Income Taxes

The taxable results of the Company's U.S. operations are included in the consolidated income tax returns of Cowen Group, Inc. as well as stand‑alone state and local tax returns. The Company has subsidiaries that are resident in foreign countries where tax filings have to be submitted on a stand‑alone basis. These subsidiaries are subject to tax in their respective countries and the Company is responsible for and, thus, reports all taxes incurred by these subsidiaries. The countries where the Company owns subsidiaries are the United Kingdom, Germany, Luxembourg, Japan, Hong Kong, and China.

The components of the Company's income tax expense for the years ended December 31, 2011, 2010, and 2009 are as follows:



	Year ended December 31,
	2011			2010			2009
	(dollars in thousands)
Continued Operations
Current tax expense/(benefit)
Federal	$	—		$	121		$	(4,227	)
State and local	560			(149		)	(556		)
Foreign	897			963			315
Total	1,457			935			(4,468		)
Deferred tax expense/(benefit)
Federal	$	2		$	(35	)	$	2,256
State and local	(6		)	(13		)	—
Foreign	(21,526		)	(22,287		)	(5,993		)
Total	(21,530		)	(22,335		)	(3,737		)
Total Tax expense/(benefit)	$	(20,073	)	$	(21,400	)	$	(8,205	)
Discontinued Operations
Current tax expense/(benefit)
Federal	$	—		$	—		$	—
State and local	(5		)	—			—
Foreign	(424		)	—			—
Total	(429		)	—			—
Deferred tax expense/(benefit)
Federal	$	—		$	—		$	—
State and local	—			—			—
Foreign	—			—			—
Total	—			—			—
Total Tax expense/(benefit)	$	(429	)	$	—		$	—
Total
Current tax expense/(benefit)
Federal	$	—		$	121		$	(4,227	)
State and local	555			(149		)	(556		)
Foreign	473			963			315
Total	1,028			935			(4,468		)
Deferred tax expense/(benefit)
Federal	$	2		$	(35	)	$	2,256
State and local	(6		)	(13		)	—
Foreign	(21,526		)	(22,287		)	(5,993		)
Total	(21,530		)	(22,335		)	(3,737		)
Total Tax expense/(benefit)	$	(20,502	)	$	(21,400	)	$	(8,205	)

Consolidated U.S. income/(loss) before income taxes was $(122.2) million in 2011, $(50) million in 2010, and $(42.8) million in 2009 . The corresponding amounts for non-U.S.-based income/(loss) were $(0.5) million in 2011, $(3.1) million in 2010, and $(4.4) million in 2009.

The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2011, 2010, and 2009 are as follows:



	2011		2010		2009
Pre-tax loss at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Partnership loss not subject to corporate tax	—		—		(17.5	)
Change in valuation allowance	(33.3	)	(29.9	)	(13.0	)
Deferred asset recognition	11.5		27.2		12.5
Bargain purchase price	6.3		—		—
Minority interest reversal	1.7		9.0		—
Other, net	(4.5	)	(1.0	)	0.4
Total	16.7	%	40.3	%	17.4	%

As of December 31, 2011, the Company has income taxes receivable of approximately $2.1 million which is included in other assets on the consolidated statements of financial condition. This receivable mainly represents refund claims for federal and foreign taxes resulting from carrying back net operating losses to the Company's 2006 and 2009 tax returns, respectively.

The components of the Company's deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:



	2011			2010
	(dollars in thousands)
Deferred tax assets, net of valuation allowance
Net operating loss	$	109,893		$	22,844
Deferred compensation	38,191			38,396
Unrealized losses on investments	13,432			2,987
Goodwill	11,760			13,288
Legal reserves	3,592			—
Foreign tax credits	1,837			1,786
Acquired lease liability	1,456			3,355
Other	1,416			1,986
Total deferred tax assets	181,577			84,642
Valuation allowance	(157,007		)	(67,959		)
Deferred tax assets, net of valuation allowance	24,570			16,683
Deferred tax liabilities
Basis difference on investments	(15,351		)	(7,772		)
Fixed assets	(5,207		)	(3,482		)
Intangible assets	(2,975		)	(5,219		)
Other	(1,028		)	(50		)
Total deferred tax liabilities	(24,561		)	(16,523		)
Deferred tax assets, net	$	9		$	160

Deferred tax assets, net of valuation allowance, are reported in other assets in the consolidated statements of financial condition. In addition to the deferred tax balances in the table above, the Company records balances related to its operating losses in Luxembourg, which are discussed below.

