21. INCOME TAXES

For tax purposes, AFN contributed its assets and certain of its liabilities to Cohen Brothers in exchange for an interest in Cohen Brothers on December 16, 2009. AFN was organized and had been operated as a REIT for United States federal income tax purposes. Accordingly, AFN generally was not subject to United States federal income tax to the extent of its distributions to stockholders and as long as certain asset, income, distribution, and share ownership tests were met. As a result of the consummation of the Merger, IFMI ceased to qualify as a REIT effective as of January 1, 2010, and is instead treated as a C corporation for United States federal income tax purposes. The components of income tax expense (benefit) included in the consolidated statements of operations for each year presented herein are:

INCOME TAX EXPENSE

(Dollars in Thousands)


	For the Year Ended December 31,
	2012			2011			2010
Current income tax expense (benefit):
Federal income tax expense	$	142		$	92		$	—
Foreign income tax expense		20			149			31
State and local income tax expense/(benefit)		120			—			47

		282			241			78

Deferred income tax expense (benefit):
Federal income tax (benefit) expense		(703	)		(1,047	)		587
State income tax (benefit) expense		(194	)		(343	)		(1,414	)

Net deferred tax expense (benefit)		(897	)		(1,390	)		(827	)

Total	$	(615	)	$	(1,149	)	$	(749	)

The current tax liability, net of refunds receivable as of December 31, 2012 and, 2011 was $1,434 and $1,023, respectively, and is included as a component of accounts payable and other liabilities in the consolidated balance sheets. The current tax liability includes the liability for unrecognized tax benefits described below.

The expected income tax expense /(benefit) using the federal statutory rate differs from income tax expense / (benefit) pertaining to pre-tax income / (loss) as a result of the following for the year ended December 31, 2012, 2011, and 2010, respectively.


	2012			2011			2010
Federal statutory rate — 35%	$	(929	)	$	(5,053	)	$	3,663
Pass thru impact		352			1,689			(1,267	)
Goodwill impairment		—			—			1,299
Deferred tax valuation allowance		(42	)		1,964			(5,214	)
Other, net		4			251			770

Total	$	(615	)	$	(1,149	)	$	(749	)

Deferred tax assets and liabilities are determined based on the difference between the book basis and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.

The components of the net deferred tax asset (liability) are as follows:

DEFERRED TAX ASSET AND LIABILITY

(Dollars in Thousands)


	December 31, 2012									December 31, 2011
	Asset			Liability			Net			Asset			Liability			Net
Federal Net operating loss carry-forward	$	29,990		$	—		$	29,990		$	28,116		$	—		$	28,116
State Net operating loss carry-forward		5,066			—			5,066			4,841			—			4,841
Capital loss carry-forward		25,283			—			25,283			19,834			—			19,834
Unrealized gain on debt		—			(14,095	)		(14,095	)		—			(14,179	)		(14,179	)
Unrealized loss on investment in the Operating LLC		113,398			—			113,398			114,121			—			114,121
Other		1,253			—			1,253			6,730			—			6,730

Ending deferred tax asset/(liability)		174,990			(14,095	)		160,895			173,642			(14,179	)		159,463
Less: Deferred tax asset valuation allowance		(167,498	)		—			(167,498	)		(166,963	)		—			(166,963	)

Net deferred tax asset/(liability)	$	7,492		$	(14,095	)	$	(6,603	)	$	6,679		$	(14,179	)	$	(7,500	)

As of December 31, 2012, the Company had a federal net operating loss (“NOL”) of approximately $85,684, which will be available to offset future taxable income, subject to limitations described below. If not used, this NOL will begin to expire in 2028. The Company also had net capital losses (“NCLs”) in excess of capital gains of $58,892 as of December 31, 2012, which can be carried forward to offset future capital gains, subject to the limitations described below. If not used, this carry forward will begin to expire in 2014. No assurance can be made that the Company will have future taxable income or future capital gains to benefit from its NOL and NCL carryovers.

The Company has determined that its NOL and NCL carryovers are not currently limited by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). However, the Company may experience an ownership change as defined in that section (“Ownership Change”) in the future.

If an Ownership Change were to occur in the future, the Company’s ability to use its NOLs, NCLs, and certain recognized built-in losses to reduce its taxable income in a future year would generally be limited to an annual amount (the “Section 382 Limitation”) equal to the fair value of the Company immediately prior to the Ownership Change multiplied by the “long term tax-exempt interest rate.” In the event of an Ownership Change, NOLs and NCLs that exceed the Section 382 Limitation in any year will continue to be allowed as carry forwards for the remainder of the carry forward period, and such NOLs and NCLs can be used to offset taxable income for years within the carry forward period subject to the Section 382 Limitation in each year. However, if the carry forward period for any NOL or NCL were to expire before that loss is fully utilized, the unused portion of that loss would be lost.

Notwithstanding the facts that the Company has determined that the use of its remaining NOL and NCL carry forwards are not currently limited by Section 382 of the Code, the Company recorded a valuation allowance for a significant portion of its NOLs and NCLs when calculating its net deferred tax liability as of December 31, 2012. The valuation allowance was recorded because the Company determined it is not more likely than not that it will realize these benefits.

In determining its federal income tax provision for 2012, the Company has assumed that it will retain the valuation allowance applied against its deferred tax asset related to the NOL and NCL carry forwards as of December 31, 2012. The Company’s determination that it is not more likely than not that it will realize future tax benefits from the NOLs and NCLs may change in the future. In the future, the Company may conclude that it is more likely than not that it will realize the benefit of all or a portion of the NOL and NCL carry forwards. If it makes this determination in the future, the Company would reduce the valuation allowance and record a tax benefit as a component of the statements of operations in the period it makes this determination. From that point forward, the Company would begin to record net deferred tax expense for federal and state income taxes as a component of its provision for income tax expense as it utilizes the NOLs and NCLs, for which the valuation allowance was removed.

A reconciliation of the beginning and ending unrecognized tax benefits for year ended December 31, 2012, 2011, and 2010, respectively, are as follows:


	2012		2011		2010
Unrecognized tax benefits as of January 1	$	1,231	$	1,231	$	—
Increases due to tax positions taken during prior periods		—		—		—
Increases due to tax positions taken in current period		—		—		1,231
Decreases due to settlements with taxing authorities		—		—		—
Reductions due to lapse of applicable statute of limitations		—		—		—

Unrecognized tax benefits as of December 31	$	1,231	$	1,231	$	1,231

The total amount of the unrecognized tax benefit of $1,231, if recognized, would affect the Company’s annual effective tax rate. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a component of the provision for income taxes in the consolidated statement of operations. During the years ended December 31, 2012, 2011, and 2010, the Company recognized interest expense of $79, $92, and $0, respectively. $171 and $92 were included in current taxes payable for accrued interest as of December 31, 2012 and 2011, respectively. No penalty amounts were recognized. The Company files tax returns in the U.S. federal jurisdiction, various states or local jurisdictions, the United Kingdom, Spain, and France. With few exceptions, the Company is no longer subject to examination for years prior to 2009.

In December 2012, IFMI received notification from the IRS that the IRS would examine its 2011 federal tax return. The exam was conducted in February 2013, IFMI received notification from the IRS that the exam was complete and no adjustments were identified.