Eaton Vance Corp.

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


(in thousands)		2017		2016		2015
Current:
Federal	$	136,959	$	114,350	$	117,682
State		22,753		17,305		20,837
Deferred:
Federal		11,952		18,391		4,614
State		2,002		3,584		81
Total	$	173,666	$	153,630	$	143,214

Deferred income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts and tax bases of the Company's assets and liabilities. The significant components of deferred income taxes are as follows:

(in thousands)			2017		2016

Deferred tax assets:
	Stock-based compensation	$	58,883	$	66,221
	Investment basis in partnerships		12,375		12,575
	Deferred rent		12,354		7,478
	Differences between book and tax bases of investments		6,961		4,193
	Compensation and benefit expense		4,679		3,233
	Federal benefit of unrecognized state tax benefits		410		716
	Other		373		409
Total deferred tax asset		$	96,035	$	94,825

Deferred tax liabilities:
	Deferred sales commissions	$	(14,022)	$	(10,407)
	Differences between book and tax bases of property		(7,930)		(7,537)
	Differences between book and tax bases of goodwill
	and intangibles		(4,240)		(1,322)
	Unrealized net holding gains on investments		(2,558)		(1,821)
	Unrealized gains on derivative instruments		(185)		(443)
Total deferred tax liability		$	(28,935)	$	(21,530)
Net deferred tax asset		$	67,100	$	73,295

The Company records a valuation allowance when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. No valuation allowance has been recorded for deferred tax assets, reflecting management's belief that all deferred tax assets will be utilized.

The following table reconciles the Company's effective tax rate from the U.S. federal statutory tax rate to such amount for each of the years ended October 31, 2017, 2016 and 2015:

	2017		2016		2015

Federal statutory rate	35.0	%	35.0	%	35.0	%
State and local income tax, net of
federal income tax benefit	3.5		3.5		3.8
Non-controlling interest	(1.8)		(2.0)		(0.8)
Stock-based compensation	0.3		0.6		0.8
Other	-		0.6		-
Effective income tax rate	37.0	%	37.7	%	38.8	%

The exercise of stock options and lapse of restricted stock awards resulted in a reduction of taxes payable of approximately $3.2 million, $2.2 million and $10.0 million for the years ended October 31, 2017, 2016 and 2015, respectively. Such benefit has been reflected as a component of shareholders' equity.

The changes in gross unrecognized tax benefits, excluding interest and penalties, for the years ended October 31, 2017, 2016 and 2015 are as follows:

(in thousands)			2017		2016		2015
Beginning Balance		$	1,859	$	2,100	$	1,798
	Additions for tax positions of prior years		12		6		437
	Additions based on tax positions related to current year		75		57		62
	Reductions for tax positions of prior years		(898)		-		(130)
	Reductions for settlements with taxing authorities		(19)		-		-
	Lapse of statute of limitations		-		(304)		(67)
Ending Balance		$	1,029	$	1,859	$	2,100

The total amount of unrecognized tax benefits as of October 31, 2017, 2016 and 2015 that, if recognized, would impact the effective tax rate is $1.0 million, $1.9 million and $2.1 million, respectively.

The Company did not recognize any interest or penalties in its tax provision during the year ended October 31, 2017. In the years ended October 31, 2016 and 2015, the Company recognized $(0.2) million and $0.1 million, respectively, in interest and penalties in its income tax provision. Accrued interest and penalties, which are included as a component of unrecognized tax benefits, totaled $0.6 million at both October 31, 2017 and 2016 and $0.8 million at October 31, 2015.

The Company believes that it is reasonably possible that approximately $0.6 million of its currently remaining unrecognized tax benefits, each of which are individually insignificant, may be recognized within the next 12 months as a result of a lapse of the statute of limitations and settlements with state taxing authorities.

The Company considers the undistributed earnings of certain of its foreign corporations to be indefinitely reinvested in foreign operations as of October 31, 2017. Accordingly, no U.S. income taxes have been provided thereon. As of October 31, 2017, the Company had approximately $61.7 million of undistributed earnings in certain Canadian, United Kingdom, and Australian foreign corporations that are not available to fund domestic operations or to distribute to shareholders unless repatriated. Repatriation would require the Company to accrue and pay U.S. corporate income taxes. The unrecognized deferred income tax liability on these un-repatriated funds, or temporary difference, is estimated to be $7.7 million at October 31, 2017. The Company does not intend to repatriate these funds, has not previously repatriated funds from these entities and has the financial liquidity to permanently leave these funds offshore.

The Company is generally no longer subject to income tax examinations by U.S. federal, state, local or non-U.S. taxing authorities for fiscal years prior to fiscal 2013.

In fiscal 2016, the Company identified an immaterial error related to basis adjustments of certain partnership interests arising from Company repurchases of non-controlling interests in majority-owned subsidiaries that was not recorded in previous fiscal periods. The cumulative impact of this error resulted in an increase to deferred income tax asset and additional paid-in-capital in the amount of $50.5 million recorded as of October 31, 2016. The error was not considered material to the Company's Consolidated Statement of Equity as of October 31, 2015, and had no effect on the Consolidated Statements of Income, Comprehensive Income, or Cash Flows as of and for the years ended October 31, 2016 and 2015. The fiscal 2016 basis adjustment of $2.2 million was reflected within the Company's deferred income tax asset and additional paid-in-capital in the accompanying Consolidated Balance Sheet as of October 31, 2016.