(13) Income Taxes

Income tax expense (benefit) consisted of the following components (dollars in thousands):

	2013		2012			2011

Current:
Federal	$	2,628	$	416		$	(1,160	)
State		1,634		782			1,282
Foreign		4,657		3,362			5,632


		8,919		4,560			5,754
Deferred:
Federal		1,606		(19,423	)		(25,146	)
State		992		(7,565	)		(8,409	)
Foreign		453		(168	)		962


		3,051		(27,156	)		(32,593	)


Total	$	11,970	$	(22,596	)	$	(26,839	)

Income (loss) before income taxes consisted of the following (dollars in thousands):

	2013		2012			2011

U.S.	$	15,687	$	(248,101	)	$	(222,337	)
Foreign		27,368		(22,354	)		15,709


Total	$	43,055	$	(270,455	)	$	(206,628	)

Deferred income taxes are provided for temporary differences in reporting certain items. The tax effects of temporary differences that gave rise to the net deferred tax assets (liabilities) at December 31 were as follows (dollars in thousands):

	2013			2012

Deferred tax assets:
Compensation and benefits	$	12,844		$	9,474
Net operating loss and capital loss carryover		17,121			19,012
Share-based compensation		6,959			8,506
Allowance for doubtful accounts		889			1,149
Tax benefits on uncertain tax positions		2,697			2,696
Goodwill and other intangibles		21,138			24,746
Depreciation		—			649
Other		9,757			9,203


Total deferred tax assets		71,405			75,435
Less: valuation allowance		20,541			20,774


Total deferred tax assets, net of valuation allowance		50,864			54,661


Deferred tax liabilities:
Depreciation		(3,916	)		—
Capitalized software		(12,838	)		(15,226	)
Other		(343	)		(573	)


Total deferred tax liabilities		(17,097	)		(15,799	)


Net deferred tax assets	$	33,767		$	38,862

The deferred tax assets and deferred tax liabilities above are presented on a net basis on the accompanying Statements of Financial Condition by tax jurisdictions in which the deferred tax assets and deferred tax liabilities relate to. At December 31, 2013, the Company believes that it is more likely than not that future reversals of its existing taxable temporary differences and the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of valuation allowance. The Company's valuation allowance is primarily the result of historical operating losses in the Asia Pacific entities, where we maintain a full valuation for all deferred tax assets and net operating losses and in certain entities in the European Operations where we currently have net operating losses.

Net operating loss carry forwards expire as follows (dollars in thousands):

	Amount		Years remaining

Hong Kong, Australia, U.K. and Ireland operating losses	$	72,943	Indefinite


	$	72,943

The effective tax rate varied from the U.S. federal statutory income tax rate due to the following:



U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of U.S. federal income tax effect	3.9		1.8		2.2
Foreign tax impact, net	(6.4	)	(3.6	)	(0.9	)
Non-deductible costs *	1.0		(24.3	)	(23.7	)
Other, net	(5.7	)	(0.5	)	0.4


Effective income tax rate	27.8	%	8.4	%	13.0	%

*: Non-deductible costs in 2012 and 2011 include goodwill impairment charges.

For the years ended December 31, 2013, 2012 and 2011, the tax benefits realized on the exercises of employee stock options and the vesting of employee restricted share awards in total were less than the deferred benefits that were recorded based on grant date fair values. The resulting net tax shortfalls on these awards, along with the impact of cancelled awards reduced additional paid-in capital by $1.5 million, $4.1 million and $3.3 million in 2013, 2012 and 2011, respectively. For further discussion, see Note 19, Employee and Non-Employee Director Stock and Benefit Plans.

Tax Uncertainties

Under ASC 740, Income Taxes, a tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

During 2013, uncertain tax positions in the U.S. were resolved for the 2003-2006 and 2008-2010 fiscal years resulting in a decrease in the recorded liability of $0.5 million and the related deferred tax asset of $0.2 million. Also, in 2013, an uncertain tax position in Europe for the 2011 year was resolved, resulting in a decrease in the recorded liability of $0.9 million. As a result of these resolutions, the Company recognized a tax benefit of $1.2 million. Furthermore, we reduced reserves related to prior years following the resolution of tax contingencies primarily in Europe.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (dollars in thousands):

Uncertain Tax Benefits	2013			2012			2011

Balance, January 1	$	13,726		$	14,542		$	12,380
Additions based on tax positions related to the current year		404			568			2,402
Additions based on tax positions of prior years		434			857			647
Reductions for tax positions of prior years		(148	)		(2,024	)		(42	)
Reductions due to settlements with taxing authorities		(124	)		(217	)		(516	)
Reductions due to expiration of statute of limitations		(1,218	)		—			(329	)


Balance, December 31	$	13,074		$	13,726		$	14,542

Included in the balance at December 31, 2013, 2012 and 2011, are $11.9 million, $12.4 million, and $12.0 million, respectively, of unrecognized tax benefits (net of federal benefits) which, if recognized, would affect the Company's effective tax rate.

With limited exception, the Company is no longer subject to U.S. federal, state, local or foreign income tax audits by taxing authorities for years preceding 2007. The Internal Revenue Service is currently examining the Company's U.S. federal income tax returns for 2007 through 2010. Certain state and local returns are also currently under various stages of audit. The Company does not anticipate a significant change to the total of unrecognized tax benefits within the next twelve months.

At December 31, 2013, interest expense of $3.8 million, gross of related tax effects of $1.6 million, was accrued related to unrecognized tax benefits. As a continuing policy, interest accrued related to unrecognized tax benefits is recorded as income tax expense. During 2013, 2012 and 2011, the Company recognized $0.5 million, $0.8 million and $0.7 million, respectively, of tax-related interest expense. No penalties were incurred during 2013, 2012 or 2011.