INCOME TAXES

Following is a summary of the components of income before income taxes for the years ended December 31 (in thousands):



	2015		2014		2013
U.S.	$	165,848	$	188,963	$	186,330
Non-U.S.	106,363		85,720		80,109
Income before income taxes	$	272,211	$	274,683	$	266,439

The expense for income taxes on the above income consists of the following components (in thousands):



	2015			2014			2013
Current tax expense:
U.S. federal	$	48,801		$	49,281		$	20,215
State and local	10,300			5,135			4,928
Foreign	23,225			16,653			17,167
Total current	82,326			71,069			42,310
Deferred tax (benefit) expense:
U.S. federal	(884		)	(6,670		)	18,824
State and local	(702		)	6,477			2,742
Foreign	1,550			779			(4,688		)
Total deferred	(36		)	586			16,878
Total current and deferred	82,290			71,655			59,188
Benefit (expense) relating to interest rate swaps used to increase (decrease) equity	893			(1,442		)	(1,405		)
Benefit from stock transactions with employees used to increase equity	13,960			18,704			25,373
Benefit (expense) relating to defined-benefit pension adjustments used to increase (decrease) equity	(567		)	2,000			482
Total tax expense	$	96,576		$	90,917		$	83,638

Current and long-term deferred tax assets and liabilities are comprised of the following (in thousands):



	December 31,
	2015			2014
Accrued liabilities	$	67,888		$	67,066
Loss and credit carryforwards	8,522			13,350
Assets relating to equity compensation	22,686			19,920
Other assets	6,712			3,420
Gross deferred tax assets	105,808			103,756
Property, equipment, and leasehold improvements	(9,904		)	(10,817		)
Intangible assets	(55,275		)	(29,400		)
Prepaid expenses	(28,535		)	(26,584		)
Other liabilities	(7,244		)	(3,591		)
Gross deferred tax liabilities	(100,958		)	(70,392		)
Valuation allowance	(1,828		)	(570		)
Net deferred tax assets (1)	$	3,022		$	32,794


(1)	The reduction in net deferred tax assets year-over-year is primarily attributable to the recognition of deferred tax liabilities for purchased intangibles in conjunction with the Company's 2015 acquisitions.

The Company early adopted FASB Accounting Standard Update No. 2015-17, "Income Taxes: Balance Sheet Classification of Deferred Taxes" on December 31, 2015. Under ASU No. 2015-17, organizations that present a classified balance are required to classify deferred taxes as noncurrent assets or noncurrent liabilities. The Company early adopted the standard on a prospective basis and prior period balance sheets were not retrospectively adjusted. The impact of the reclassification of these amounts on the Company's December 31, 2015 balance sheet was immaterial.

Pursuant to the adoption of ASU No. 2015-17, the Company had no current deferred tax assets or liabilities as of December 31, 2015. As of December 31, 2014, current net deferred tax assets and current net deferred tax liabilities were $17.5 million and $2.1 million, respectively, and are reported in Prepaid expenses and other current assets and Accounts payable and accrued liabilities in the Consolidated Balance Sheets. Long-term net deferred tax assets and long-term net deferred tax liabilities were $26.4 million and $23.4 million as of December 31, 2015 and $18.0 million and $0.6 million as of December 31, 2014, respectively, and are reported in Other assets and Other liabilities in the Consolidated Balance Sheets. Management has concluded it is more likely than not that the reversal of deferred tax liabilities and results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of the valuation allowance at December 31, 2015.

The valuation allowances of $1.8 million as of December 31, 2015 and $0.6 million as of 2014, primarily relate to net operating losses which are not likely to be realized.

As of December 31, 2015, the Company had state and local tax net operating loss carryforwards of $5.5 million, of which $0.4 million expire within one to five years, $3.1 million expire within six to fifteen years, and $2.0 million expire within sixteen to twenty years. The Company also had state tax credits of $1.2 million which will largely expire within two to five years. As of December 31, 2015, the Company had non-U.S. net operating loss carryforwards of $23.9 million, of which $0.3 million expire over the next 20 years and $23.6 million can be carried forward indefinitely. In addition, the Company also had foreign tax credit carryforwards of $0.3 million, the majority of which will expire at the end of 2026. These amounts have been reduced for unrecognized tax benefits, consistent with FASB ASU 2013-11.

