17.

INCOME TAXES

Lazard Ltd, through its subsidiaries, is subject to U.S. federal income taxes on all of its U.S. operating income, as well as on the portion of non-U.S. income attributable to its U.S. subsidiaries. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes in foreign jurisdictions. Lazard Group is also subject to UBT attributable to its operations apportioned to New York City.

Substantially all of Lazard’s operations outside the U.S. are conducted in “pass-through” entities for U.S. income tax purposes. The Company provides for U.S. income taxes on a current basis for 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, 2015, 2014 and 2013, 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,
	2015			2014			2013
Current:
Federal	$	8,177		$	3,112		$	(3,678	)
Foreign		78,086			61,143			41,084
State and local (primarily UBT)		4,970			5,519			(167	)

Total current		91,233			69,774			37,239

Deferred:
Federal		(988,900	)		2,766			19,934
Foreign		(3,960	)		9,239			(4,520	)
State and local		(107,925	)		3,623			(960	)

Total deferred		(1,100,785	)		15,628			14,454

Total	$	(1,009,552	)	$	85,402		$	51,693


	Year Ended December 31,
	2015			2014			2013
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Income of noncontrolling interests		13.8			(0.5	)		(0.8	)
Foreign source income not subject to U.S. income tax		419.4			(12.4	)		(12.7	)
Foreign taxes		(361.6	)		8.2			14.1
State and local taxes		522.2			1.8			2.6
Change in U.S. federal valuation allowance		5,477.0			(18.7	)		(14.9	)
Other, net		(31.5	)		3.0			0.5

Effective income tax rate (a)		6,074.3	%		16.4	%		23.8	%

(a)

For the year ended December 31, 2015, the effective tax rate on “operating income (loss)” includes (i) the significant effect of the release of substantially all of our valuation allowance on deferred tax assets and the recognition of deferred tax assets associated with the recording of the tax receivable agreement obligation, as described below, and (ii) the negative impact on “operating income (loss)” as a result of the provision pursuant to the tax receivable agreement described below.

See Note 20 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 are as follows:


	December 31,
	2015			2014
Deferred Tax Assets:
Basis adjustments (a)	$	727,696		$	598,607
Compensation and benefits		204,780			258,976
Net operating loss and tax credit carryforwards		309,811			283,198
Depreciation and amortization		840			950
Other		36,154			36,470

Gross deferred tax assets		1,279,281			1,178,201
Valuation allowance		(89,251	)		(1,044,152	)

Deferred tax assets (net of valuation allowance)		1,190,030			134,049

Deferred Tax Liabilities:
Depreciation and amortization		17,629			21,908
Compensation and benefits		9,332			28,035
Goodwill		15,208			15,289
Other		28,370			39,705

Deferred tax liabilities		70,539			104,937

Net deferred tax assets	$	1,119,491		$	29,112

(a)	The basis adjustments recorded as of December 31, 2015 and 2014 are primarily the result of additional basis from acquisitions of interests, including the impact of recording the tax receivable agreement obligation during the year ended December 31, 2015, discussed below.

As of December 31, 2014, the Company had a valuation allowance on substantially all of our deferred tax assets. Certain of our tax-paying entities at which we have historically recorded significant valuation allowances were profitable on a cumulative basis for the three year periods ended June 30, 2015. In assessing our valuation allowance as of June 30, 2015, we considered all available information, including the magnitude of recent and current operating results, the relatively long duration of statutory carryforward periods, our historical experience utilizing tax attributes prior to their expiration dates, the historical volatility of operating results of these entities and our assessment regarding the sustainability of their profitability. At that time, we concluded that there was a sufficient history of sustained profitability at these entities that it was more likely than not that these entities would be able to realize deferred tax assets. Accordingly, during the period ended June 30, 2015, we released substantially all of the valuation allowance against the deferred tax assets held by these entities.

