3. Non-controlling Interest

RE/MAX Holdings is the sole managing member of RMCO and operates and controls all of the business affairs of RMCO. The ownership of the common units in RMCO is summarized as follows:


	As of December 31,
	2017			2016
	Shares	Ownership %		Shares	Ownership %
Non-controlling interest ownership of common units in RMCO	12,559,600	41.51	%	12,559,600	41.57	%
RE/MAX Holdings, Inc. outstanding Class A common stock (equal to RE/MAX Holdings, Inc. common units in RMCO)	17,696,991	58.49	%	17,652,548	58.43	%
Total common units in RMCO	30,256,591	100.00	%	30,212,148	100.00	%

The weighted average ownership percentages for the applicable reporting periods are used to calculate the net income attributable to RE/MAX Holdings. In 2015 RE/MAX Holdings’ economic interest in RMCO significantly increased as a result of RIHI’s redemption of 5.2 million common units in RMCO and issuance of 5.2 million shares of Class A common stock.

A reconciliation of “Income before provision for income taxes” to “Net income attributable to RE/MAX Holdings, Inc.” and “Net Income attributable to non-controlling interest” in the accompanying Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands, except percentages):


	Year Ended December 31,
	2017									2016									2015
	RE/MAX Holdings, Inc.			Non-controlling interest			Total			RE/MAX Holdings, Inc.			Non-controlling interest			Total			RE/MAX Holdings, Inc.			Non-controlling interest			Total
Weighted average ownership percentage of RMCO (a)		58.48	%		41.52	%		100.00	%		58.40	%		41.60	%		100.00	%		42.33	%		57.67	%		100.00	%
Income before provision for income taxes	$	66,599		$	24,156		$	90,755		$	36,446		$	26,053		$	62,499		$	26,554		$	36,251		$	62,805
Provision for income taxes (b)(c)		(53,784)			(1,792)			(55,576)			(14,050)			(1,223)			(15,273)			(10,142)			(1,888)			(12,030)
Net income	$	12,815		$	22,364		$	35,179		$	22,396		$	24,830		$	47,226		$	16,412		$	34,363		$	50,775

(a)

The weighted average ownership percentage of RMCO differs from the allocation of income before provision for income taxes between RE/MAX Holdings and the non-controlling interest due to certain relatively insignificant expenses and the gain on reduction in TRA liability in 2017 being recorded at RE/MAX Holdings.

(b)

The provision for income taxes attributable to RE/MAX Holdings is primarily comprised of U.S. federal and state income taxes on its proportionate share of the pass-through income from RMCO. However, it also includes its share of taxes directly incurred by RMCO and its subsidiaries, related primarily to tax liabilities in certain foreign jurisdictions.

(c)

The provision for income taxes attributable to the non-controlling interest represents its share of taxes related primarily to tax liabilities in certain foreign jurisdictions directly incurred by RMCO or its subsidiaries. Because RMCO is a pass-through entity there is no U.S. federal and state income tax provision recorded on the non-controlling interest.

Distributions and Other Payments to Non-controlling Unitholders

Under the terms of RMCO’s fourth amended and restated limited liability company operating agreement (the “New RMCO, LLC Agreement”), RMCO makes cash distributions to non-controlling unitholders on a pro-rata basis. The distributions paid or payable to or on behalf of non-controlling unitholders are summarized as follows (in thousands):


	Year Ended
	December 31,
	2017		2016
Tax and other distributions	$	8,217	$	10,391
Dividend distributions		9,043		7,536
Total distributions to non-controlling unitholders	$	17,260	$	17,927

On February 21, 2018, the Company declared a distribution to non-controlling unitholders of $2.5 million, which is payable on March 21, 2018.

RE/MAX Holdings ownership of RMCO and Tax Receivable Agreements

RE/MAX Holdings has twice acquired significant portions of the ownership in RMCO; first in October 2013 at the time of IPO when RE/MAX Holdings acquired its initial 11.6 million common units of RMCO and, second, in November and December 2015 when it acquired 5.2 million additional common units. RE/MAX Holdings sold Class A common stock, which it exchanged for these common units of RMCO. RIHI then sold the Class A common stock to the market.

When RE/MAX Holdings has acquired common units in RMCO, it received a step-up in tax basis on the underlying assets held by RMCO. The step-up is principally equivalent to the difference between (1) the fair value of the underlying assets on the date of acquisition of the common units and (2) their tax basis in RMCO, multiplied by the percentage of units acquired. The majority of the step-up in basis relates to intangibles assets, primarily franchise agreements and goodwill, and the step-up is often substantial. These assets are amortizable under IRS rules and result in deductions on the Company’s tax return for many years and consequently, RE/MAX Holdings receives a future tax benefit. These future benefits are reflected within deferred tax assets of approximately $59.2 million on the Company’s consolidated balance sheets as of December 31, 2017.

If RE/MAX Holdings acquires additional common units of RMCO from RIHI, the percentage of RE/MAX Holdings’ ownership of RMCO will increase, and additional deferred tax assets will be created as additional tax basis step-ups occur.

In connection with the initial sale of RMCO common units in October 2013, RE/MAX Holdings entered into TRAs which require that RE/MAX Holdings make annual payments to RIHI and Oberndorf Investments LLC (a successor to the other previous owner of RMCO) equivalent to 85% of any tax benefits realized on each year’s tax return from the additional tax deductions arising from the step-up in tax basis. A TRA liability was established for the future cash obligations expected to be paid under the TRAs and is not discounted. As of December 31, 2017, this liability was $53.2 million. Similar to the deferred tax assets, these liabilities would increase if RE/MAX Holdings acquires additional common units of RMCO from RIHI.

Both these deferred tax assets and TRA liability were substantially reduced by the Tax Cuts and Jobs Act enacted in December 2017. The reduction in the corporate tax rate from 35% to 21% resulted in comparable reductions in both the deferred tax asset amounts and the TRA liabilities. See Note 11, Income Taxes for further information on the impact of the Tax Cuts and Jobs Act.