Uncertain Tax Positions

As of December 31, 2014, 2013, and 2012, the liability for unrecognized tax benefits, excluding interest and penalties, was $22.8 million, $25.4 million, and $35.4 million, respectively, and is recorded in the Consolidated Balance Sheets as follows (in thousands of dollars):



December 31	2014		2013		2012
Deferred income taxes (contra assets)	$	—	$	—	$	12,445
Accrued income taxes (current)	—		—		482
Accrued income taxes (long-term)	22,798		25,423		22,473
Total liability for unrecognized tax benefits	$	22,798	$	25,423	$	35,400

As of December 31, 2014 and 2013, the total amount of unrecognized tax benefits that, if recognized, would favorably affect Sotheby’s effective income tax rate was $12.3 million and $11.7 million, respectively.

The table below presents a reconciliation of the beginning and ending balances of the liability for unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2014, 2013, and 2012 (in thousands of dollars):



	2014			2013			2012
Balance at January 1	$	25,423		$	35,400		$	34,689
Increases in unrecognized tax benefits related to the current year	2,229			8,999			2,484
Increases in unrecognized tax benefits related to prior years	167			9			1,689
Decreases in unrecognized tax benefits related to prior years	(134		)	(16,651		)	(3,350		)
Decreases in unrecognized tax benefits related to settlements	(590		)	(555		)	—
Decreases in unrecognized tax benefits due to the lapse of the applicable statute of limitations	(4,297		)	(1,779		)	(112		)
Balance at December 31	$	22,798		$	25,423		$	35,400

In 2014, the net decrease to the liability for unrecognized tax benefits is primarily attributable to the expiration of the statute of limitations for certain tax years and the settlement of an audit. The decrease is partially offset by increases in reserves for transfer pricing and other U.S. federal and state and non-U.S. matters.

In 2013, the net decrease to the liability for unrecognized tax benefits was primarily attributable to the settlement of an audit and the expiration of the statute of limitations for certain tax years. The decrease was partially offset by a liability recognized for a portion of a tax benefit recorded during the year related to a worthless stock deduction Sotheby’s claimed on its 2013 U.S. federal income tax return related to the tax basis of a foreign subsidiary.

In 2012, the net increase to the liability for unrecognized tax benefits was primarily attributable to increased reserves related to transfer pricing and other U.S. federal and state and non-U.S matters, partially offset by the reduction of the liability for unrecognized tax benefits primarily related to U.S. state issues that are no longer uncertain tax positions as a result of filing amended state returns and to U.S. federal matters for which the timing of the deduction is now certain.

Sotheby’s recognizes interest expense and penalties related to unrecognized tax benefits as a component of income tax expense in the Consolidated Income Statements. During 2014, 2013, and 2012, Sotheby’s recognized an expense of $0.2 million, a benefit of $0.2 million, and an expense of $0.5 million, respectively, for interest expense and penalties related to unrecognized tax benefits. As of December 31, 2014, 2013, and 2012, the liability for tax-related interest and penalties included on Sotheby's Consolidated Balance Sheets was $1.8 million, $1.6 million, and $1.8 million, respectively. The net increase in 2014 was due primarily to the accrual of additional interest partially offset by the reversal of the interest accrued on unrecognized tax benefits that were recognized during 2014. The net decrease in 2013 was due primarily to the reversal of the interest accrued on the unrecognized tax benefits that were recognized during 2013, partially offset by an accrual of additional interest for the year.

Sotheby’s is subject to taxation in the U.S. and various state and foreign jurisdictions and as a result, is subject to ongoing tax audits in various jurisdictions. Sotheby's U.S. federal, and various U.S. state and foreign tax returns are currently under examination by taxing authorities. The earliest open tax year for the major jurisdictions in which Sotheby's does business, which includes the U.S. (including various state and local jurisdictions), the U.K., and Hong Kong, is 2007.

Management believes it is reasonably possible that a decrease of $5.5 million in the balance of unrecognized tax benefits can occur within 12 months of the December 31, 2014 balance sheet date primarily as a result of the expiration of the statutes of limitation and an expected settlement of an ongoing tax audit.