As a result, during the year ended December 31, 2015, we recorded a deferred tax benefit of approximately $878,000. In addition, included in basis adjustments, we also recorded (i) a separate deferred tax benefit of approximately $378,000 that reflected the tax deductibility of payments under the tax receivable agreement and (ii) a deferred tax expense of approximately $161,000 relating to the reduction of a deferred tax asset as a result of the partial extinguishment of our tax receivable agreement obligation. See “—Tax Receivable Agreement” below for more information regarding our accrual under the tax receivable agreement in the second quarter of 2015 and the partial extinguishment of our tax receivable agreement obligation in the third quarter of 2015.

Changes in the deferred tax assets valuation allowance for the years ended December 31, 2015, 2014 and 2013 was as follows:


	Year Ended December 31,
	2015		2014			2013
Beginning Balance	$	1,044,152	$	1,225,305		$	1,238,765
Credited to provision (benefit) for income taxes (a)		(954,487)		(203,051	)		(35,470	)
Charged (credited) to other comprehensive income		(414)		21,898			22,010

Ending Balance	$	89,251	$	1,044,152		$	1,225,305

(a)	Of the amount in 2014 of $203,051, approximately $106,000 is due primarily to the remeasurement of certain deferred tax assets with a corresponding valuation allowance.

The Company had net operating loss and tax credit carryforwards for which related deferred tax assets of $309,811 were recorded at December 31, 2015 primarily relating to:

(i)

indefinite-lived carryforwards (subject to various limitations) of approximately $24,892, primarily in Germany, Hong Kong, Luxembourg, Singapore, Spain and U.K.; and

(ii)

certain carryforwards of approximately $281,483 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, 2015 and 2014 of $111,587 and $46,633 are not included in the deferred tax assets and liabilities 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 2011. 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, 2015, 2014 and 2013 is as follows:


	Year Ended December 31,
	2015			2014			2013
Balance, January 1 (excluding interest and penalties of $13,004, $12,200 and $14,799, respectively)	$	68,224		$	62,905		$	55,947
Increases in gross unrecognized tax benefits relating to tax positions taken during:
Prior years		–			2,837			417
Current year		22,212			18,698			17,596
Decreases in gross unrecognized tax benefits relating to:
Tax positions taken during prior years		(621	)		(3,191	)		(385	)
Settlements with tax authorities		–			–			(5,587	)
Lapse of the applicable statute of limitations		(12,535	)		(13,025	)		(5,083	)

Balance, December 31 (excluding interest and penalties of $13,083, $13,004 and $12,200, respectively)	$	77,280		$	68,224		$	62,905

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


	Year Ended December 31,
	2015		2014		2013
Unrecognized tax benefits at the end of the year that, if recognized, would favorably affect the effective tax rate (includes interest and penalties of $13,083, $13,004 and $12,200, respectively)	$	74,785	$	40,353	$	36,272
Offset to deferred tax assets for unrecognized tax benefits that, if recognized, would not affect the effective tax rate	$	15,578	$	40,875	$	38,833
Interest and penalties recognized in current income tax expense (after giving effect to the reversal of interest and penalties of $3,865, $3,177 and $7,326, respectively)	$	79	$	804	$	(2,599	)

The Company anticipates that it is reasonably possible that approximately $17,000 of unrecognized tax benefits, including interest and penalties recorded at December 31, 2015 may be recognized within 12 months as a result of the lapse of the statute of limitations in various tax jurisdictions.

Tax Receivable Agreement

In connection with our initial public offering and related transactions in May 2005, we entered into a tax receivable agreement with the predecessor of LMDC Holdings on May 10, 2005 (the “Tax Receivable Agreement”). The agreement was based on the mutual recognition that the redemption of Lazard Group membership interests that were held by the historical partners of Lazard Group on May 10, 2005 for cash resulted in an increase in the tax basis of the tangible and intangible assets of Lazard Group attributable to our subsidiaries’ interest in Lazard Group that otherwise would not have been available. The agreement also was based on the mutual recognition that the exchange from time to time by such historical partners of exchangeable interests in LAZ-MD Holdings LLC for shares of our Class A common stock could subsequently result in additional increases in such tax basis.

