Corporate Income Taxes

On December 22, 2017, the U.S. President signed into law H.R.1, formerly known as the Tax Cuts and Jobs Act (the “Tax Legislation”). The Tax Legislation significantly revises the U.S. tax code by, (i) lowering the U.S federal statutory income tax rate from 35% to 21%, (ii) implementing a territorial tax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries (“Transition Tax”), (iv) requiring a current inclusion of global intangible low taxed income (“GILTI”) of certain earnings of controlled foreign corporations in U.S. federal taxable income, (v) creating the base erosion anti-abuse tax (“BEAT”) regime, (vi) implementing bonus depreciation that will allow for full expensing of qualified property, and (vii) limiting deductibility of interest and executive compensation expense, among other changes. The Company has computed its current tax benefit using the U.S. federal statutory rate of 35% while it has computed its deferred tax expense using the new statutory rate effective on January 1, 2018 of 21%.

The Company recorded the applicable impact of the Tax Legislation within its provision for income taxes in the year ended December 31, 2017. The Company has recorded the required income tax effects under the Tax Legislation and provided disclosure pursuant to ASC 740, Income Taxes, and the SEC Staff Accounting Bulletin (“SAB”) 118, using its best estimates based on reasonable and supportable assumptions and available inputs and underlying information as of the reporting date. The three provisions that most significantly impact the Company for the year ended December 31, 2017 are (i) the impact of the U.S. federal statutory rate reduction, from 35% to 21%, on the deferred tax provision and related valuation allowance (ii) the full expensing of qualified property and (iii) the calculation of the Transition Tax. These amounts were recorded as provisional pursuant to SAB 118 since they require more detailed information before these amounts can be finalized. All amounts recorded were based on current available guidance on interpretation of the Tax Legislation, and reasonable approaches to estimating their impact. The amounts recorded in the year ended December 31, 2017, are subject to adjustment as future guidance becomes available, additional facts become known or estimation approaches are refined.

Other provisions of the new legislation that are not applicable to the Company until the year ended December 31, 2018 include, but are not limited to, limiting deductibility of interest and executive compensation expense. Based on current facts and circumstances, we do not anticipate the impact of these provisions to be material to the overall financial statements.

The (benefit) provision for income taxes for the years ended December 31, 2017, 2016 and 2015 consisted of the following:



	Year Ended December 31, 2017
	Federal			Foreign			State and Local			Total
Current	$	(9,599	)	$	(63	)	$	(56	)	$	(9,718	)
Deferred	12			—			20			32
	$	(9,587	)	$	(63	)	$	(36	)	$	(9,686	)



	Year Ended December 31, 2016
	Federal		Foreign			State and Local		Total
Current	$	9,346	$	(63	)	$	488	$	9,771
Deferred	—		—			—		—
	$	9,346	$	(63	)	$	488	$	9,771



	Year Ended December 31, 2015
	Federal			Foreign		State and Local			Total
Current	$	(3,100	)	$	67	$	197		$	(2,836	)
Deferred	(8,262		)	—		(3,253		)	(11,515		)
	$	(11,362	)	$	67	$	(3,056	)	$	(14,351	)

The components of deferred tax liabilities, net consist of the following items:



	December 31,
	2017			2016
Deferred tax assets
Basis differences in depreciation and amortization	$	—		$	10,073
Deferred lease liabilities	15,638			23,527
Deferred revenue	4,590			8,247
Deferred compensation expense incurred in connection with stock options	912			994
Federal and state net operating loss carry-forwards	15,645			8,473
Accruals, reserves and other	4,942			7,297
	$	41,727		$	58,611
Deferred tax liabilities
Deferred costs	$	1,740		$	803
Basis differences in depreciation and amortization	1,311			—
Change in accounting method	—			3,147
Undistributed foreign earnings and other	—			529
	$	3,051		$	4,479
Gross deferred tax assets	38,676			54,132
Valuation allowance	(38,769		)	(54,193		)
Deferred tax liabilities, net	$	(93	)	$	(61	)

As of December 31, 2017 and 2016, the Company had a net deferred tax liability of $93 and $61, respectively.

In assessing the realizability of deferred tax assets, the Company evaluates whether it is more likely than not (more than 50%) that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amount expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carryforward can be utilized. The Company evaluates all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable.

As required by the authoritative guidance on accounting for income taxes, the Company evaluates the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, we establish a valuation allowance. The Company has recorded valuation allowances in the amounts of $38,769 and $54,193 at December 31, 2017 and 2016, respectively. Due to the change in the U.S. federal statutory income tax rate from the Tax Legislation, the deferred tax assets and liabilities of the Company were re-measured from using a 35% tax rate to a 21% tax rate. As the Company maintains a full valuation allowance against its outstanding net deferred tax assets, the change in net deferred tax assets due to the rate change was offset by a corresponding change in the valuation allowance.

