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 are the United Kingdom, Luxembourg, and Hong Kong.

The components of the Company's income tax expense for the years ended December 31, 2016, 2015 and 2014 are as follows:



	Year ended December 31,
	2016			2015			2014
	(dollars in thousands)
Current tax expense/(benefit)
Federal	$	1,268		$	(635	)	$	2,247
State and local	1,972			313			573
Foreign	262			348			341
Total	$	3,502		$	26		$	3,161
Deferred tax expense/(benefit)
Federal	$	(22,834	)	$	(37,979	)	$	(99,284	)
State and local	(1,900		)	(7,420		)	(28,825		)
Foreign	2,140			(2,123		)	4
Total	(22,594		)	(47,522		)	(128,105		)
Total Tax expense/(benefit)	$	(19,092	)	$	(47,496	)	$	(124,944	)

Consolidated U.S. income/(loss) before income taxes was $(29.5) million in 2016, $8 million in 2015, and $56.7 million in 2014. The corresponding amounts for non-U.S.-based income/(loss) were $(2.0) million in 2016, $3.5 million in 2015, and $1.1 million in 2014.

The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2016, 2015, and 2014 are as follows:



	Year ended December 31,
	2016		2015		2014
Pre-tax loss at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Deferred asset recognition	—		(323.8	)	—
Unrecognized gains on foreign subsidiaries	38.7		—		—
Change in valuation allowance	(6.7	)	—		(252.7	)
Impact of change in NY tax law	—		(27.9	)	—
State and foreign tax	1.3		(39.6	)	5.8
Minority interest reversal	1.3		(46.5	)	(9.4	)
Other, net	(9.0	)	(11.0	)	5.3
Total	60.6	%	(413.8	)%	(216.0	)%

As of December 31, 2016, the Company has net income taxes receivable of approximately $2.0 million representing Federal and foreign tax overpayments, which is included in other assets on the accompanying consolidated statements of financial condition. The Company also has state income taxes payable of $0.02 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, 2016 and 2015 are as follows:



	As of December 31,
	2016			2015
	(dollars in thousands)
Deferred tax assets, net of valuation allowance
Net operating loss	$	126,037		$	110,904
Deferred compensation	44,966			65,162
Goodwill	4,758			7,009
Fixed assets	3,541			2,003
Tax credits	2,898			1,630
Acquired lease liability	4,111			4,843
Other	2,238			2,317
Total deferred tax assets	188,549			193,868
Valuation allowance	(2,119		)	—
Deferred tax assets, net of valuation allowance	186,430			193,868
Deferred tax liabilities
Basis difference on investments	—			(15,352		)
Unrealized gains on investments	(20,774		)	(34,613		)
Intangible assets	—			(296		)
Other	—			(47		)
Total deferred tax liabilities	(20,774		)	(50,308		)
Deferred tax assets/(liabilities), net	$	165,656		$	143,560

Deferred tax assets, net of valuation allowance, are reported 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 approximately $2.1 million valuation allowance against its deferred tax assets of $188.5 million as of December 31, 2016 and recorded no valuation allowance against its deferred tax assets of $193.9 million as of December 31, 2015. Separately, the Company has deferred tax liabilities of $20.8 million as of December 31, 2016, and $50.3 million as of December 31, 2015.

In December 2016, the Company recorded a deferred tax benefit of $22.6 million which was derived by the release of deferred tax liabilities related to the previous acquisitions by a local subsidiary, and reversal of temporary items during the course of normal operations. The deferred tax benefit of $47.5 million in December 31, 2015 was mainly represented the deferred tax benefits generated by an acquisition of a local subsidiary. At the time of the acquisition, pursuant to an Advance Tax Agreement, the local subsidiary generated deferred tax assets that fully offsets the deferred tax liabilities of the acquired company, resulting in the recognition of the deferred tax benefit in 2015. The deferred tax benefit of $128.1 million recorded in December 31, 2014, predominantly represented the release of valuation allowance due to the anticipation of future profits.

The Company has the following net operating loss carryforwards at December 31, 2016:



	Federal		California		Massachusetts		Illinois		New York State		New York City		Hong Kong
Jurisdiction:
Net operating loss (in millions)		$296.7		$61.8		$31.5		$12.3		$95.6		$142.8		$12.8
Year of expiration	2036		2036		2036		2028		2036		2036		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 $113.8 million, net of deferred tax liabilities of $357.1 million in connection with future taxable income, and an offsetting valuation allowance of $113.8 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income. The increase in deferred tax liabilities and corresponding reduction in the valuation allowance was caused by the acquisition of Hollenfels, as described above.

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 $6.6 million of pre-transaction losses. Further, as a result of an acquisition of a subsidiary with net operating loss carryovers in June 2011, a portion of the Company’s deferred tax assets, are subject to an annual limitation under Section 382 of the Internal Revenue Code (“Section 382”). The deduction limitation is approximately $6.7 million annually and applies to approximately $57.2 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, 2016, 2015, and 2014. 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, 2016, 2015, and 2014.

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 2010 to 2012 tax years. 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 $0.8 million and $1.0 million as of December 31, 2016 and 2015, respectively, and the tax liability that would arise if these earnings were remitted to the United States would be approximately $0.1 million and $0.1 million, respectively.