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 with tax filing obligations in United Kingdom, Luxembourg, and Hong Kong.

The components of the Company's income tax expense for the years ended December 31, 2014 , 2013 and 2012 are as follows:



	Year ended December 31,
	2014			2013		2012
	(dollars in thousands)
Current tax expense/(benefit)
Federal	$	2,247		$	—	$	—
State and local	573			241		(133		)
Foreign	341			188		569
Total	$	3,161		$	429	$	436
Deferred tax expense/(benefit)
Federal	$	(99,284	)	$	—	$	8
State and local	(28,825		)	—		2
Foreign	4			28		2
Total	(128,105		)	28		12
Total Tax expense/(benefit)	$	(124,944	)	$	457	$	448

Consolidated U.S. income/(loss) before income taxes was $56.7 million in 2014, $11.9 million in 2013, and $(25.9) million in 2012 . The corresponding amounts for non-U.S.-based income/(loss) were $1.1 million in 2014, $6.4 million in 2013, and $2.4 million in 2012.

The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2014, 2013, and 2012 are as follows:



	2014		2013		2012
Pre-tax loss at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Stock compensation	—		12.6		(28.1	)
Change in valuation allowance	(252.7	)	(27.2	)	(7.6	)
State and foreign tax	5.8		—		—
Minority interest reversal	(9.4	)	(25.2	)	(0.1	)
Other, net	5.3		7.3		(1.1	)
Total	(216.0	)%	2.5	%	(1.9	)%

As of December 31, 2014, the Company has net income taxes receivable of approximately $0.1 million representing state tax overpayments which is included in other assets on the accompanying consolidated statements of financial condition. The Company also has alternative minimum and foreign income taxes payable of $2.5 million, which is included in other liabilities on the accompanying consolidated statements of financial condition.

The components of the Company's deferred tax assets and liabilities as of December 31, 2014 and 2013 are as follows:



	2014			2013
	(dollars in thousands)
Deferred tax assets, net of valuation allowance
Net operating loss	$	94,628		$	130,562
Deferred compensation	56,069			22,538
Goodwill	8,434			9,937
Tax credits	2,668			1,820
Acquired lease liability	5,164			3,336
Other	2,394			4,081
Total deferred tax assets	169,357			172,274
Valuation allowance	(2,263		)	(148,816		)
Deferred tax assets, net of valuation allowance	167,094			23,458
Deferred tax liabilities
Basis difference on investments	(15,352		)	(15,352		)
Unrealized gains on investments	(21,739		)	(6,354		)
Intangible assets	(537		)	(1,177		)
Other	(66		)	(602		)
Total deferred tax liabilities	(37,694		)	(23,485		)
Deferred tax assets/(liabilities), net	$	129,400		$	(27	)

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 $2.3 million against its deferred tax assets of $169.4 million as of December 31, 2014 and approximately $148.8 million against its deferred tax assets of $172.3 million as of December 31, 2013. Separately, the Company has deferred tax liabilities of $37.7 million as of December 31, 2014, and $23.5 million as of December 31, 2013.

The deferred tax benefit of $128.1 million recorded in 2014 predominantly represented the release of the Company's US federal and state valuation allowance due to the anticipation of future profits. During the fourth quarter of 2014, the Company emerged from a three-year cumulative deficit which had caused the Company to record a full valuation allowance until September 30, 2014. As of December 31, 2014, the Company recorded a valuation allowance against its foreign deferred tax assets related to net operating losses in these jurisdictions. For the years ended December 31, 2013 and 2012, the deferred tax expense recorded by the Company was immaterial.

The Company has the following net operating loss carryforwards at December 31, 2014:



	Federal		New York		Hong Kong
Jurisdiction:
Net operating loss (in millions)	$	230	$	295	$	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 $183.4 million, net of deferred tax liabilities of $204.2 million in connection with future taxable income, and an offsetting valuation allowance of $183.4 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income.

On June 28, 2011, the Company acquired a subsidiary, causing an ownership change of the subsidiary under Section 382 of the Internal Revenue Code ("Section 382"). As such, net operating losses this subsidiary had generated as of the date of its acquisition were subject to an annual Section 382 limitation of $6.7 million. As of December 31, 2014, the unused portion of the subsidiary's net operating losses that are subject to this annual limitation is $64 million. The Company is not expected to lose any of these net operating losses as a result of the Section 382 limitation.

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, 2014, 2013, and 2012. 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, 2014, 2013, and 2012.

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. Currently, the Company is under audit by New York State for the 2009-2012 tax years. The Company does not expect to incur material tax liabilities from these audits.

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 $1.1 million as of December 31, 2014 and 2013, respectively, and the tax liability that would arise if these earnings were remitted to the United States would be approximately $0.2 million and $0.2 million, respectively.