On June 16, 2015, Lazard and LMDC Holdings amended and restated the Tax Receivable Agreement and, on October 26, 2015, Lazard and LTBP Trust, a Delaware statutory trust (the “Trust”), entered into a Second Amended and Restated Tax Receivable Agreement (the “Amended and Restated Tax Receivable Agreement”). Pursuant to these transactions, among other things, (i) LMDC Holdings assigned all of its obligations under the Tax Receivable Agreement, including the obligation to receive payments and promptly distribute them to historical partners of Lazard Group, to LTBP Trust, and the Trust assumed all of LMDC Holdings’ obligations thereunder, (ii) LMDC Holdings distributed the interests in the Trust to certain owners of LMDC Holdings, and (iii) holders of interests in the Trust obtained the ability, subject to certain restrictions and conditions, to transfer such interests to certain additional persons and entities, including Lazard.

The Amended and Restated Tax Receivable Agreement provides for the payment by our subsidiaries to the Trust of (i) approximately 45% (following the July 2015 purchase described below) of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of the increases in tax basis and of certain other tax benefits related to the Amended and Restated Tax Receivable Agreement, and (ii) an amount that we currently expect will approximate 85% of the cash tax savings that may arise from tax benefits attributable to payments under the Amended and Restated Tax Receivable Agreement. Our subsidiaries expect to benefit from the balance of cash savings, if any, in income tax that our subsidiaries realize. Any amount paid by our subsidiaries to the Trust will generally be distributed to the owners of the Trust, including our executive officers, in proportion to their beneficial interests in the Trust.

For purposes of the Amended and Restated Tax Receivable Agreement, cash savings in income and franchise tax will be computed by comparing our subsidiaries’ actual income and franchise tax liability to the amount of such taxes that our subsidiaries would have been required to pay had there been no increase in the tax basis of the tangible and intangible assets of Lazard Group attributable to our subsidiaries’ interest in Lazard Group as a result of the redemption and exchanges and had our subsidiaries not entered into the Amended and Restated Tax Receivable Agreement. The term of the Amended and Restated Tax Receivable Agreement will continue until approximately 2033 or, if earlier, until all relevant tax benefits have been utilized or expired.

As described above, during the period ended June 30, 2015, we released substantially all of our valuation allowance against deferred tax assets. As a result, we accrued a corresponding liability of $961,948 during the quarter ended June 30, 2015 for amounts relating to the Amended and Restated Tax Receivable Agreement at that time.

The amount of the Amended and Restated Tax Receivable Agreement liability is an undiscounted amount based upon currently enacted tax laws, the current structure of the Company and various assumptions regarding potential future operating profitability. The assumptions reflected in the estimate involve significant judgment. As such, the actual amount and timing of payments under the Amended and Restated Tax Receivable Agreement could differ materially from our estimates. Any changes in the amount of the estimated liability would be recorded as a non-compensation expense in the consolidated statement of operations. Adjustments, if necessary, to the related deferred tax assets would be recorded through the “provision (benefit) for income taxes”.

In July 2015, we purchased approximately 47% of the then-outstanding beneficial interests in the Trust from certain owners of the Trust for $42,222 in cash, which resulted in the automatic cancellation of such beneficial interests and the extinguishment of a significant portion of our payment obligations under the Amended and Restated Tax Receivable Agreement. The extinguishment of these payment obligations resulted in a pre-tax gain of $420,792 recorded in “provision pursuant to tax receivable agreement” on the consolidated statement of operations for the year ended December 31, 2015. In addition, the extinguishment of these payment obligations resulted in a reduction of the tax benefits that would have been attributable to the actual payments and, accordingly, we recorded a deferred tax expense of approximately $161,000 on the consolidated statement of operations for the year ended December 31, 2015.

The cumulative liability relating to our obligations under the Amended and Restated Tax Receivable Agreement as of December 31, 2015 was $523,962.