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, 2012, 2011, and 2010 are as follows:



	Year ended December 31,
	2012			2011			2010
	(dollars in thousands)
Continued Operations
Current tax expense/(benefit)
Federal	$	—		$	—		$	121
State and local	(134		)	560			(149		)
Foreign	570			897			963
Total	$	436		$	1,457		$	935
Deferred tax expense/(benefit)
Federal	$	(1	)	$	2		$	(35	)
State and local	2			(6		)	(13		)
Foreign	2			(21,526		)	(22,287		)
Total	3			(21,530		)	(22,335		)
Total Tax expense/(benefit)	$	439		$	(20,073	)	$	(21,400	)
Discontinued Operations
Current tax expense/(benefit)
Federal	$	—		$	—		$	—
State and local	1			(5		)	—
Foreign	(1		)	(424		)	—
Total	$	—		$	(429	)	$	—
Deferred tax expense/(benefit)
Federal	$	9		$	—		$	—
State and local	—			—			—
Foreign	—			—			—
Total	9			—			—
Total Tax expense/(benefit)	$	9		$	(429	)	$	—
Total
Current tax expense/(benefit)
Federal	$	—		$	—		$	121
State and local	(133		)	555			(149		)
Foreign	569			473			963
Total	$	436		$	1,028		$	935
Deferred tax expense/(benefit)
Federal	$	8		$	2		$	(35	)
State and local	2			(6		)	(13		)
Foreign	2			(21,526		)	(22,287		)
Total	12			(21,530		)	(22,335		)
Total Tax expense/(benefit)	$	448		$	(20,502	)	$	(21,400	)

Consolidated U.S. income/(loss) before income taxes was $(25.9) million in 2012, $(122.2) million in 2011, and $(50.0) million in 2010 . The corresponding amounts for non-U.S.-based income/(loss) were $2.4 million in 2012, $(0.5) million in 2011, and $(3.1) million in 2010.

The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2012, 2011, and 2010 are as follows:



	2012		2011		2010
Pre-tax loss at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Stock compensation	(28.1	)	—		—
Change in valuation allowance	(7.6	)	(33.3	)	(29.9	)
Deferred asset recognition	—		11.5		27.2
Bargain purchase price	—		6.3		—
Minority interest reversal	(0.1	)	1.7		9.0
Other, net	(1.1	)	(4.5	)	(1.0	)
Total	(1.9	)%	16.7	%	40.3	%

As of December 31, 2012, the Company has income taxes receivable of approximately $1.4 million which is included in other assets on the accompanying consolidated statements of financial condition. This receivable mainly represents a refund claim for federal taxes resulting from carrying back net operating losses to the Company's 2006 tax return and state tax overpayments.

The components of the Company's deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows:



	2012			2011
	(dollars in thousands)
Deferred tax assets, net of valuation allowance
Net operating loss	$	135,108		$	109,893
Deferred compensation	23,373			38,191
Unrealized losses on investments	4,450			13,432
Goodwill	10,885			11,760
Legal reserves	803			3,592
Foreign tax credits	1,756			1,837
Acquired lease liability	1,036			1,456
Other	3,532			1,416
Total deferred tax assets	180,943			181,577
Valuation allowance	(161,181		)	(157,007		)
Deferred tax assets, net of valuation allowance	19,762			24,570
Deferred tax liabilities
Basis difference on investments	(15,351		)	(15,351		)
Fixed assets	(1,405		)	(5,207		)
Intangible assets	(1,230		)	(2,975		)
Other	(1,766		)	(1,028		)
Total deferred tax liabilities	(19,752		)	(24,561		)
Deferred tax assets, net	$	10		$	9

Deferred tax assets, net of valuation allowance, are reported in other assets in the accompanying 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 $161.2 million against its deferred tax assets as of December 31, 2012 and approximately $157.0 million as of December 31, 2011 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 $19.8 million as of December 31, 2012, and $24.6 million as of December 31, 2011.

The Company's acquisition of ATM Group on April 5, 2012 and Cowen Equity Finance LP on November 1, 2012 did not have a material impact on the Company's tax balances. As partnerships, ATM Group entities and Cowen Equity Finance LP were predominantly subject to unincorporated business tax (UBT) in New York City. ATM INC was subject to federal, state, and local taxation as a corporation. After their acquisition, ATM Group (including ATM INC) and Cowen Equity Finance LP became part of the Company's consolidated tax return for federal, state and local tax purposes. As such, they are not subject to UBT since their acquisition by the Company. The amount of deferred tax assets and taxes receivable acquired as a result of these transactions was insignificant.

The deferred tax expense recorded during the year ended December 31, 2012 was insignificant. The deferred tax benefit of $21.7 million and $22.2 million, recorded in 2011 and 2010, respectively, represented the deferred tax benefits generated by a local subsidiary upon acquisition of two reinsurance companies, respectively, in Luxembourg from third parties offering a service program that provides reinsurance coverage to the Company against certain risks. These reinsurance companies carried deferred tax liabilities and upon their purchase, pursuant to an Advance Tax Agreement, the local subsidiary generated deferred tax assets that fully offset these liabilities, resulting in the recognition of the deferred tax benefits. The Company incurred transaction related financing costs of $4.1 million in 2010 as a result of these transactions, which is reflected in interest and dividends expense in the accompanying consolidated statements of operations.

The Company has the following net operating loss carryforwards at December 31, 2012:



	Federal		New York		Hong Kong
Jurisdiction:
Net operating loss (in millions)	$	316	$	377	$	13
Year of expiration	2032		2032		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 $134.9 million, net of deferred tax liabilities of $186.4 million in connection with future taxable income, and an offsetting valuation allowance of $134.9 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income.

As of December 31, 2012, 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 (“Section 382”). Accordingly, a portion of the Company's deferred tax assets, in particular a portion of its net operating loss and foreign tax credit carryovers, are subject to an annual limitation. The deduction limitation is approximately $2.4 million annually and applies to approximately $13.7 million of pre-transaction losses. 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 net operating losses from LaBranche as of the date of its acquisition is subject to a separate annual limitation. The limitation is approximately $6.7 million annually and applies to approximately $87.4 million of net operating losses. Finally, the acquisition of ATM INC subjected the losses available to carry forward by ATM INC to a limitation under Section 382. The amount of losses available to carry forward was negligibly insignificant. The Company is not expected to lose any deferred tax assets as a result of these limitations.

The Company adopted the accounting guidance for accounting for uncertainty in income taxes as which 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 years ended December 31, 2012, 2011 and 2010. Further, the Company did not record any additions to its unrecognized tax benefit balances as a result of current or prior year tax positions or reductions due to expired statute of limitations during the years ended December 31, 2012, 2011, and 2010.

The Company is subject to examination by the United States Internal Revenue Service, the United Kingdom Inland Revenue Service as well as state, local and foreign tax authorities in jurisdictions where the Company has significant business operations, such as New York.

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, 2012. Determining the tax liability that would arise if these earnings were remitted is not practicable.