7. INCOME TAXES

The components of income (loss) before income tax provision (benefit) are as follows:



	2013			2012		2011
Domestic	$	(264,342	)	$	257,866	$	230,334
Foreign	(246,265		)	45,217		134,863
Total	$	(510,607	)	$	303,083	$	365,197

The components of income tax expense (benefit) are as follows:



	2013			2012			2011
Federal	$	(74,185	)	$	54,179		$	75,290
Foreign	(85,677		)	(7,850		)	18,788
State and local	9,003			25,723			25,356
Total income tax provision (benefit)	$	(150,859	)	$	72,052		$	119,434
Current	$	6,496		$	22,860		$	39,162
Deferred	(157,355		)	49,192			80,272
Total income tax provision (benefit)	$	(150,859	)	$	72,052		$	119,434

A reconciliation of the difference between the effective income tax (benefit) rate and the statutory federal income tax (benefit) rate is as follows:



	2013		2012		2011
Tax provision (benefit) at statutory U.S. federal income tax rate	(35.0	)%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit⁽¹⁾	1.5		5.4		4.9
Effect of foreign tax rates⁽¹⁾	3.8		(1.8	)	(5.4	)
Effect of loss on Australian restructuring	—		(6.0	)	—
Changes in U.K. tax rates on deferred tax assets and liabilities	(3.5	)	(6.0	)	(2.5	)
Net (income) loss attributable to noncontrolling interests	0.5		(0.8	)	0.8
Other, net⁽¹⁾	3.2		(2.0	)	(0.1	)
Effective income tax (benefit) rate	(29.5	)%	23.8	%	32.7	%


(1)	State income taxes include changes in valuation allowances, net of the impact on deferred tax assets of changes in state apportionment factors and planning strategies. The effect of foreign tax rates also includes changes in valuation allowances. Other includes changes in federal valuation allowances. See schedule below for the change in valuation allowances by jurisdiction.

During the quarter ended September 30, 2010, the U.K. Finance (No. 2) Act 2010 was enacted, which reduced the main U.K. corporate tax rate from 28% to 27%. In July 2011, The U.K. Finance Act 2011 (the "Act") was enacted. The Act further reduced the main U.K. corporate tax rate from 27% to 26% effective April 1, 2011, and from 26% to 25% effective April 1, 2012. In July 2012, The U.K. Finance Act 2012 was enacted, further reducing the main U.K. corporate tax rate to 24% effective April 1, 2012 and 23% effective April 1, 2013. The reductions in the U.K. corporate tax rate resulted in tax benefits of $18,075, $18,268 and $8,878, recognized in fiscal 2013, 2012 and 2011, respectively, as a result of the revaluation of deferred tax assets and liabilities at the new rates. In addition, during the year ended March 31, 2012, Legg Mason recorded $18,254 of tax benefits related to a restructuring of our Australian business.

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Consolidated Balance Sheets. These temporary differences result in taxable or deductible amounts in future years. A summary of Legg Mason's deferred tax assets and liabilities are as follows:



	2013			2012
DEFERRED TAX ASSETS
Accrued compensation and benefits	$	107,411		$	125,797
Accrued expenses	73,181			62,410
Operating loss carryforwards	449,806			397,013
Capital loss carryforwards	41,256			46,244
Convertible debt obligations	—			4,951
Foreign tax credit carryforward	115,819			59,871
Federal benefit of uncertain tax positions	21,165			17,602
Mutual fund launch costs	24,324			14,476
Net unrealized losses from investments	4,447			5,327
Other	5,086			18,119
Deferred tax assets	842,495			751,810
Valuation allowance	(115,815		)	(102,722		)
Deferred tax assets after valuation allowance	$	726,680		$	649,088


	2013			2012
DEFERRED TAX LIABILITIES
Basis differences, principally for intangible assets and goodwill	$	134,873		$	196,611
Depreciation and amortization	386,959			431,280
Other	1,528			3,667
Deferred tax liabilities	523,360			631,558
Net deferred tax asset	$	203,320		$	17,530

Certain tax benefits associated with Legg Mason's employee stock plans are recorded directly in Stockholders' Equity. No tax benefit was recorded to equity in fiscal 2013, 2012 or 2011, due to the net operating loss position of the Company. As of March 31, 2013, an additional $6,700 of net operating loss will be recognized as an increase in Stockholders' Equity when ultimately realized.

