GAMCO INVESTORS, INC. ET AL

D. Income Taxes

GBL and its greater than 80% owned operating subsidiaries file a consolidated federal income tax return. Accordingly, the income tax provision represents the aggregate of the amounts provided for all companies.

ASU 2016-09, which was issued in March 2016 and became effective for interim and annual reporting periods beginning after December 15, 2016, simplifies several aspects of accounting for employee share-based payment transactions. Upon adoption of ASU 2016-09 on January 1, 2017, our accounting for excess tax benefits has changed and adopted prospectively, resulting in recognition of excess tax benefits or tax deficiencies against income tax expenses rather than additional paid-in capital. During the twelve months ended December 31, 2017, the ETR was higher by 0.7% as a result of a reduction to previously recorded stock compensation tax benefits.

The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 consisted of the following:

	2017			2016			2015
(In thousands)
Federal:
Current	$	54,318		$	63,991		$	47,699
Deferred		(3,670	)		(4,424	)		(1,441	)
State and local:
Current		6,212			6,652			5,359
Deferred		(1,781	)		(1,113	)		109
Total	$	55,079		$	65,106		$	51,726

A reconciliation of the Federal statutory income tax rate to the effective tax rate is set forth below:

	2017		2016		2015
Statutory Federal income tax rate	35.0	%	35.0	%	35.0	%
State income tax, net of Federal benefit	0.5		1.0		2.7
Impact of Tax Act	6.2		-		-
Other	(0.3)		(0.3)		(0.5)
Effective income tax rate	41.4	%	35.7	%	37.2	%

Significant components of our deferred tax assets and liabilities are as follows:

	2017			2016
(In thousands)
Deferred tax assets:
Stock compensation expense	$	110		$	4,006
Deferred compensation		14,740			7,629
Capital lease obligation		633			944
Other		238			311
Total deferred tax assets		15,721			12,890
Deferred tax liabilities:
Investments in securities available for sale		(4,609	)		(6,805	)
Contingent deferred sales commissions		(189	)		(322	)
Intangible asset amortization		(233	)		(235	)
Other		(10	)		(9	)
Total deferred tax liabilities		(5,041	)		(7,371	)
Net deferred tax assets (liabilities)	$	10,680		$	5,519

As a result of the vesting of RSAs, and in accordance with GAAP, decreases of $0.4 million and $1.2 million were recorded in additional paid in capital for the years ended December 31, 2016 and December 31, 2015, respectively, as the actual tax benefits realized by the Company were less than the previously recorded deferred tax benefits.

As of December 31, 2017 and 2016, the total amount of gross unrecognized tax benefits related to uncertain tax positions was approximately $13.3 million and $15.0 million, respectively, of which recognition of $10.5 million and $9.8 million, respectively, would impact the Company’s effective tax rate.

As of December 31, 2017 and 2016, the net liability for unrecognized tax benefits related to uncertain tax positions was $14.5 million and $14.1 million, respectively, and is included in accrued expenses and other liabilities on the consolidated statements of financial condition.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits related to uncertain tax positions is as follows:

	(in millions)
Balance at December 31, 2014	$	16.0
Additions based on tax positions related to the current year		2.8
Additions for tax positions of prior years		0.1
Reductions for tax positions of prior years		(0.5	)
Settlements		-
Balance at December 31, 2015		18.4
Additions based on tax positions related to the current year		2.3
Additions for tax positions of prior years		1.2
Reductions for tax positions of prior years		(6.9	)
Settlements		-
Balance at December 31, 2016		15.0
Additions based on tax positions related to the current year		2.2
Additions for tax positions of prior years		-
Reductions for tax positions of prior years		(3.9	)
Settlements		-
Balance at December 31, 2017	$	13.3

The Company records penalties and interest related to tax uncertainties in income taxes. As of December 31, 2017 and 2016, the Company had recognized gross liabilities of approximately $4.8 million and $6.7 million related to interest and penalties, respectively. For the years ended December 31, 2017 and 2016, the Company recorded an income tax benefit related to a decrease in its liability for interest and penalties of $0.3 million and $0.7 million, respectively. For the years ended December 31, 2015, the Company recorded income tax expenses related to an increase in its liability for interest and penalties of $1.1 million.

The Tax Cuts and Jobs Act that was enacted in December 2017 resulted in an $8.2 million write down of net deferred tax assets.

Specifically, the 2017 income tax expense included the following amounts related to the Tax Cuts and Jobs Act enacted in the United States in December 2017.

·	$10.9 million tax expense related to the revaluation of certain deferred income tax assets;

·	$2.7 million non-cash tax benefit related to the revaluation of certain deferred income tax liabilities

The Company is currently being audited by New York State for years 2007 through 2011 but does not expect that any potential assessments will be material to its results of operations. The Company is subject to future audits by New York State for all years after 2011. The Company’s remaining state income tax returns are subject to future audit for all years after 2010. The Company’s Federal tax returns are subject to future audit for 2015 and 2016.