Income Taxes
Holdings operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal, state, and local income tax purposes. Since January 2015, all of Holdings’ operations are held by Group, a limited liability company that is also treated as a partnership between Holdings and Leucadia for U.S. federal, state and local income tax purposes. As a result, neither Holdings’ nor Group’s income from its U.S. operations is subject to U.S. federal income tax because the income is attributable to its members. Accordingly, the Company’s U.S. tax provision is solely based on the portion of income attributable to the Corporation from the lower tier limited liability companies and excludes the income attributable to other members of Holdings and Group whose income is included in Net income (loss) attributable to non-controlling interest in Global Brokerage Holdings, LLC in the consolidated statements of operations.
In addition to U.S. federal and state income taxes, the Company is subject to Unincorporated Business Tax which is attributable to Group’s operations apportioned to New York City. The Company’s foreign subsidiaries are also subject to local taxes.
Income (loss) from continuing operations before income taxes, as shown in the consolidated statements of operations, includes the following components, with amounts in thousands:
|
| | | | | | | |
| For the Years Ended December 31, |
| 2016 | | 2015 |
Domestic | $ | 100,414 |
| | $ | (628,527 | ) |
Foreign | 62,156 |
| | (4,778 | ) |
| $ | 162,570 |
| | $ | (633,305 | ) |
The provision for income taxes attributable to continuing operations consists of the following, with amounts in thousands:
|
| | | | | | | |
| For the Years Ended December 31, |
| 2016 | | 2015 |
Current | | | |
Federal income tax benefit | $ | — |
| | $ | (176 | ) |
State and local tax benefit | (34 | ) | | (11 | ) |
Foreign income tax expense (benefit) | 1,592 |
| | (412 | ) |
Subtotal | 1,558 |
| | (599 | ) |
| | | |
Deferred | | | |
Federal income tax | — |
| | 172,618 |
|
State and local income tax | — |
| | 7,474 |
|
Foreign income tax (benefit) expense | (781 | ) | | 1,705 |
|
Subtotal | (781 | ) | | 181,797 |
|
Total provision for taxes attributable to continuing operations | $ | 777 |
| | $ | 181,198 |
|
The following table reconciles the provision for income taxes attributable to continuing operations to the U.S. federal statutory tax rate:
|
| | | | | |
| For the Years Ended December 31, |
| 2016 | | 2015 |
Statutory U.S. federal income tax rate | 34.0 | % | | 34.0 | % |
Income passed through to non-controlling members | (10.6 | ) | | (17.0 | ) |
State and local income tax | 2.1 |
| | 1.3 |
|
Foreign income tax | (0.3 | ) | | (1.1 | ) |
Tax Receivable Agreement true-up | — |
| | 7.8 |
|
Loss on liquidation of subsidiary | (1.4 | ) | | — |
|
Non-deductible penalty | 1.1 |
| | — |
|
Valuation allowance | (27.1 | ) | | (50.9 | ) |
Non-deductible interest | 2.3 |
| | (2.3 | ) |
Other | 0.4 |
| | (0.4 | ) |
Effective tax rate | 0.5 | % | | (28.6 | )% |
The change in the effective tax rate for the year ended December 31, 2016 compared to the year ended December 31, 2015 is predominantly the result of reversing the valuation allowance previously established on the deferred tax assets of the Company to offset the tax provision associated with the book income for the period. During 2015, the Corporation determined that, given the losses incurred from the events of January 15, 2015 and due to the Leucadia Transaction, it was not more likely than not that it would benefit from the tax deduction attributable to the tax basis step-up from the conversion of the non-controlling membership units of Holdings, nor would it receive tax benefit from the losses incurred. As a result, a valuation allowance was established on substantially all of the deferred tax assets of the Company due to their doubtful realizability, which was the primary driver of the tax provision recorded for the year ended December 31, 2015. The negative tax rate for the year ended December 31, 2015 reflects the recording of a tax provision on the book loss for the period.
Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences from continuing operations is as follows, with amounts in thousands:
|
| | | | | | | |
| As of December 31, |
| 2016 | | 2015 |
Deferred tax assets | | | |
|
Equity-based compensation | $ | 294 |
| | $ | 336 |
|
Investment in partnership | 190,844 |
| | 277,775 |
|
Fixed assets | — |
| | 747 |
|
Tax loss carryforwards | 125,898 |
| | 120,580 |
|
Intangible assets | 679 |
| | 302 |
|
Tax credit carryforward/foreign sub income | 4,539 |
| | 5,090 |
|
Gain/(Loss) on derivative liability — Letter Agreement | — |
| | 3,067 |
|
Other | 1,072 |
| | 491 |
|
Gross deferred tax assets | 323,326 |
| | 408,388 |
|
Less: valuation allowance | (322,201 | ) | | (407,590 | ) |
Net deferred tax asset | 1,125 |
| | 798 |
|
Deferred tax liabilities | | | |
Fixed assets | 28 |
| | 5 |
|
Intangible assets | 228 |
| | 714 |
|
Software development cost | 171 |
| | 245 |
|
Other | 583 |
| | 539 |
|
Gross deferred tax liabilities | 1,010 |
| | 1,503 |
|
Net deferred tax asset (liability) | $ | 115 |
| | $ | (705 | ) |
The increase in net deferred tax assets was primarily driven by a decrease in the deferred tax liability associated with certain identified intangibles and the reversal of valuation allowance. Additionally, the increase in deferred tax assets is driven by the increase in the Corporation’s ownership in Holdings as a result of members of Holdings exchanging their membership units for the Corporation's Class A common stock. As Existing Unit Holders exchange their membership units, the Company records a deferred tax benefit related to Holdings election under Section 754 of the Internal Revenue Code (see Note 2). The increase in net operating loss carryforwards also contributed to the increase.
The Company assesses available positive and negative evidence to estimate if it is more-likely-than-not to use certain jurisdiction-based deferred tax assets including certain tax credits and net operating loss carryovers. On the basis of this assessment, a valuation allowance of $85.4 million was released during the year ended December 31, 2016.
As of December 31, 2016, the Company has $258.7 million of domestic net operating loss carryforwards and $480.1 million of foreign net operating loss carryforwards from all operations. The U.S. net operating loss carryforwards have various expiration dates through 2036 with the net operating losses generated by certain of our U.K. subsidiaries having indefinite carryforward periods.
The tax credit carryforward includes foreign tax credits of $3.5 million and a research and development credit of $0.5 million, each of which may be carried forward for a period of 10 years and begin to expire in 2021 and New York City unincorporated business tax credits of $0.5 million that may be carried forward for 7 years.
The Company does provide for deferred taxes on the excess of the financial reporting over the tax basis in its investments in foreign subsidiaries because the amounts are not deemed to be permanent in duration.
Income tax payable as of December 31, 2016 and 2015 was $0.9 million and $1.4 million, respectively, and is included in Accounts payable and accrued expenses in the consolidated statements of financial condition (see Note 12). Tax receivable as of December 31, 2016 and 2015 was $0.2 million and $1.8 million, respectively.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, with amounts in thousands:
|
| | | | | | | |
| For the Years Ended December 31, |
| 2016 | | 2015 |
Unrecognized tax benefits – January 1 | $ | 390 |
| | $ | 409 |
|
Gross increases – tax positions in prior period | 36 |
| | — |
|
Gross decreases – tax positions in prior period | — |
| | (137 | ) |
Gross increases – tax positions in current period | 166 |
| | 118 |
|
Lapse of statute of limitations | (51 | ) | | — |
|
Unrecognized tax benefits – December 31 | $ | 541 |
| | $ | 390 |
|
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated statements of financial condition. Related to the unrecognized tax benefits noted above, the Company accrued penalties and interest of immaterial amounts during the years ended December 31, 2016 and 2015.
The Company does not believe that it will have a material increase in its unrecognized tax benefits during the coming year.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of December 31, 2016, the Company’s tax years for 2013, 2014 and 2015 are subject to examination by the tax authorities. Currently, the Company and Holdings’ 2013 U.S. Federal tax returns are under examination along with the Company’s 2013 and 2014 New York State tax returns. Additionally, several of the Company’s U.K. subsidiaries are under examination for the 2012 tax year.