and intangible assets, including increases attributable to payments made under the TRAs, and deductions attributable to imputed and actual interest that accrues in respect of such payments. These tax benefit payments are not necessarily conditioned upon one or more of RIHI or Weston Presidio maintaining a continued ownership interest in either RMCO or RE/MAX Holdings. RE/MAX Holdings expects to benefit from the remaining 15% of cash savings, if any, that it may actually realize, which has been reflected as an increase in “Additional paid-in capital” in the accompanying Consolidated Balance Sheets and Consolidated Statements of Stockholders’ Equity. The provisions of the separate TRAs that RE/MAX Holdings entered into with RIHI and Weston Presidio were substantially identical.

During the second quarter of 2015, Weston Presidio assigned, transferred and conveyed to Oberndorf all of its rights, title and interest in and to, and all of its liabilities and obligations under, the TRA dated as of October 7, 2013 by and between RE/MAX Holdings and Weston Presidio. In connection therewith, the Company entered into a joinder to the TRA on May 29, 2015 with Weston Presidio and Oberndorf (the “Joinder Agreement”). Neither the assignment and transfer nor the Joinder Agreement impacted the financial position, results of operations or cash flows of the Company.

Payments Pursuant to the Tax Receivable Agreements

As of December 31, 2016, the Company reflected a liability of $98,809,000 representing the payments due to RIHI and Oberndorf under the terms of the TRAs (see current and non-current portion of “Payable pursuant to tax receivable agreements” in the accompanying Consolidated Balance Sheets).

As of December 31, 2016, the Company estimates that amounts payable pursuant to the TRAs within the next 12-month period will be approximately $13,235,000, of which $2,602,000 is related to RE/MAX Holdings’ 2014 federal and state tax returns, $4,605,000 is related to RE/MAX Holdings’ 2015 federal and state tax returns and the remainder is related to RE/MAX Holdings’ 2016 federal and state tax returns. To determine the current amount of the payments due to RIHI and Oberndorf, the Company estimated the amount of taxable income that RE/MAX Holdings generated as well as the amount of the specified deductions subject to the TRAs which were realized by RE/MAX Holdings in its federal and state tax returns. This amount was then used as a basis for determining the Company’s increase in estimated tax cash savings as a result of such deductions on which a current TRA obligation became due (i.e. payable within 12 months of the Company’s year-end). These calculations are performed pursuant to the terms of the TRAs. The Company paid $1,344,000 and $0 pursuant to the terms of the TRAs during the years ended December 31, 2016 and 2015, respectively. On January 20, 2017, the Company paid $1,931,000 pursuant to the TRAs.

The timing and amount of the payments to be made under the TRAs are subject to certain contingencies, including RE/MAX Holdings having sufficient taxable income to utilize all of the tax benefits defined in the TRAs. If the Company elects to terminate the TRAs early, the Company would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRAs, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits.

Obligations pursuant to the TRAs are obligations of RE/MAX Holdings. They do not impact the non-controlling interest. These obligations are not income tax obligations and have no impact on the “Provision for income taxes” in the accompanying Consolidated Statements of Income. In general, items of income, gain, loss and deduction are allocated on the basis of the members’ ownership interests pursuant to the New RMCO, LLC Agreement after taking into consideration all relevant sections of the Internal Revenue Code.