Corporate Income Taxes

The provision for income taxes for the years ended December 31, 2016, 2015 and 2014 consisted of the following:



	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	)



	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

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



	December 31,
	2016			2015

Deferred tax assets
Basis differences in depreciation and amortization	$	10,073		$	6,578
Deferred lease liabilities	23,527			24,345
Deferred revenue	8,247			10,974
Deferred compensation expense incurred in connection with stock options	994			1,589
Federal and state net operating loss carry-forwards	8,473			10,430
Accruals, reserves and other	7,297			7,654
	$	58,611		$	61,570
Deferred tax liabilities
Deferred costs	$	803		$	1,751
Change in accounting method	3,147			6,621
Undistributed foreign earnings and other	529			622
	$	4,479		$	8,994
Gross deferred tax assets	54,132			52,576
Valuation allowance	(54,193		)	(52,637		)
Deferred tax liabilities, net	$	(61	)	$	(61	)

As of December 31, 2016 and 2015, the Company had a net deferred tax liability of $61.

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 $54,193 and $52,637 at December 31, 2016 and 2015, 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, 2016 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, 2016, state tax net operating loss carry-forwards were $8,473. 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 was approximately $590 as of December 31, 2016.

The Company’s foreign pre-tax earnings (loss) related to the Swiss clubs were $(264), $277 and $762 for the years ended December 31, 2016, 2015 and 2014, respectively, and the related current tax provisions (benefit) were $(63), $67 and $183, 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 $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.

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, 2016, 2015 and 2014:



	Years Ended December 31,
	2016		2015		2014
Federal statutory tax rate	35	%	35	%	35	%
State and local income taxes (net of federal tax benefit)	2		11		8
Change in state effective income tax rate	—		3		(4	)
State tax (benefit) provision related to insurance premiums	—		(14	)	7
Tax reserves	—		1		1
Permanent differences in fines and penalties	—		2		1
	37		38		48
Valuation allowance	18		(249	)	(422	)
Elimination of federal effect of state deferred taxes	—		—		53
	55	%	(211	)%	(321	)%

The effective tax rate on the Company’s pre-tax income or loss was 55% for 2016, (211)% for 2015, and (321)% for 2014, 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 as of both December 31, 2016 and 2015. Interest (income) expense on unrecognized tax benefits was $81 for the years ended December 31, 2016 and 2015, and $(334) for the year ended December 31, 2014. 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, 2016 and 2015 of $785 and $704, respectively.

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



	2016		2015		2014

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

As of December 31, 2016, 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 2017 since the income tax returns may no longer be subject to audit in 2017.

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 2012 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 was recently notified by the Internal Revenue Service that they intend to examine 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 2012).

In a revised letter dated December 12, 2016, the Company received from the State of New York a revised assessment related to tax years 2006-2009 for $4,722, inclusive of $2,044 of interest. The Company disagreed with the proposed assessment and have scheduled a conciliation conference with the State of New York to appeal the assessment. 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.