Income Taxes

Total income taxes were allocated as follows (in thousands):



	Year Ended November 30,
	2016		2015		2014
Income tax expense	$	14,566	$	18,898	$	142,061
Stockholders’ equity, for compensation expense for tax purposes (in excess of)/less than amounts recognized for financial reporting purposes	4,186		5,935		(1,276		)

The provision for income tax expense consists of the following components (in thousands):



	Year Ended November 30,
	2016			2015			2014
Current:
U.S. Federal	$	27,473		$	(45,007	)	$	4,335
U.S. state and local	6,196			(28,260		)	4,056
Foreign	(5,090		)	3,369			11,475
Total current	28,579			(69,898		)	19,866
Deferred:
U.S. Federal	(11,249		)	74,085			87,293
U.S. state and local	(4,819		)	22,811			27,181
Foreign	2,055			(8,100		)	7,721
Total deferred	(14,013		)	88,796			122,195
Total income tax expense	$	14,566		$	18,898		$	142,061

The following table presents the U.S. and non-U.S. components of income before income tax expense (in thousands):



	Year Ended November 30,
	2016			2015		2014
U.S.	$	34,178		$	82,515	$	285,806
Non-U.S. (1)	(4,206		)	31,712		17,215
Income before income tax expense	$	29,972		$	114,227	$	303,021


(1)	For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.

Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate of 35% to earnings before income taxes as a result of the following (dollars in thousands):



	Year Ended November 30,
	2016					2015					2014
	Amount			Percent		Amount			Percent		Amount			Percent
Computed expected income taxes	$	10,490		35.0	%	$	39,979		35.0	%	$	106,058		35.0	%
Increase (decrease) in income taxes resulting from:
State and city income taxes, net of Federal income tax benefit	124			0.5		(3,542		)	(3.1	)	20,304			6.7
International operations (including foreign rate differential)	(3,404		)	(11.4	)	(11,474		)	(10.0	)	(3,061		)	(1.0	)
Tax exempt income	(4,640		)	(15.5	)	(6,789		)	(5.9	)	(6,746		)	(2.2	)
Non deductible settlements	—			—		—			—		3,850			1.3
Valuation allowance related to the Jefferies Bache business	—			—		—			—		4,655			1.5
Goodwill impairment	—			—		—			—		13,619			4.5
Foreign tax credits	—			—		(7,240		)	(6.3	)	(3,149		)	(1.0	)
Non-deductible Jefferies Bache wind down costs	—			—		3,225			2.8		—			—
Meals and entertainment	4,640			15.5		5,232			4.6		4,103			1.4
Excess stock detriment	9,755			32.6		—			—		—			—
Federal benefits related to prior year tax filings	(2,928		)	(9.8	)	199			0.1		1,055			0.3
Other, net	529			1.7		(692		)	(0.7	)	1,373			0.4
Total income taxes	$	14,566		48.6	%	$	18,898		16.5	%	$	142,061		46.9	%

The following table presents a reconciliation of gross unrecognized tax benefits (in thousands):



	Year Ended November 30,
	2016			2015			2014
Balance at beginning of period	$	107,902		$	126,662		$	126,844
Increases based on tax positions related to the current period	5,045			—			4,831
Increases based on tax positions related to prior periods	1,447			2,818			1,624
Decreases based on tax positions related to prior periods	(4,520		)	(3,883		)	(1,709		)
Decreases related to settlements with taxing authorities	(347		)	(17,695		)	(4,928		)
Balance at end of period	$	109,527		$	107,902		$	126,662

The total amount of unrecognized benefit that, if recognized, would favorably affect the effective tax rate was $73.1 million and $71.9 million (net of federal benefits of taxes) at November 30, 2016 and 2015, respectively.

We recognize interest accrued related to unrecognized tax benefits in Interest expense. Penalties, if any, are recognized in Other expenses in the Consolidated Statements of Earnings. Net interest expense related to unrecognized tax benefits was $6.5 million, $2.2 million and $7.7 million for the years ended November 30, 2016, 2015 and 2014, respectively. At November 30, 2016 and 2015, we had interest accrued of approximately $39.3 million and $32.8 million, respectively, included in Accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. No material penalties were accrued for the years ended November 30, 2016 and 2015.

The cumulative tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below (in thousands):



	November 30,
	2016			2015
Deferred tax assets:
Compensation and benefits	$	285,542		$	253,291
Net operating loss	11,021			7,862
Long-term debt	60,707			95,765
Accrued expenses and other	124,269			113,259
Sub-total	481,539			470,177
Valuation allowance	(9,464		)	(13,337		)
Total deferred tax assets	472,075			456,840
Deferred tax liabilities:
Amortization of intangibles	107,474			103,560
Other	21,630			26,345
Total deferred tax liabilities	129,104			129,905
Net deferred tax asset, included in Other assets	$	342,971		$	326,935

The valuation allowance represents the portion of our deferred tax assets for which it is more likely than not that the benefit of such items will not be realized. We believe that the realization of the net deferred tax asset of $343.0 million is more likely than not based on expectations of future taxable income in the jurisdictions in which we operate.

At November 30, 2016, we had gross net operating loss carryforwards of $56.3 million, primarily in Europe (primarily the United Kingdom (“U.K.”)). The losses in the U.K. have an unlimited carryforward period. A deferred tax asset of $0.8 million related to net operating losses in Asia has been fully offset by a valuation allowance while $5.9 million of deferred tax assets related to net operating losses in Europe has been fully offset by a valuation allowance. The remaining valuation allowance is attributable to deferred tax assets related to compensation and benefits, capital losses, and tax credits in the U.K.

We have a tax sharing agreement between us and Leucadia. Refer to Note 21. Related Party Transactions, for further information.

At November 30, 2016 and 2015, we had approximately $157.0 million and $205.0 million, respectively, of earnings attributable to foreign subsidiaries that are indefinitely reinvested abroad and for which no U.S. Federal income tax provision has been recorded. Accordingly, a deferred tax liability of approximately $55.0 million and $59.0 million has not been recorded with respect to these earnings at November 30, 2016 and 2015, respectively.

We are currently under examination by the Internal Revenue Service and other major tax jurisdictions. We do not expect that resolution of these examinations will have a material effect on our consolidated financial position, but could have a material impact on the consolidated results of operations for the period in which resolution occurs. It is reasonably possible that, within the next twelve months, statutes of limitation will expire which would have the effect of reducing the balance of unrecognized tax benefits by $2.7 million.

The table below summarizes the earliest tax years that remain subject to examination in the major tax jurisdictions in which we operate:



Jurisdiction	Tax Year
United States	2007
California	2007
New Jersey	2010
New York State	2001
New York City	2003
United Kingdom	2014
Hong Kong	2009