13. Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740. Under ASC Topic 740, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company’s business. Based upon management’s assessment of all available evidence, including the estimates of future profitability based on projected royalty revenues from its licensees, and the overall prospects of the Company’s business, management is of the opinion that the Company will be able to utilize the deferred tax assets in the foreseeable future.

At December 31, 2016, the Company has approximately $18.5 million in federal net operating loss carryforwards (NOLs) which will expire in FY 2035 if unused. The Company also has foreign tax credit carryforwards of approximately $18.2 million which will expire between FY 2023 and FY 2025. The Company also has approximately $18.6 million apportioned state and local NOLs that expire in FY 2034 and FY 2035 if not used.

Pre-tax book income (loss) for FY 2016, FY 2015 and FY 2014 were as follows:

	FY 2016			FY 2015			FY 2014
Domestic	$	(245,055	)	$	(300,534	)	$	118,060
Foreign		(80,946	)		16,260			49,050
Total pre-tax income (loss)	$	(326,001	)	$	(284,274	)	$	167,110

The income tax provision (benefit) for federal, and state and local income taxes in the consolidated statement of operations consists of the following:

	Year Ended December 31, 2016			Year Ended December 31, 2015			Year Ended December 31, 2014
Current:
Federal	$	7,140		$	6,927		$	1,511
State and local		702			3,765			1,500
Foreign		11,246			6,800			13,153
Total current	$	19,088		$	17,492		$	16,164
Deferred:
Federal		(94,114	)		(110,705	)		27,705
State and local		594			(431	)		3,996
Foreign		(2,060	)		(1,700	)		423
Total deferred		(95,580	)		(112,836	)		32,124
Total provision (benefit)	$	(76,492	)	$	(95,344	)	$	48,288

The Company has not provided U.S. taxes on the undistributed earnings from its foreign subsidiaries as these earnings are considered indefinitely reinvested. As of December 31, 2016, the amount of indefinitely reinvested foreign earnings was approximately $77.8 million. If these earnings were repatriated to the U.S. in the future, an additional tax provision would be required. Due to complexities in the U.S. law and certain assumptions that would be required, determination of the U.S. tax liability on the undistributed earnings is not practicable.

The significant components of net deferred tax assets of the Company consist of the following:

	December 31,
	2016			2015
State net operating loss carryforwards	$	753		$	839
U.S. Federal net operating loss carryforwards		6,467			4,036
Receivable reserves		5,495			1,911
Hedging transaction		5,611			15,164
Intangibles		3,185			3,105
Equity compensation		2,030			6,013
Foreign Tax Credit		18,190			15,305
Other		5,572			44
Total deferred tax assets		47,303			46,417
Valuation allowance		—			—
Net deferred tax assets	$	47,303		$	46,417
Trademarks, goodwill and other intangibles		(41,422	)		(123,348	)
Depreciation		(744	)		(990	)
Difference in cost basis of acquired intangibles		(50,650	)		(49,670	)
Convertible notes		(7,889	)		(17,853	)
Investment in joint ventures		(31,813	)		(35,261	)
Other accruals		—			(488	)
Total deferred tax liabilities		(132,518	)		(227,610	)
Total net deferred tax liabilities	$	(85,215	)	$	(181,193	)
Balance Sheet detail on total net deferred tax assets (liabilities):
Non-current portion of net deferred tax assets	$	884		$	—
Non-current portion of net deferred tax liabilities	$	(86,099	)	$	(181,193	)

The following is a rate reconciliation between the amount of income tax provision (benefit) at the Federal rate of 35% and provision (benefit) from taxes on income (loss) before income taxes:

	Year ended December, 31
	2016			2015			2014
Income tax provision (benefit) computed at the federal rate of 35%	$	(114,100	)	$	(99,496	)	$	58,489
Increase (reduction) in income taxes resulting from:
State and local income taxes (benefit), net of federal income tax		742			6,337			3,090
Non-controlling interest		(1,619	)		(938	)		(6,552	)
Unrecognized tax benefits		241			6,985			—
Valuation allowance		—			(11,205	)		—
Non-deductible executive compensation		1,330			645			1,018
Foreign Earnings (rate differential)		37,674			349			(8,472	)
Other, net		(760	)		1,979			715
Total	$	(76,492	)	$	(95,344	)	$	48,288

The Valuation Allowance decreased by approximately $11.2 million during FY 2015 as a result of State NOLs that were utilized as part of a New York State audit settlement along with NOLs for which the availability has been determined to be uncertain during the year. Accordingly, a corresponding offset has been recorded to the FIN 48 Liability during FY 2015.

With the exception of the Buffalo brand joint venture, Iconix Canada joint venture, Diamond Icon Joint Venture and Iconix Middle East joint venture, the Company is not responsible for the income taxes related to the non-controlling interest’s share of the joint venture’s earnings. Therefore, the tax liability associated with the non-controlling interest share of the joint venture’s earnings is not reported in the Company’s income tax expense, despite the joint venture’s entire income being consolidated in the Company’s reported income before income tax expense. As such, the joint venture’s earnings have the effect of lowering our effective tax rate. This effect is more pronounced in periods in which joint venture earnings are higher relative to our other earnings. Since the Buffalo brand joint venture and the Iconix Canada joint venture are taxable entities in Canada, and the Diamond Icon joint venture and Iconix Middle East joint venture is a taxable entity in the United Kingdom, the Company is required to report its tax liability, including taxes attributable to the non-controlling interest, in its statement of operations. All other consolidated joint ventures are partnerships and treated as pass-through entities not subject to taxation in their local tax jurisdiction, and therefore the Company includes only the tax attributable to its proportionate share of income from the joint venture in income tax expense.

The Company files income tax returns in the U.S. federal and various state and local jurisdictions. For federal income tax purposes, during the fourth quarter of 2016, the Internal Revenue Service initiated an audit of the 2014 federal tax return. For state tax purposes, our 2011 and forward tax years remain open for examination by New York State and for local tax purposes, our 2007 and forward tax years remain open for examination by New York City.

At December 31, 2016, December 31, 2015 and December 31, 2014, the total unrecognized tax benefit was approximately $7.5 million, $7.5 million and $1.2 million, respectively. However, at December 31, 2014 the liability is not recognized for accounting purposes because the related deferred tax asset has been fully reserved in prior years. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties is as follows:

	FY 2016		FY 2015			FY 2014
Uncertain tax positions at January 1	$	7,470	$	1,180		$	1,180
Additions for current year tax positions		—		—		—
Additions for prior year tax positions		—		7,470		—
Reductions for prior year tax positions		—		—		—
Settlements		—		(1,180	)	—
Reductions due to lapse of applicable statute of limitation		—		—		—
Uncertain tax positions at December 31	$	7,470	$	7,470		$	1,180

Approximately $3.4 million of unrecognized tax benefits at December 31, 2016 would affect the Company's effective tax rate if recognized. The Company believes it is reasonably possible that there may be a reduction of approximately $7.5 million of unrecognized tax benefits in the next 12 months as a result of settlements with taxing authorities and or statute of limitations expirations.

The Company is continuing its practice of recognizing interest and penalties to income tax matters in income tax expense. Total interest related to uncertain tax positions for FY 2016, FY 2015 and FY 2014 were $0.2 million, $1.2 million and $0, respectively. There were no penalties accrued in any of these periods.