17.

INCOME TAXES

As a result of its indirect investment in Lazard Group, Lazard Ltd, through certain of its subsidiaries, is subject to U.S. federal income taxes on its portion of Lazard Group’s operating income. Although a portion of Lazard Group’s income is subject to U.S. federal income taxes, Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Group’s income from its U.S. operations is generally not subject to U.S. federal income taxes because such income is attributable to its partners. In addition, Lazard Group is subject to UBT which is attributable to Lazard Group’s operations apportioned to New York City. UBT is incremental to the U.S. federal statutory tax rate. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes.

Substantially all of Lazard’s foreign operations are conducted in “pass-through” entities for U.S. income tax purposes and the Company provides for U.S. income taxes on a current basis for substantially all of those earnings. The repatriation of prior earnings attributable to “non-pass-through” entities would not result in the recognition of a material amount of additional U.S. income taxes.

The components of the Company’s provision (benefit) for income taxes for the years ended December 31, 2013, 2012 and 2011, and a reconciliation of the U.S. federal statutory income tax rate to the Company’s effective tax rates for such years, are shown below.


	Year Ended December 31,
	2013			2012			2011
Current:
Federal	$	(3,678	)	$	2,094		$	(501	)
Foreign		41,084			27,650			35,885
State and local (primarily UBT)		(167	)		5,813			2,342

Total current		37,239			35,557			37,726

Deferred:
Federal		19,934			(3,330	)		16,167
Foreign		(4,520	)		(1,127	)		(2,832	)
State and local (primarily UBT)		(960	)		–			(6,121	)

Total deferred		14,454			(4,457	)		7,214

Total	$	51,693		$	31,100		$	44,940


	Year Ended December 31,
	2013			2012			2011
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Income of noncontrolling interests		(0.8	)		(2.4	)		(2.0	)
Share-based incentive compensation		–			7.4			–
Foreign source income not subject to U.S. income tax		(12.7	)		(34.6	)		(13.8	)
Foreign taxes		14.1			13.5			8.3
State and local taxes (primarily UBT)		2.6			3.4			0.9
Change in U.S. federal valuation allowance		(14.9	)		1.4			(8.3	)
Other, net		0.5			1.4			(1.0	)

Effective income tax rate		23.8	%		25.1	%		19.1	%

See Note 21 of Notes to Consolidated Financial Statements regarding operating income (loss) by geographic region.

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated statements of financial condition. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities, which are included in “other assets” and “other liabilities”, respectively, on the consolidated statements of financial condition, are as follows:


	December 31,
	2013			2012
Deferred Tax Assets:
Basis adjustments (primarily as a result of the separation and recapitalization transactions that occurred during 2005 and from secondary offerings)	$	739,059		$	820,229
Compensation and benefits		250,413			243,564
Net operating loss and tax credit carryforwards		348,433			308,233
Depreciation and amortization		8,169			3,404
Other		58,273			30,626

Gross deferred tax assets		1,404,347			1,406,056
Valuation allowance		(1,225,305	)		(1,238,765	)

Deferred tax assets (net of valuation allowance)	$	179,042		$	167,291

Deferred Tax Liabilities:
Depreciation and amortization	$	19,296		$	33,715
Compensation and benefits		30,042			4,292
Goodwill		15,434			15,843
Other		70,394			50,648

Deferred tax liabilities	$	135,166		$	104,498

The basis adjustments recorded as of December 31, 2013 and 2012 are the result of:

•

purchases and redemptions of historical and working member interests consummated in connection with the separation and recapitalization of the Company, which resulted in deferred tax assets of $123,027 and $158,459 at December 31, 2013 and 2012, respectively,

•

tax basis step-ups resulting from the exchange of LAZ-MD exchangeable interests and from secondary offerings, and associated with the LAM Merger, which in the aggregate resulted in deferred tax assets of $603,552 and $638,993 at December 31, 2013 and 2012, respectively,

•

tax basis step-up for U.S. income tax purposes on certain U.K. assets, which resulted in deferred tax assets of $6,538 and $16,083 at December 31, 2013 and 2012, respectively, and

•

tax basis step-up for payments made under the tax receivable agreement of $5,942 and $6,694 at December 31, 2013 and 2012, respectively.

Although we have been profitable on a consolidated basis in the last three years, certain of our tax-paying entities have individually experienced minimal profits on a cumulative three-year basis and losses in 2012, primarily due to permanent differences between net income and taxable income at such entities. Considering the recent operating results of such entities, we have recorded valuation allowances on our deferred tax assets of $1,225,305 and $1,238,765 as of December 31, 2013 and December 31, 2012, respectively. The valuation allowance at December 31, 2013 reflects a net decrease of $13,460 from the balance of $1,238,765 at December 31, 2012. This net decrease in the valuation allowance for the year ended December 31, 2013 consists of additions of $13,375 and $22,010 for the amounts charged to income tax expense and stockholders’ equity, respectively, and a deduction of $48,845 which was credited to income tax expense.