The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management's view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. The Company recorded a valuation allowance of approximately $157.0 million against its deferred tax assets as of December 31, 2011 and approximately $68.0 million as of December 31, 2010 as management believes it is more likely than not that the deferred tax assets will not be realized. Separately, the Company has deferred tax liabilities of $24.6 million as of December 31, 2011, and $16.5 million as of December 31, 2010.

In 2011, the Company recorded a deferred tax benefit of $21.7 million, representing the deferred tax benefits generated by a local subsidiary upon acquisition of reinsurance companies in Luxembourg. The Company acquired two reinsurance companies in Luxembourg from third parties offering a service program that provides reinsurance coverage to the Company against certain risks. These reinsurance companies had deferred tax liabilities and upon these purchases, pursuant to an Advance Tax Agreement, the local subsidiary generated deferred tax assets that fully offset these liabilities, resulting in the recognition of this deferred tax benefit. In 2010, the Company recorded a deferred tax benefit of $22.2 million from similar acquisitions. In 2011 and 2010, the Company incurred $0 and $4.1 million, respectively, of transaction related financing costs in connection with acquisitions of Luxembourg reinsurance companies, which is reflected in interest and dividends expense in the consolidated Statements of Operations.

The Company has the following net operating loss carryforwards at December 31, 2011:



	Federal		New York		Hong Kong
Jurisdiction:
Net operating loss (in millions)	$	262	$	362	$	9
Year of expiration	2029		2029		Indefinite

In addition to the net operating loss carryforwards in the table above, the Company also has net operating loss carryforwards in Luxembourg. These loss carryforwards are only accessible to the extent of taxable income generated by the Luxembourg reinsurance companies, including any deferred income that will be generated in the future. Consequently, the Company recorded a deferred tax asset of $85.8 million, net of deferred tax liabilities of $173.9 million in connection with future taxable income, and an offsetting valuation allowance of $85.8 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income.

As of December 31, 2011, the Company has capital loss and foreign tax credit carryovers of $0 and $1.8 million, respectively. The foreign tax credit carryforwards will fully expire by 2019. The Company underwent a change of control under Section 382 of the Internal Revenue Code on November 2, 2009. Accordingly, a portion of the Company's deferred tax assets, in particular a portion of its net operating loss and foreign tax credit carryovers, will be subject to an annual limitation. The deduction limitation is approximately $2.4 million annually and applies to approximately $13.7 millions of pre-transaction losses. The Company will not lose any deferred tax assets as a result of this limitation. Further, the acquisition of LaBranche by the Company on June 28, 2011 caused an ownership change of LaBranche under Section 382. As such, the portion of the Company's deferred tax assets representing the net operating losses from LaBranche will be subject to a separate annual limitation. The limitation is approximately $6.7 million annually and applies to approximately $101.7 million of net operating losses.

The Company adopted the accounting guidance for accounting for uncertainty in income taxes as of April 1, 2007. This guidance clarifies the criteria that must be met prior to recognition of the financial statement benefit of a position taken in a tax return. The Company does not have any uncertain tax positions recorded for the year ended December 31, 2011. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Year ended December 31,
	2011		2010		2009
	(dollars in thousands)
Beginning Balance	$	—	$	—	$	504
Additions:
Current year tax positions	—		—		—
Prior year tax positions	—		—		—
Reductions:
Expired statue of limitations	—		—		(504		)
Ending Balance	$	—	$	—	$	—

The Company is subject to examination by the United States Internal Revenue Service (IRS), the United Kingdom Inland Revenue Service and state and local and foreign tax authorities in jurisdictions where the Company has significant business operations, such as New York. The Company concluded the IRS audit for the tax years 2006 through 2009 with no proposed changes by the IRS.

The Company intends to permanently reinvest the capital and accumulated earnings of its foreign subsidiaries in the respective subsidiary, but remits the current earnings of its foreign subsidiaries to the United States to the extent permissible under local regulatory rules. The undistributed earnings of the Company's foreign subsidiaries totaled $3.5 million at December 31, 2011. Determining the tax liability that would arise if these earnings were remitted is not practicable.