In connection with the completion and filing of its fiscal 2010 federal tax return in December 2010, Legg Mason recorded a net additional tax benefit of approximately $36,000 in fiscal 2011 with respect to the Equity Unit extinguishment that occurred in fiscal 2010. The tax benefit increased Additional paid-in capital in a manner consistent with the fiscal 2010 allocation of the extinguishment payment.

Legg Mason has various loss carryforwards that may provide future tax benefits. Related valuation allowances are established in accordance with accounting guidance for income taxes, if it is management's opinion that it is more likely than not that these benefits will not be realized. Substantially all of Legg Mason's deferred tax assets relate to U.S. and U.K. taxing jurisdictions. As of March 31, 2013, U.S. federal deferred tax assets aggregated $770,933, realization of which is expected to require approximately $4,200,000 of future U.S. earnings, approximately $331,606 of which must be in the form of foreign source income. Based on estimates of future taxable income, using assumptions consistent with those used in Legg Mason's goodwill impairment testing, it is more likely than not that current federal tax benefits relating to net operating losses are realizable and no valuation allowance is necessary at this time. With respect to those resulting from foreign tax credits, it is more likely than not that tax benefits relating to the utilization of $36,319 of foreign tax credits as credits will not be realized and an additional valuation allowance of $17,066 was provided in fiscal 2013. In addition, a valuation allowance was established in prior years for the substantial portion of our deferred tax assets relating to U.K. taxing jurisdictions. While tax planning may enhance Legg Mason's tax positions, the realization of these current tax benefits is not dependent on any significant tax strategies.

As of March 31, 2013, U.S. state deferred tax assets aggregated approximately $172,704. Due to state tax planning which will allow for the utilization of NOLs generated in certain jurisdictions the Company recognized a net valuation allowance release of $2,046. Due to the uncertainty of future state apportionment factors and future effective state tax rates, the value of state net operating loss benefits ultimately realized may vary.

A net valuation allowance release of approximately $3,500 in fiscal 2013 was primarily related to the full release of the valuation allowance on deferred tax assets related to Australia and Singapore offset by an establishment of a valuation allowance against certain U.K. deferred tax assets. To the extent the analysis of the realization of deferred tax assets relies on deferred tax liabilities, Legg Mason has considered the timing, nature and jurisdiction of reversals, as well as, future increases relating to the tax amortization of goodwill and indefinite-life intangible assets.

The following deferred tax assets and valuation allowances relating to carryforwards have been recorded at March 31, 2013 and 2012, respectively.



	2013		2012		Expires Beginning after Fiscal Year
Deferred tax assets
U.S. federal net operating losses	$	266,659	$	219,984	2029
U.S. federal capital losses	74		74		2015
U.S. federal foreign tax credits	115,819		59,871		2015
U.S. charitable contributions	5,401		4,709		2013
U.S. state net operating losses ^(1,2)	161,136		151,762		2015
U.S. state capital losses	34,960		39,046		2015
Non-U.S. net operating losses	22,011		26,704		2027
Non-U.S. capital losses	6,222		7,124		n/a
Total deferred tax assets for carryforwards	$	612,282	$	509,274
Valuation allowances
U.S. federal capital losses	$	74	74
U.S. federal foreign tax credits	23,608		6,542
U.S. charitable contributions	1,597		—
U.S. state net operating losses	25,951		23,911
U.S. state capital losses	34,960		39,046
Non-U.S. net operating losses	15,899		22,956
Non-U.S. capital losses	6,222		7,124
Valuation allowances for carryforwards	108,311		99,653
Non-U.S. other deferred assets	7,504		3,069
Total valuation allowances	$	115,815	$	102,722


(1)	Substantially all of the U.S. state net operating losses carryforward through fiscal 2029.