As mentioned previously, certain of our tax-paying entities have individually experienced minimal profits on a cumulative basis over the past several years and losses in 2012. Taking into account all available information, we cannot determine that it is more likely than not that deferred tax assets will be realized. If the cumulative positive information outweighs the negative, including among other matters the achievement by the relevant tax-paying entities of sustainable levels of profitability, the evaluation of the realizability of the deferred tax assets could change and a significant amount of the valuation allowance could be released in whole or in part. This could occur at some point or points over the next few years, including as early as the end of 2014. If any significant valuation allowance reduction were to occur, we would likely have a negative effective tax rate in the period in which such reduction occurs.

The Company had net operating loss and tax credit carryforwards for which related deferred tax assets were recorded at December 31, 2013 primarily relating to:

(i)

indefinite-lived carryforwards (subject to various limitations) of approximately $74,619, primarily in the U.K., France, Australia, Italy, Germany, Singapore and Italy; and

(ii)

certain carryforwards of approximately $266,243 in the U.S., which begin expiring in 2029.

As a result of certain realization requirements regarding share-based incentive plan awards, certain deferred tax assets pertaining to tax deductions related to equity compensation in excess of compensation recognized for financial reporting that would otherwise have been recognized at December 31, 2013 and 2012 of $30,200 and $19,900 are not included in the table above. The impact of such excess tax deductions will be recorded in stockholders’ equity if and when such deferred tax assets are ultimately realized.

With few exceptions, the Company is no longer subject to income tax examination by foreign tax authorities and by U.S. federal, state and local tax authorities for years prior to 2009. While we are under examination in various tax jurisdictions with respect to certain open years, the Company does not expect that the result of any final determination related to these examinations will have a material impact on its financial statements. Developments with respect to such examinations are monitored on an ongoing basis and adjustments to tax liabilities are made as appropriate.

A reconciliation of the beginning to the ending amount of gross unrecognized tax benefits (excluding interest and penalties) for the years ended December 31, 2013, 2012 and 2011 is as follows:


	Year Ended December 31,
	2013			2012			2011
Balance, January 1 (excluding interest and penalties of $14,799, $8,454 and $7,099, respectively)	$	55,947		$	62,200		$	58,605
Increases in gross unrecognized tax benefits relating to tax positions taken during:
Prior years		417			1,393			1,081
Current year		17,596			19,690			16,928
Decreases in gross unrecognized tax benefits relating to:
Tax positions taken during prior years		(385	)		(5,397	)		(5,133	)
Settlements with tax authorities		(5,587	)		(12,077	)		–
Lapse of the applicable statute of limitations		(5,083	)		(9,862	)		(9,281	)

Balance, December 31 (excluding interest and penalties of $12,200, $14,799 and $8,454, respectively)	$	62,905		$	55,947		$	62,200

Additional information with respect to unrecognized tax benefits is as follows:


	Year Ended December 31,
	2013			2012		2011
Unrecognized tax benefits at the end of the year that, if recognized, would favorably affect the effective tax rate (includes interest and penalties of $12,200, $14,799 and $8,454, respectively)	$	36,272		$	44,452	$	44,545
Offset to deferred tax assets for unrecognized tax benefits that, if recognized, would not affect the effective tax rate	$	38,833		$	26,294	$	26,109
Interest and penalties recognized in current income tax expense (after giving effect to the reversal of interest and penalties of $7,326, $3,130 and $1,785, respectively)	$	(2,599	)	$	6,345	$	1,355

The Company anticipates that it is reasonably possible that approximately $8,600 of unrecognized tax benefits recorded at December 31, 2013 may be recognized within 12 months as a result of the lapse of the statute of limitations in various tax jurisdictions.

Tax Receivable Agreement

The redemption of historical partner interests in connection with the Company’s separation and recapitalization that occurred in May 2005 and the subsequent exchanges through December 31, 2013 of LAZ-MD Holdings exchangeable interests for shares of Class A common stock have resulted, and future exchanges of LAZ-MD Holdings exchangeable interests for shares of Class A common stock may result, in increases in the tax basis of the tangible and/or intangible assets of Lazard Group. Included in our deferred tax assets as of December 31, 2013 are approximately $652,000 related to certain basis step-up assets and approximately $257,000 of net operating losses generated by the amortization of such step-up assets, all of which are subject to the tax receivable agreement dated as of May 10, 2005 with LFCM Holdings. The tax receivable agreement requires the Company to pay LFCM Holdings 85% of the cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes as a result of these increases in tax basis. The Company records provisions for payments under the tax receivable agreement to the extent they are probable and estimable. During the years ended December 31, 2013 and 2011, the Company recorded a provision pursuant to tax receivable agreement of $1,249 and $429, respectively, in “operating expenses—other” on the consolidated statements of operations (no provision was required for the year ended December 31, 2012).