14. 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.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on these items and the third consecutive year of pretax losses (resulting from impairment), management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance for all taxing jurisdictions as of December 31, 2017, other than for Canadian operations and certain assets for the US that management believe will be available to reduce current federal taxes on the balance sheet at December 31, 2017. In addition, the Company continues to have deferred tax liabilities related to indefinite lived intangibles on the balance sheet in an amount of approximately $11.5 million which cannot be considered to be a source of taxable income to offset deferred tax assets.

At December 31, 2017, the Company has approximately $20.4 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 $5.3 million which will expire in 2023 and 2024. The Company also has approximately $22.8 million apportioned state and local NOLs that expire in 2034 and 2035 if not used.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act. The new law, which is also commonly referred to as “U.S. tax reform”, significantly changes U.S. corporate income tax laws. The primary impact on the Company’s 2017 financial results was associated with the effect of reducing the U.S. corporate income tax rate from 35% to 21% starting in 2018. As a result, the Company has estimated a net benefit of $67 million during the fourth quarter of 2017. Other provisions of the law are not effective until January 1, 2018, including, but are not limited to, creating a territorial tax system, eliminating or limiting the deduction of certain expenses including interest expense, and requiring a tax of earnings generated by foreign subsidiaries that are in excess of a specified return.

As of December 31, 2017, the Company has not completed its accounting for the tax effects of the enactment of the law. However, the Company has made a reasonable estimate and recorded in the fourth quarter of 2017 (i) a net income tax provision of $34 million resulting from the remeasurement of the Company’s net deferred income tax assets and liabilities and uncertain tax liabilities based on the new reduced U.S. corporate income tax rate, and (ii) an income tax benefit of $101 million from the remeasurement of the Company’s valuation allowance for the impact of the law on certain tax attributes. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on its existing accounting under GAAP and the provisions of the tax laws that were in effect prior to enactment. One such case is the Company’s intent regarding whether to continue to assert indefinite reinvestment on a part or all the foreign undistributed earnings, as discussed further below.

The Company is still analyzing the new tax law and refining its calculations, which could potentially impact the measurement of its income tax balances. Once the Company finalizes its analysis and certain additional tax calculations and tax positions, which are subject to complex tax rules and interpretation when it files its 2017 U.S. tax return, it will be able to conclude on any further adjustments to be recorded on these provisional amounts. Any such change will be reported as a component of income taxes in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.

The Company’s consolidated effective tax rate from continuing operations was 14.7% and 23.3% for the Year ended December 31, 2017 and December 31, 2016, respectively. The decrease in the effective tax rate for the Current Year’s effective tax rate as compared to the Prior Year is primarily a result of the establishment of a valuation allowance on the deferred tax assets. This charge had the effect of reducing the tax benefit on the pretax loss which lowers the effective tax rate.

In June 2017, the Company made a one-time cash distribution of approximately $72.5 million from its foreign subsidiaries to its U.S. parent. The cash was utilized to repay a portion of the outstanding principal balance of the Company’s Senior Secured Term Loan and the corresponding prepayment premium as discussed in Note 7. The Company has accrued no additional taxes associated with this distribution as we accounted for the distribution as non-taxable return of capital for U.S. tax purposes.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations; however, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.

Pre-tax book income (loss) for FY 2017, FY 2016 and FY 2015 were as follows:

	FY 2017			FY 2016			FY 2015
Domestic	$	(575,547	)	$	(255,003	)	$	(330,259	)
Foreign		(77,885	)		(80,946	)		16,260
Total pre-tax loss	$	(653,432	)	$	(335,949	)	$	(313,999	)

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, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
Current:
Federal	$	(1,152	)	$	7,140		$	6,927
State and local		986			702			3,765
Foreign		8,358			9,557			5,256
Total current	$	8,192		$	17,399		$	15,948
Deferred:
Federal		(93,376	)		(94,058	)		(117,623	)
State and local		(93	)		594			(526	)
Foreign		(10,700	)		(2,060	)		(1,700	)
Total deferred		(104,169	)		(95,524	)		(119,849	)
Total benefit	$	(95,977	)	$	(78,125	)	$	(103,901	)

As of December 31, 2017, the amount of indefinitely reinvested foreign earnings was zero. As a result of the enactment of the new law, the Company has estimated that the previously deferred earnings of its foreign subsidiaries do not result in a charge relating to the one-time Tax Reform transition tax.