In recording the valuation allowance, deferred tax liabilities associated with goodwill generally cannot be used as a source of taxable income to realize deferred tax assets with a definitive loss carry forward period. The Company does not amortize goodwill for book purposes but does amortize goodwill with tax basis for tax purposes. The deferred tax liability remaining after full valuation allowance at December 31, 2017 relates to the tax effect of differences between book and tax basis of intangible assets not expected to reverse during the Company’s net operating loss carry forward period.

As of December 31, 2017, state tax net operating loss carry-forwards were $133,840. Such amounts expire between December 31, 2018 and December 31, 2037.

The Company’s foreign pre-tax earnings (loss) related to the Swiss clubs were $(262), $(264) and $277 for the years ended December 31, 2017, 2016 and 2015, respectively. The related current tax provisions (benefit) were $(63) for both the years ended December 31, 2017 and 2016, and $67 for the year ended December 31, 2015. In 2011, the Company repatriated Swiss earnings through 2010. In accordance with ASC 740-30, the Company had recognized a deferred tax liability of $529 for the incremental U.S. tax cost on the total cumulative undistributed earnings of the Swiss clubs for the period through December 31, 2016. Due to the Transition Tax, the Company expects a deemed repatriation of its foreign earnings and profits related to the Swiss clubs therefore reversing its deferred tax liability on those unrepatriated foreign earnings and profits. As the Company has a taxable loss for the current year, it expects to not pay any Transition Tax but rather it will have a corresponding reduction to its net operating loss carryforward.

The differences between the U.S. Federal statutory income tax rate and the Company’s effective tax rate were as follows for the years ended December 31, 2017, 2016 and 2015:



	Years Ended December 31,
	2017		2016		2015
Federal statutory tax rate	35	%	35	%	35	%
State and local income taxes (net of federal tax benefit)	1		2		11
Change in state effective income tax rate	—		—		3
State tax (benefit) provision related to insurance premiums	—		—		(14	)
Tax reserves	—		—		1
Permanent differences in fines and penalties	(3	)	—		2
Permanent difference in compensation	(2	)	—		—
	31		37		38
Valuation allowance	151		18		(249	)
	182	%	55	%	(211	)%

The effective tax rate on the Company’s pre-tax income or loss was 182% for 2017, 55% for 2016, and (211)% for 2015, which was primarily impacted by the change in the valuation allowance.

The amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate in any future periods were $1,155 and $1,187 as of December 31, 2017 and 2016, respectively. Interest expense on unrecognized tax benefits was $81 for the years ended both December 31, 2017 and 2016. The Company recognizes both interest accrued related to unrecognized tax benefits and penalties in income tax expenses. The Company had total accruals for interest as of December 31, 2017 and 2016 of $865 and $785, respectively.

A reconciliation of unrecognized tax benefits, excluding interest and penalties, is as follows:



	2017			2016		2015

Balance on January 1	$	1,187		$	1,187	$	1,187
Gross decreases for tax positions taken in prior years	—			—		—
Gross increases for tax positions taken in prior years	—			—		—
Decreases relating to settlements with taxing authorities	—			—		—
Reductions due to a lapse of applicable statute of limitations	(32		)	—		—
Balance on December 31	$	1,155		$	1,187	$	1,187

As of December 31, 2017, the Company had $1,155 of unrecognized tax benefits and it is reasonably possible that the entire amount could be realized by the Company in 2018 since the income tax returns may no longer be subject to audit in 2018.

The Company files federal, foreign and multiple state and local jurisdiction income tax returns. The Company is no longer subject to examinations of its federal income tax returns by the Internal Revenue Service for years 2013 and prior. U.S. net operating losses generated in closed years and utilized in open years are subject to adjustment by tax authorities. The Company is under examination by the Internal Revenue Service regarding federal income tax returns for years 2014 and 2015.

The following state and local jurisdictions are currently examining our respective returns for the years indicated: New York State (2006 through 2014), and New York City (2006 through 2014).

In particular, the Company disagrees with the proposed assessment dated December 12, 2016 from the State of New York and attended a conciliation conference with the New York State Department of Taxation and Finance Audit section on June 7, 2017. No settlement was reached at the conference and the proposed assessment was sustained. As such, in a revised letter dated November 30, 2017, the Company received from the State of New York a revised assessment related to tax years 2006-2009 for approximately $5,097, inclusive of approximately $2,419 of interest. The Company is currently in the process of appealing the assessment with the New York State Division of Tax Appeals. The Company has not recorded a tax reserve related to the proposed assessment. It is difficult to predict the final outcome or timing of resolution of any particular matter regarding these examinations. An estimate of the reasonably possible change to unrecognized tax benefits within the next 12 months cannot be made. On November 17, 2017, the Company was notified that the State of New York proposed an adjustment in the amount of approximately $3,906 for the years 2010 to 2014, inclusive of approximately $757 in interest. The Company is also under examination in New York City (2006 through 2014), which the Company has consented to extend the assessment period through December 31, 2018.