Corporate Income Taxes

The provision for income taxes for the years ended December 31, 2015, 2014 and 2013 consisted of the following:



	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	)



	Year Ended December 31, 2014
	Federal		Foreign		State and Local		Total
Current	$	12,454	$	183	$	266	$	12,903
Deferred	14,684		—		25,024		39,708
	$	27,138	$	183	$	25,290	$	52,611



	Year Ended December 31, 2013
	Federal		Foreign		State and Local		Total
Current	$	396	$	232	$	175	$	803
Deferred	6,487		—		77		6,564
	$	6,883	$	232	$	252	$	7,367

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



	December 31,
	2015			2014

Deferred tax assets
Basis differences in depreciation and amortization	$	6,578		$	—
Deferred lease liabilities	24,345			25,077
Deferred revenue	10,974			12,603
Deferred compensation expense incurred in connection with stock options	1,589			2,370
Federal and state net operating loss carry-forwards	10,430			7,197
Accruals, reserves and other	7,654			6,121
Deferred Financing Arrangement	—			39,295
	$	61,570		$	92,663
Deferred tax liabilities
Basis differences in depreciation and amortization	$	—		$	16,674
Deferred costs	1,751			5,604
Deferred rent receivable	—			1,564
Change in accounting method	6,621			10,121
Undistributed foreign earnings and other	622			587
	$	8,994		$	34,550
Gross deferred tax assets	52,576			58,113
Valuation allowance	(52,637		)	(69,689		)
Deferred tax liabilities, net	$	(61	)	$	(11,576	)

As of December 31, 2015, the Company has net deferred tax liability of $61. The state net deferred tax liability balance as of December 31, 2015 is $17. For the year ending December 31, 2014 the Company had a net deferred tax liability of $11,576. The state net deferred tax liability balance as of December 31, 2014 was $3,274.

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 $43,681 and $60,368 at December 31, 2015 and 2014, respectively.

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 recorded at December 31, 2015 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, 2015, state tax net operating loss carry-forwards were $11,020. Such amounts expire between December 31, 2016 and December 31, 2034. The Company has not recorded a tax benefit for the windfall portion of the stock compensation that either created or increased the remaining state net operating losses for tax purposes. As such, the amount of state net operating loss carry-forwards for which a tax benefit would be recorded to additional paid-in capital when the tax benefit is realized is approximately $590 as of December 31, 2015.

The Company’s foreign pre-tax earnings related to the Swiss entity were $277, $762 and $968 for the years ended December 31, 2015, 2014 and 2013, respectively, and the related current tax provisions were $67, $183 and $232, respectively. In 2011, the Company repatriated Swiss earnings through 2010. In accordance with ASC 740-30, the Company has recognized a deferred tax liability of $622 for the incremental U.S. tax cost on the total cumulative undistributed earnings of the Swiss clubs for the period through December 31, 2015.

The results for the years ended December 31, 2013 include error corrections that resulted in an increase in benefit for corporate income taxes and a related increase in deferred tax assets in the Company’s consolidated statement of operations and consolidated balance sheet for each year, respectively. In the fourth quarter of 2013, the Company identified a correction relating to temporary differences in fixed assets for state depreciation that resulted in the recognition of an income tax benefit of $225. Also in the fourth quarter of 2013, the Company identified corrections related to temporary differences in landlord allowances resulting in the recognition of out of period expense of $209 for a net benefit to provision for corporate income taxes of $16 recorded in the year ended December 31, 2013. The Company does not believe that these error corrections are material to the current or prior reporting periods.

The differences between the United States Federal statutory income tax rate and the Company’s effective tax rate were as follows for the years ended December 31, 2015, 2014 and 2013:



	Years Ended December 31,
	2015		2014		2013
Federal statutory tax rate	35	%	35	%	35	%
State and local income taxes (net of federal tax benefit)	11		8		8
Change in state effective income tax rate	3		(4	)	—
State tax benefit related to insurance premiums	(14	)	7		(6	)
Tax reserves	1		1		2
Correction of an error	—		—		(1	)
Permanent differences in fines and penalties	2		1		—
Other permanent differences	—		—		(1	)
	38		48		37
Valuation allowance	(249	)	(422	)	—
Elimination of federal effect of state deferred taxes	—		53		—
	(211	)%	(321	)%	37	%

The 2015, 2014 and 2013 effective tax rate of (211)%, (321)%, and 37%, respectively, on the Company’s pre-tax income or loss was primarily impacted by the change in the valuation allowance and the state tax benefits related to insurance premiums and interest paid to the captive insurance company.

The amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate in any future periods were $1,155 as of both December 31, 2015 and 2014. For the years ended December 31, 2015, 2014 and 2013, interest (income) expense on unrecognized tax benefits was $81, $(334) and $495, respectively. 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, 2015 and 2014 of $704 and $623, respectively.

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



	2015		2014			2013

Balance on January 1	$	1,187	$	13,830		$	15,659
Gross decreases for tax positions taken in prior years	—		(12,675		)	(1,829		)
Gross increases for tax positions taken in prior years	—		32			—
Balance on December 31	$	1,187	$	1,187		$	13,830

As of December 31, 2015, the Company had $1,187 of unrecognized tax benefits and it is reasonably possible that the entire amount could be realized by the Company in 2016 since the income tax returns may no longer be subject to audit in 2016.

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 2010 and prior. U.S. net operating losses generated in closed years and utilized in open years are subject to adjustment by tax authorities.

The following state and local jurisdictions are currently examining our respective returns for the years indicated: New York State (2006 through 2012), and New York City (2006 through 2012).

On January 13, 2016, the Company received from the State of New York a revised assessment related to tax years 2006-2009 for $4,119, inclusive of $1,617 of interest. The Company continues to evaluate the merits of the proposed assessment as new information becomes available during continued discussions with the State of New York. 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.