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

	December 31,
	2017			2016
State net operating loss carryforwards	$	1,225		$	753
U.S. Federal net operating loss carryforwards		4,278			6,467
Receivable reserves		675			5,495
Hedging transaction		551			5,611
Intangibles		68,922			3,185
Investment in joint ventures		6,733			—
Equity compensation		2,600			2,030
Foreign Tax Credit		5,317			18,190
Other		7,183			5,572
Total deferred tax assets		97,484			47,303
Valuation allowance		(80,800	)		—
Net deferred tax assets	$	16,684		$	47,303
Trademarks, goodwill and other intangibles		—			(41,422	)
Depreciation		(614	)		(744	)
Difference in cost basis of acquired intangibles		(22,652	)		(50,650	)
Convertible notes		(392	)		(7,889	)
Investment in joint ventures		—			(31,813	)
Total deferred tax liabilities		(23,658	)		(132,518	)
Total net deferred tax liabilities	$	(6,974	)	$	(85,215	)
Balance Sheet detail on total net deferred tax assets (liabilities):
Non-current portion of net deferred tax assets	$	4,492		$	884
Non-current portion of net deferred tax liabilities	$	(11,466	)	$	(86,099	)

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
	2017			2016			2015
Income tax benefit computed at the federal rate of 35%	$	(228,701	)	$	(117,582	)	$	(109,900	)
Increase (reduction) in income taxes resulting from:
State and local income taxes (benefit), net of federal income tax		(8,511	)		695			6,103
Non-controlling interest		8,869			567			1,257
Unrecognized tax benefits		1,690			241			6,985
Valuation allowance		80,800			—			(11,205	)
Change in position of prior year foreign tax credits		8,410			—			—
Non-deductible executive compensation		929			1,330			645
Foreign Earnings (rate differential)		6,287			37,384			235
US Tax Reform / rate reduction		34,205			—			—
Other, net		45			(760	)		1,979
Total	$	(95,977	)	$	(78,125	)	$	(103,901	)

During the fourth quarter of 2017, the Company decided to amend its 2015 and 2016 federal returns in order to change its position as it relates to foreign tax credits generated in those years. The Company will take as a tax deduction these foreign tax credits as opposed to a credit carried over to future years. This resulted in a charge of approximately $8.4 million in 2017.

With the exception of the Buffalo brand 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 is a taxable entity in Canada, and the Diamond Icon joint venture and Iconix Middle East joint venture are taxable entities 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 which is ongoing. For state tax purposes, our 2011 and forward tax years remain open for examination by New York State. During 2017, the Company concluded its New York City audit covering 2007 through 2014. This resulted in a tax charge of approximately $2.0 million recorded during the year. The Company also files returns in numerous foreign jurisdictions that have varied years remaining open for examination, but generally the statute of limitations is three to four years from when the return is filed.

At December 31, 2017, December 31, 2016 and December 31, 2015, the total unrecognized tax benefit was approximately $0.4 million, $7.5 million and $7.5 million, respectively. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:

	2017			2016		2015
Uncertain tax positions at January 1	$	7,470		$	7,470	$	1,180
Additions for current year tax positions		—			—	—
Additions for prior year tax positions		—			—		7,470
Reductions for prior year tax positions		(397	)		—	—
Settlements		(6,719	)		—		(1,180	)
Uncertain tax positions at December 31	$	354		$	7,470	$	7,470

Approximately $0.5 million of unrecognized tax benefits at December 31, 2017 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 $0.4 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 2017, FY 2016 and FY 2015 were $0.9 million, $0.2 million and $1.2 million, respectively. There were no penalties accrued in any of these periods.