Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2016

The provision for income taxes for 2016, 2015 and 2014 consisted of the following:



	Federal			State and Local			Total
2016:
Current	$	—		$	929		$	929
Deferred	8,992			104			9,096
	$	8,992		$	1,033		$	10,025
2015:
Current	$	(1,491	)	$	1,331		$	(160	)
Deferred	(1,623		)	1,223			(400		)
Benefit applied to reduce goodwill	—			78			78
	$	(3,114	)	$	2,632		$	(482	)
2014:
Current	$	947		$	1,160		$	2,107
Deferred	(21,012		)	(4,509		)	(25,521		)
Benefit applied to reduce goodwill	—			68			68
	$	(20,065	)	$	(3,281	)	$	(23,346	)

The difference between the income taxes expected at the U.S. federal statutory income tax rate of 35% and the reported income tax expense (benefit) is summarized as follows:



	2016			2015			2014
(Loss) income before income taxes	$	(12,286	)	$	(11,695	)	$	10,006
(Benefit) expense under statutory U.S. tax rates	(4,300		)	(4,093		)	3,502
Increase (decrease) in taxes resulting from:
Increase (decrease) in valuation allowance	12,540			79			(28,590		)
Nondeductible items	1,323			1,701			818
State taxes, net of federal benefit	671			1,600			689
Other, net	(209		)	231			235
Income tax expense (benefit)	$	10,025		$	(482	)	$	(23,346	)

The Company accounts for income taxes under the asset and liability method, which requires the recognition of tax benefits or expense on the temporary differences between the tax basis and financial statement basis of its assets and liabilities as well as tax loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.

Significant components of the Company's deferred tax assets and liabilities as of December 31, 2016 and December 31, 2015 are as follows:



	2016			2015
Deferred tax assets (liabilities):
Net operating loss carryforwards	$	14,132		$	13,197		*
AMT credit carryforward	76			76
Accrued expenses	5,084			4,501
Compensation and benefits	18,333			19,674
Deferred compensation liability	6,496			6,494
Securities owned	900			770
Total deferred tax assets	45,021			44,712
Valuation allowance	(13,766		)	(1,226		)	*
Net deferred tax assets	31,255			43,486
Fixed assets	(6,025		)	(4,699		)
Intangibles	(25,097		)	(34,100		)
Goodwill	(10,775		)	(9,103		)
Total deferred liabilities	(41,897		)	(47,902		)
Net deferred tax liability	$	(10,642	)	$	(4,416	)

* Reclassified from amounts previously reported.

As a result of the Highland and KMS acquisitions in 2014 and intended inclusion of such entities in the Company's consolidated federal and certain combined state and local income tax returns, deferred federal and a substantial portion of deferred state and local tax liabilities assumed in the acquisitions (see Note 3) are able to offset the reversal of the Company's pre-existing deferred tax assets. Accordingly, the Company's deferred tax valuation allowance at December 31, 2013 which amounted to $28,590 was reduced to the extent of $21,238 of the deferred tax liability recorded in the acquisitions and recorded as a deferred tax benefit in the 2014 consolidated statement of operations. Further, after utilization of a portion of the Company's net operating loss carryforward to offset taxable income for 2014 and a corresponding reversal of $5,760 of the valuation allowance, the remaining valuation allowance of $1,592 was reversed and recorded as a deferred tax benefit in the 2014 consolidated statement of operations. Management's decision for such reversal was based on income from operations in 2014 as well as reductions in interest expense due to repayment of debt from proceeds of preferred stock and expectation of future taxable income, including future reversals of existing taxable temporary differences. Based on such available evidence, management concluded that it was more likely than not that the Company's deferred tax assets at December 31, 2014 would be realized and no valuation allowance was required.

At December 31, 2016, the Company had a consolidated federal net operating loss carryforward of approximately $48,410, which expires in various years from 2018 to 2036. The annual utilization of the net operating loss carryforward may be limited in future years due to the change in ownership provisions prescribed by Section 382 of the U.S. Internal Revenue Code. In addition, the Company has a Florida state net operating loss carryforward of approximately $42,978 expiring between 2028 and 2033; a New York state net operating loss carryforward of approximately $63,924 expiring in 2036 and a New York City net operating loss carryforward of approximately $61,775 expiring in 2036. Deferred tax assets related to net operating loss carryforwards do not include tax deductions of approximately $11,205 related to equity compensation that was greater than the compensation recognized for financial reporting.

Goodwill for tax purposes recognized in connection with the acquisition of Triad by the Company, all of which is tax deductible, exceeded the amount of goodwill recognized in the financial statements.

Authoritative accounting guidance in effect when the acquisition was consummated requires the tax benefit for the excess goodwill to be recognized when realized and applied first to reduce goodwill and thereafter reduce non-current intangible assets with the remaining benefit recognized as a reduction of income tax expense.

In assessing the Company's ability to recover its deferred tax assets, the Company evaluated whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. The Company considered all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, historical earnings, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Based on these considerations the Company believes it was more likely than not that it will not realize the benefit of its deferred tax assets with the exception of certain state net operating losses as of December 31, 2015. With respect to 2016 a significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2016. On the basis of this evaluation, the Company determined that its deferred tax assets were not realizable on a more-likely-than-not basis and recorded a valuation allowance against its deferred tax assets. As such, the Company’s valuation allowance increased by $12,540 during 2016.

In accordance with ASC 350-10, the Company does not amortize indefinite lived-intangibles and goodwill for financial reporting purposes. The Company does amortize the indefinite-lived intangibles and goodwill for tax purposes to the extent the Company has tax basis in such items. The deferred tax liability of $10,642 primarily relates to the tax effects of differences between the financial reporting and tax basis of intangible assets and goodwill that are not expected to reverse during the Company’s net operating loss carryforward period, as reversal will occur when such assets are dispose of or impaired which period is not determinable.

The Company applied the "more-likely-than-not" recognition threshold to all tax positions taken or expected to be taken in a tax return, which resulted in unrecognized state tax benefits as of December 31, 2016 and December 31, 2015. The Company has elected to classify interest and penalties that would accrue with respect to unrecognized tax benefits as interest and other expense, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2016		2015
Balance at January 1,	$	423	$	—
Increases in tax positions for prior years	9		268
Increases in tax positions for current years	71		155
Balance at December 31,	$	503	$	423

Of the amounts reflected in the above table at December 31, 2016, the entire amount would reduce the Company’s annual effective tax rate if recognized. As of December 31, 2016, the Company accrued interest and penalties of approximately $150. As of December 31, 2016, the Company does not anticipate a significant change in unrecognized tax benefits within 12 months of the reporting date.

The Company files income tax returns in the United States and various state jurisdictions. The Company's tax years 2012 through 2016 remain open to examination by most taxing authorities.

Prior to being acquired by the Company in November 2011, Securities America was included in consolidated federal and state income tax returns filed by its parent Ameriprise Financial, Inc. ("Ameriprise"). Accordingly, Securities America is jointly, with other members of the consolidated group, and severally liable for any additional taxes that may be assessed against the group. In connection with the acquisition, Ameriprise has agreed to indemnify the Company for any such assessments imposed on any members of the group other than Securities America. Ameriprise has disclosed that in 2016 the IRS completed auditing its U.S. Income Tax Returns for 2008 through 2011.

However, the years 2010 and 2011 remain open because of certain un-agreed upon issues. Ameriprise or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 1997 through 2011.