The differences between the U.S. federal statutory income tax rate and the Company’s effective tax rate on income before income taxes for the years ended December 31 follow:



	2015		2014		2013
Statutory tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	3.4		3.1		3.2
Effect of non-U.S. operations	(7.7	)	(7.0	)	(6.1	)
Record (release) reserve for tax contingencies	3.0		2.6		0.9
Record (release) valuation allowance	0.5		—		(0.5	)
Other items, net	1.3		(0.6	)	(1.1	)
Effective tax rate	35.5	%	33.1	%	31.4	%

In 2015 the Company decided to sell certain tax credits that would otherwise expire as a result of an audit settlement and the enactment of tax legislation in Connecticut favorable to the Company. The provision for income taxes includes a benefit for the audit settlement offset by an expense for the reduction of tax credits sold or to be sold. Other income includes a gain of $6.8 million for the sale of tax credits.

For 2015 and 2014 state income taxes, net of federal tax benefit, include approximately $1.6 million and $1.3 million, respectively, of benefit relating to economic development tax credits associated with the renovation of the Company’s Stamford headquarters facility.

In July 2015, the United States Tax Court (the “Court”) issued an opinion relating to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement. In its opinion, the Court held that affiliated companies may exclude stock-based compensation expense from their cost-sharing arrangement. Because of uncertainty related to the final resolution of this litigation and the recognition of potential benefits to the Company, the Company has not recorded any financial benefit associated with this decision. The Company will monitor developments related to this case and the potential impact of those developments on the Company’s current and future financial statements.

As of December 31, 2015 and December 31, 2014, the Company had unrecognized tax benefits of $25.9 million and $20.6 million, respectively. The increase is primarily attributable to positions taken with respect to the exclusion of stock-based compensation expense from the Company's cost-sharing arrangement. The unrecognized tax benefits as of December 31, 2015 related primarily to the utilization of certain tax attributes, state income tax positions, the ability to realize certain refund claims, and intercompany transactions. It is reasonably possible that unrecognized tax benefits will be decreased by $1.3 million within the next 12 months due to anticipated closure of audits and the expiration of certain statutes of limitation.

Included in the balance of unrecognized tax benefits at December 31, 2015 are potential benefits of $20.8 million that if recognized would reduce the effective tax rate on income from continuing operations. Also included in the balance of unrecognized tax benefits as of December 31, 2015 are potential benefits of $5.1 million that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes and additional paid in capital.

The Company classifies uncertain tax positions not expected to be settled within one year as long term liabilities. As of December 31, 2015 and December 31, 2014, the Company had $24.6 million and $15.7 million, respectively, related to long term uncertain tax positions.

The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, for the years ending December 31 (in thousands):



	2015			2014
Beginning balance	$	20,645		$	14,488
Additions based on tax positions related to the current year	5,150			6,351
Additions for tax positions of prior years	7,839			4,112
Reductions for tax positions of prior years	(3,880		)	(2,317		)
Reductions for expiration of statutes	(2,287		)	(1,027		)
Settlements	(960		)	(143		)
Change in foreign currency exchange rates	(596		)	(819		)
Ending balance	$	25,911		$	20,645

The Company accrues interest and penalties related to unrecognized tax benefits in its income tax provision. As of December 31, 2015 and December 31, 2014, the Company had $3.7 million and $3.3 million, respectively, of accrued interest and penalties related to unrecognized tax benefits. These amounts are in addition to the unrecognized tax benefits disclosed above. The total amount of interest and penalties recognized in the Consolidated Statements of Operations for the years ending December 31, 2015 and December 31, 2014 was $0.9 million and $0.1 million, respectively.

The number of years with open statutes of limitation varies depending on the tax jurisdiction. The Company’s statutes are open with respect to the U.S. federal jurisdiction for 2011 and forward, and India for 2003 and forward. For other major taxing jurisdictions including the U.S. states, the United Kingdom, Canada, Japan, France, and Ireland, the Company's statutes vary and are open as far back as 2009.

Under U.S. accounting rules, no provision for income taxes that may result from the remittance of earnings held overseas is required if the Company intends to reinvest such funds overseas. Our current plans do not demonstrate a need to repatriate these undistributed earnings to fund our U.S. operations or otherwise satisfy the liquidity needs of our U.S operations. We intend to reinvest these earnings in our non-U.S. operations, except in instances in which the repatriation of these earnings would result in minimal additional tax. As a result, the Company has not recognized additional income tax expense that may result from the remittance of these earnings. The accumulated undistributed earnings of non-U.S. subsidiaries were approximately $270.0 million as of December 31, 2015. The income tax that would be payable if such earnings were not indefinitely invested is estimated at $60.0 million.