Income taxes

The income tax provision shown in the consolidated statements of income is reconciled to amounts of tax that would have been payable (recoverable) from the application of the federal tax rate to pre-tax profit, as follows:



(Expressed in thousands)
	For the Year Ended December 31,
	2015					2014					2013
	Amount			Percentage		Amount			Percentage		Amount			Percentage
U.S. federal statutory income tax rate	$	2,348		35.0	%	$	9,008		35.0	%	$	15,368		35.0	%
U.S. state and local income taxes, net of U.S. federal income tax benefits	373			5.5	%	2,033			7.9	%	2,131			4.9	%
Unrecognized tax benefit	589			8.8	%	6			—	%	1,244			2.8	%
Tax exempt income, net of interest expense	(696		)	-10.4	%	(528		)	-2.0	%	(715		)	-1.6	%
Non-deductible regulatory settlements	—			—	%	5,298			20.6	%	—			—	%
Business promotion and other non-deductible expenses	577			8.6	%	655			2.5	%	660			1.5	%
Insurance proceeds, non-taxable	—			—	%	(65		)	-0.3	%	(597		)	-1.4	%
Adjustment to reflect prior year tax return filings	397			5.9	%	256			1.0	%	(251		)	-0.6	%
Tax rate change on deferred income taxes	116			1.7	%	241			0.9	%	208			0.5	%
Tax rate differential on foreign operations	145			2.2	%	(447		)	-1.7	%	185			0.4	%
Other	(36		)	-0.5	%	(282		)	-1.1	%	(477		)	-1.1	%
Total income tax provision	$	3,813		56.8	%	$	16,175		62.8	%	$	17,756		40.4	%

Income taxes included in the consolidated statements of income represent the following:



(Expressed in thousands)
	For the Year Ended December 31,
	2015			2014			2013
Current:
U.S. federal tax (benefit)	$	(1,738	)	$	10,302		$	(2,984	)
State and local tax	832			1,520			1,885
Non-U.S. operations	181			(264		)	116
Total Current	(725		)	11,558			(983		)
Deferred:
U.S. federal tax	3,173			1,273			16,658
State and local tax	1,145			2,057			2,482
Non-U.S. operations	220			1,287			(401		)
Total Deferred	4,538			4,617			18,739
Total	$	3,813		$	16,175		$	17,756

Profit (loss) before income tax provision (benefit) with respect to foreign operations was $732,000, $4.3 million and $(1.3) million for the years ended December 31, 2015, 2014 and 2013, respectively.

Tax expense for 2015 was lower than in 2014 primarily because the Company earned less pretax income in 2015 than in 2014. The effective tax rate for 2015 was lower than the effective tax rate in 2014 mainly due to nondeductible penalties incurred in 2014 pursuant to regulatory settlements.

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of such taxable temporary differences totaled $20.5 million as of December 31, 2015. The unrecognized deferred tax liability associated with earnings of foreign subsidiaries, net of associated U.S. foreign tax credits, is $2.5 million for those subsidiaries with respect to which the Company would be subject to residual U.S. tax on cumulative earnings through 2015 were those earnings to be repatriated.

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 enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2015 and 2014 were as follows:



(Expressed in thousands)
	For the Year Ended December 31,
	2015			2014
Deferred tax assets:
Employee deferred compensation plans	$	27,423		$	30,969
Deferred rent	10,582			10,024
Lease incentive	5,855			6,212
Broker notes	3,441			3,460
Auction rate securities reserve	2,666			3,229
Net operating loss	2,834			2,896
Involuntary conversion	2,245			2,033
Reserve for litigation and legal fees	3,350			5,808
Allowance for doubtful accounts	1,037			984
State and local net operating loss/credit carryforward	1,330			357
Other	2,718			2,650
Total deferred tax assets	63,481			68,622
Valuation allowance	126			113
Deferred tax assets after valuation allowance	63,355			68,509
Deferred tax liabilities:
Goodwill amortization (Section 197)	53,364			48,025
Partnership investments	7,444			10,865
Mortgage servicing rights	10,571			12,173
Company owned life insurance	6,431			6,501
Change in accounting method	1,313			2,591
Book versus tax depreciation differences	657			982
Other	248			469
Total deferred tax liabilities	80,028			81,606
Deferred tax liabilities, net	$	(16,673	)	$	(13,097	)

The Company has deferred tax assets at December 31, 2015 of $1.3 million, $1.0 million and $397,000 arising from net operating losses incurred by Oppenheimer Israel (OPCO) Ltd., Oppenheimer Investments Asia Limited, and Oppenheimer Europe Ltd., respectively. The Company believes that realization of the deferred tax assets is more likely than not based on expectations of future taxable income in Israel, Asia and Europe. These net operating losses carry forward indefinitely and are not subject to expiration, provided that these subsidiaries and their underlying businesses continue operating normally (as is anticipated).

Goodwill arising from the acquisitions of Josephthal Group Inc. and the Oppenheimer Divisions is being amortized for tax purposes on a straight-line basis over 15 years. The difference between book and tax is recorded as a deferred tax liability.

The Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. The Company has closed tax years through 2010 in the U.S. federal jurisdiction.

The Company is under examination in various states and overseas jurisdictions in which the Company has significant business operations. The Company has closed tax years through 2007 for New York State and is currently under exam for the period 2008 to 2011. The Company also has closed tax years through 2008 with New York City and is currently under exam for the 2009 to 2012 tax years. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2010. The Company is currently under examination for the 2013 federal tax return.

The Company has unrecognized tax benefits of $2.5 million, $1.6 million and $1.6 million as of December 31, 2015, 2014 and 2013, respectively (as shown on the table below). Included in the balance of unrecognized tax benefits as of December 31, 2015 and 2014 are $1.8 million and $1.3 million of tax benefits for either year that, if recognized, would affect the effective tax rate.

During the year ended December 31, 2013, the Company reclassified $4.9 million of unrecognized tax benefit to other tax accounts when the Internal Revenue Service approved the Company’s application for a tax accounting method change. A reconciliation of the beginning and ending amount of unrecognized tax benefit follows:



(Expressed in thousands)
	2015		2014		2013
Balance at January 1,	$	1,583	$	1,574	$	5,236
Additions for tax positions of prior years	907		—		1,168
Additions for tax positions of current year	—		9		77
Reclass to other tax accounts	—		—		(4,907		)
Balance at December 31,	$	2,490	$	1,583	$	1,574

On its consolidated statements of income, the Company records interest and penalties accruing on unrecognized tax benefits in income before tax provision as interest expense and other expense, respectively. For the years ended December 31, 2015 and 2014, the Company recorded tax-related interest expense of $23,000 and $22,000, respectively, in its consolidated statement of income. At December 31, 2015 and 2014, the Company had an income tax-related interest payable of $106,000 and $83,000, respectively, on its consolidated balance sheet.