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 that file tax returns are United Kingdom, Luxembourg, Gibraltar, and Hong Kong.

The components of the Company's income tax expense for the years ended December 31, 2013 , 2012 and 2011 are as follows:



	Year ended December 31,
	2013		2012			2011
	(dollars in thousands)
Continued Operations
Current tax expense/(benefit)
Federal	$	—	$	—		$	—
State and local	241		(133		)	560
Foreign	188		569			897
Total	$	429	$	436		$	1,457
Deferred tax expense/(benefit)
Federal	$	—	$	8		$	2
State and local	—		2			(6		)
Foreign	28		2			(21,526		)
Total	28		12			(21,530		)
Total Tax expense/(benefit)	$	457	$	448		$	(20,073	)
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	$	—	$	—		$	—
State and local	241		(133		)	555
Foreign	188		569			473
Total	$	429	$	436		$	1,028
Deferred tax expense/(benefit)
Federal	$	—	$	8		$	2
State and local	—		2			(6		)
Foreign	28		2			(21,526		)
Total	28		12			(21,530		)
Total Tax expense/(benefit)	$	457	$	448		$	(20,502	)

Consolidated U.S. income/(loss) before income taxes was $11.9 million in 2013, $(25.9) million in 2012, and $(122.2) million in 2011 . The corresponding amounts for non-U.S.-based income/(loss) were $6.4 million in 2013, $2.4 million in 2012, and $(0.5) million in 2011.

The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2013, 2012, and 2011 are as follows:



	2013		2012		2011
Pre-tax loss at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Stock compensation	12.6		(28.1	)	—
Change in valuation allowance	(27.2	)	(7.6	)	(33.3	)
Deferred asset recognition	—		—		11.5
Bargain purchase price	—		—		6.3
Minority interest reversal	(25.2	)	(0.1	)	1.7
Other, net	7.3		(1.1	)	(4.5	)
Total	2.5	%	(1.9	)%	16.7	%

As of December 31, 2013, the Company has net income taxes receivable of approximately $1.9 million representing a federal refund claim resulting from carrying back net operating losses and state tax overpayments, which is included in other assets on the consolidated statements of financial condition. The Company also has foreign income taxes payable of $0.4 million, which is included in other liabilities on the consolidated statements of financial condition.

The components of the Company's deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:



	2013			2012
	(dollars in thousands)
Deferred tax assets, net of valuation allowance
Net operating loss	$	130,562		$	135,108
Deferred compensation	22,538			23,373
Unrealized losses on investments	—			4,450
Goodwill	9,937			10,885
Legal reserves	—			803
Foreign tax credits	1,820			1,756
Acquired lease liability	3,336			1,036
Other	4,842			3,532
Total deferred tax assets	173,035			180,943
Valuation allowance	(148,816		)	(161,181		)
Deferred tax assets, net of valuation allowance	24,219			19,762
Deferred tax liabilities
Basis difference on investments	(15,352		)	(15,351		)
Unrealized gains on investments	(6,354		)	—
Fixed assets	(761		)	(1,405		)
Intangible assets	(1,177		)	(1,230		)
Other	(602		)	(1,766		)
Total deferred tax liabilities	(24,246		)	(19,752		)
Deferred tax assets, net	$	(27	)	$	10

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 $148.8 million against its deferred tax assets as of December 31, 2013 and approximately $161.2 million as of December 31, 2012 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 $24.2 million as of December 31, 2013, and $19.8 million as of December 31, 2012.

The Company’s acquisition of Dahlman on March 11, 2013 did not have a material impact on the Company’s tax balances.

The deferred tax expense recorded during the year ended December 31, 2013 and 2012 was insignificant. The deferred tax benefit of $21.7 million recorded in 2011, 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 has the following net operating loss carryforwards at December 31, 2013:



	Federal		New York		Hong Kong
Jurisdiction:
Net operating loss (in millions)	$	323	$	390	$	14
Year of expiration	2033		2033		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 $160.1 million, net of deferred tax liabilities of $193.4 million in connection with future taxable income, and an offsetting valuation allowance of $160.1 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income.

As of December 31, 2013, the Company has foreign tax credit carryovers of $1.8 million which will 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. 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, 2013, 2012, and 2011. 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, 2013, 2012, and 2011.

The Company is subject to examination by the United States Internal Revenue Service, the United Kingdom HM Revenue and Customs as well as state, local and foreign tax authorities in jurisdictions where the Company has significant business operations, such as New York. Currently, the Company is under audit by New York State for the 2009 tax year. Management is not expecting a material tax liability from this audit.

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 $1.1 million and $3.5 million as of December 31, 2013 and 2012, respectively, and the tax liability that would arise if these earnings were remitted to the United States would be approximately $0.2 million and $0.3 million, respectively.