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INCOME TAXES
12 Months Ended
Dec. 31, 2012
INCOME TAXES  
INCOME TAXES

9. INCOME TAXES

        The provision (benefit) for income taxes consists of the following:

 
  Years Ended December 31,  
 
  2012   2011   2010  

Current

                   

Federal Income Tax

  $ 45,918   $ 79,713   $ 51,164  

State and Local Income Tax

    19,233     30,508     11,695  

Foreign Income Tax

    14,348     11,581     12,837  
               

Subtotal

    79,499     121,802     75,696  
               

Deferred

                   

Federal Income Tax

    (25,929 )   (23,760 )   1,795  

State and Local Income Tax

    (9,542 )   (6,501 )   (1,655 )

Foreign Income Tax

    (623 )   (2,296 )   (476 )
               

Subtotal

    (36,094 )   (32,557 )   (336 )
               

Total Income Taxes

  $ 43,405   $ 89,245   $ 75,360  
               

        The following table reconciles income before taxes at the statutory rate to the effective tax expense:

 
  Years Ended December 31,  
 
  2012   2011   2010  

Income Before Taxes at Statutory Rate

  $ 2,825,077   $ 338,006   $ 2,748,141  

Income not attributable to KKR Management Holdings Corp.(a)

    (2,887,575 )   (339,054 )   (2,817,081 )

Foreign Income Taxes

    13,724     9,285     12,361  

State and Local Income Taxes

    6,451     18,193     7,065  

Compensation Charges Borne by Holdings

    112,455     64,695     134,188  

Other

    (26,727 )   (1,880 )   (9,314 )
               

Effective Tax Expense

  $ 43,405   $ 89,245   $ 75,360  
               

(a)
Represents primarily income attributable to (i) redeemable noncontrolling interests, (ii) noncontrolling interests and (iii) net carried interest of certain general partners of KKR investment vehicles that are not owned by KKR Management Holdings L.P.

        Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences is as follows:

 
  As of December 31,  
 
  2012   2011  

Deferred Tax Assets

             

Fund Management Fees

  $ 54,660   $ 34,428  

Equity Based Compensation

    17,008     11,248  

KKR Holdings Unit Exchanges(a)

    85,018     47,658  

Other

    1,797     2,976  
           

Total Deferred Tax Assets

  $ 158,483   $ 96,310  
           

Deferred Tax Liabilities

             

Investment Basis Difference / Net Unrealized Gains

  $ 47,735   $ 58,883  

Other

    5,094     3,302  
           

Total Deferred Tax Liabilities

  $ 52,829   $ 62,185  
           

(a)
In connection with exchanges of KKR Holdings units into common units of KKR, KKR recorded a deferred tax asset associated with an increase in KKR Management Holdings Corp.'s share of the tax basis of the tangible and intangible assets of KKR Management Holdings L.P. This amount was offset by an adjustment to record amounts Due to KKR Holdings and executives under the tax receivable agreement, which is included within Due to Affiliates in the statements of financial condition. The net of these adjustments was recorded as an adjustment to equity at the time of the exchanges.

        KKR files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, KKR is subject to examination by federal and certain state, local and foreign tax regulators. As of December 31, 2012, the federal, state and local tax returns of KKR and its predecessor entities for the years 2009 through 2011 are open under normal statute of limitations and are therefore subject to examination.

        At December 31, 2012, 2011and 2010, KKR's unrecognized tax benefits, excluding related interest and penalties, were:

 
  Years Ended December 31,  
 
  2012   2011   2010  

Unrecognized Tax Benefits, beginning of period

  $ 3,850   $ 3,973   $ 4,640  

Gross increases in tax positions in prior periods

    31     175      

Gross decreases in tax positions in prior periods

            (1,722 )

Gross increases in tax positions in current period

    985     555     1,227  

Gross decreases in tax positions in current period

             

Settlement of tax positions

             

Lapse of statute of limitations

    (239 )   (853 )   (172 )
               

Unrecognized Tax Benefits, end of period

  $ 4,627   $ 3,850   $ 3,973  
               

        If the above tax benefits were recognized it would reduce the annual effective income tax rate. KKR believes that there will not be a significant increase or decrease to the tax positions within 12 months of the reporting date.

        The unrecognized tax benefits are recorded in Accounts Payable, Accrued Expenses and Other Liabilities. KKR recognizes interest and penalties accrued related to unrecognized tax positions in income taxes. For the years ended December 31, 2012, 2011 and 2010, interest and penalties included in KKR's tax provision were immaterial.