(2)	Due to potential for change in the factors relating to apportionment of income to various states, the Company's effective state tax rates are subject to fluctuation which will impact the value of the Company's deferred tax assets, including net operating losses, and could have a material impact on the future effective tax rate of the Company.

Legg Mason had total gross unrecognized tax benefits of approximately $72,650, $90,831 and $77,653 as of March 31, 2013, 2012 and 2011, respectively. Of these totals, approximately $46,340, $62,400 and $53,500, respectively, (net of the federal benefit for state tax liabilities) are the amounts of unrecognized benefits which, if recognized, would favorably impact future income tax provisions and effective tax rates. During fiscal 2013, as a result of the expiration of statutes of limitation and the completion of tax authority examinations, unrecognized benefits of $16,842 were realized.

A reconciliation of the beginning and ending amount of unrecognized gross tax benefits for the years ended March 31, 2013, 2012 and 2011, is as follows:



	2013			2012			2011
Balance, beginning of year	$	90,831		$	77,653		$	51,027
Additions based on tax positions related to the current year	11,726			9,822			1,361
Additions for tax positions of prior years	8,439			10,668			34,959
Reductions for tax positions of prior years	(13,083		)	(3,575		)	(6,107		)
Decreases related to settlements with taxing authorities	(25,205		)	(3,185		)	(2,667		)
Expiration of statutes of limitations	(58		)	(552		)	(920		)
Balance, end of year	$	72,650		$	90,831		$	77,653

Although management cannot predict with any degree of certainty the timing of ultimate resolution of matters under review by various taxing jurisdictions, it is reasonably possible that the Company's gross unrecognized tax benefits balance may change within the next twelve months by up to $11,400 as a result of the expiration of statutes of limitation and the completion of tax authorities' exams.

The Company accrues interest related to unrecognized tax benefits in interest expense and recognizes penalties in other operating expense. During the years ended March 31, 2013, 2012 and 2011, the Company recognized approximately $5,500, $1,300, and $3,000, respectively, which was substantially all interest. At March 31, 2013, 2012 and 2011, Legg Mason had approximately $14,000, $10,000, and $9,000, respectively, accrued for interest and penalties on tax contingencies in the Consolidated Balance Sheets.

Legg Mason is under examination by the Internal Revenue Service, the Inland Revenue Service, and other tax authorities in various states. The following tax years remain open to income tax examination for each of the more significant jurisdictions where Legg Mason is subject to income taxes: after fiscal 2009 for U.S. federal; after fiscal 2012 for the United Kingdom; after fiscal 2004 for the state of California; after fiscal 2005 for the state of New York; and after fiscal 2009 for the states of Connecticut, Maryland and Massachusetts. The Company does not anticipate making any significant cash payments with the settlement of these audits in excess of amounts that have been reserved.

During the year ended March 31, 2013, Legg Mason repatriated approximately $394,000 of foreign cash, and plans to repatriate up to another $325,000, over the next several years in order to make the cash available in the U.S. for general corporate purposes. Legg Mason anticipates an incremental tax cost of approximately $18,000 with respect to this repatriation and has adjusted the tax reserve accordingly. No further repatriation of accumulated prior period foreign earnings is currently planned. However, if circumstances change, Legg Mason will provide for and pay any applicable additional U.S. taxes in connection with repatriation of these funds. It is not practical at this time to determine the income tax liability that would result from any further repatriation of accumulated foreign earnings.

Except as noted above, Legg Mason intends to permanently reinvest cumulative undistributed earnings of its non-U.S. subsidiaries in non-U.S. operations. Accordingly, no U.S. federal income taxes have been provided for the undistributed earnings to the extent that they are permanently reinvested in Legg Mason's non-U.S. operations. It is not practical at this time to determine the income tax liability that would result upon repatriation of the earnings.