Income Taxes and Related Payments

6 Months Ended

Jun. 30, 2012

Income Taxes and Related Payments [Abstract]

INCOME TAXES AND RELATED PAYMENTS

11. INCOME TAXES AND RELATED PAYMENTS

In connection with the 2007 Private Offering, Oaktree was established as a publicly traded partnership and Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., two of its Intermediate Holding Companies, were established as wholly-owned corporate subsidiaries. Accordingly, income earned by these corporate subsidiaries is subject to U.S. federal and state income taxation and taxed at prevailing rates. Historically, the income earned by the corporate subsidiaries was subject to tax at a combined federal and state tax rate of 41%. However, due to a change in state tax law, one of the corporate subsidiaries, Oaktree Holdings, Inc., is now subject to tax at a combined federal and state tax rate of 38%. Income earned by non-corporate subsidiaries is not subject to U.S. federal corporate income tax and is allocated to the Oaktree Operating Group’s unitholders. For the periods beginning prior to January 1, 2012, Oaktree incurred income tax expense despite reporting losses before income taxes for financial reporting purposes because the non-cash compensation expense arising from the 2007 Private Offering that caused the reported losses was generally not deductible for income tax purposes. The final portion of the non-cash compensation expense associated with the 2007 Private Offering was charged against pre-tax income in the first quarter of 2012 and did not create a loss before taxes for financial reporting purposes for the three and six months ended June 30, 2012. The Company’s effective income tax rate is dependent on many factors, including the estimated nature of many amounts and the mix of revenues and expenses between the two corporate subsidiaries that are subject to income taxes and the three other subsidiaries that are not; consequently, the effective income tax rate is subject to significant variation from period to period.

As a result of the change in state tax law that reduced the combined federal and state tax rate applicable to income from Oaktree Holdings, Inc. from 41% to 38%, the existing deferred tax assets and liabilities of Oaktree Holdings Inc., were remeasured. The remeasurement reduced the deferred tax asset under the tax receivable agreement associated with the 2007 Private Offering from $64.4 million to $56.6 million, consequently reducing the related tax receivable agreement liability payable to OCGH Unitholders by $6.3 million. The $6.3 million reduction in the tax receivable agreement payable is reflected in other income (expense), net in the condensed consolidated statements of operations.

The exchange of OCGH units in connection with the Company’s initial public offering resulted in increases in the tax basis of the tangible and intangible assets of the Oaktree Operating Group. As a result, the Company recorded a deferred tax asset of $103.3 million and an associated liability of $87.8 million for payments to OCGH Unitholders under the tax receivable agreement, which combined to increase capital by $15.5 million. These payments are expected to occur over the period ending approximately in 2034.

No amounts were paid under the tax receivable agreement for the six months ended June 30, 2012.