Income Taxes

The federal and state and foreign income tax provision is summarized as follows:



Year Ended December 31,	2015			2014		2013
Current
Federal	$	159,774		$	155,273	$	153,856
State	7,756			8,744		11,542
Foreign	5,224			5,254		4,727
	172,754			169,271		170,125
Deferred, including current deferred
Federal	(5,343		)	1,667		(2,214		)
State	1,414			11		(16,264		)
Foreign	—			—		(4,814		)
	(3,929		)	1,678		(23,292		)
Income taxes attributable to the noncontrolling interest	—			—		91
Total income taxes	$	168,825		$	170,949	$	146,924

Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ materially from the amount accrued. The examination and the resolution process may last longer than one year.

The components of Income before income taxes are summarized as follows:



Year Ended December 31,	2015		2014		2013
Domestic	$	472,384	$	475,175	$	427,915
Foreign	28,096		14,487		7,042
	$	500,480	$	489,662	$	434,957

The effective income tax rate differs from the federal income tax statutory rate due to the following:



Year Ended December 31,	2015		2014		2013
Statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax benefit	1.6		1.2		1.5
Foreign tax expense and tax rate differential	(1.2	)	(0.7	)	0.5
Research and development tax credit	(0.6	)	(0.4	)	(0.8	)
Domestic Production Activities Deduction	(0.6	)	(0.4	)	(0.5	)
PA Tax Law changes and change in valuation allowance on loss carryforwards	—		—		(2.4	)
Net change in uncertain tax positions	—		0.3		0.1
Settlement of state tax petition	(0.8	)	—		—
Other, net	0.3		(0.1	)	0.3
	33.7	%	34.9	%	33.7	%

The decrease in the Company's effective income tax rate in 2015 was primarily due to a one-time reduction resulting from a favorable settlement of a tax petition filed with the State of Pennsylvania relating to the apportionment methodology of net income for prior years.

In 2014, the Company completed international tax planning which reduced the effective income tax rate for international operations. Additionally, there was an increase in the pre-tax income in certain foreign jurisdictions which were taxed at a lower rate or was offset by foreign tax credit.

The impact on the Company's effective income tax rate from the net change in uncertain tax positions in 2014 relates to federal issues mainly associated with the compilation of foreign tax credits and state tax issues. For 2013, the impact from the net change in uncertain tax positions relates to federal and state tax issues and foreign tax issues.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $84,620 at December 31, 2015. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes, subject to an adjustment for foreign tax credits, and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation, including the availability, or lack thereof, of foreign tax credits to reduce a portion of the U.S. liability.

Deferred income taxes for 2015, 2014 and 2013 reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. In 2013, the Company's deferred income tax net liability decreased significantly due to the following: (1) Pennsylvania Tax Law changes enacted on July 18, 2013 which became effective on January 1, 2014. These changes reduced the deferred tax liability which had accumulated during prior years. In accordance with the tax accounting rules, the effect of the law change is recorded in the year in which the law was signed. The primary change that affects the Company results from the reduction of net income apportioned to the State of Pennsylvania. The bill adopts “market-based” sourcing for apportionment. This method apportions sales to the state where the benefits are being derived by the customer. The method prior to 2014 apportions sales of services to the state where the cost was incurred to perform those services; (2) the Company's current payable decreased as a result of the sale of SEI AK.

The net deferred income tax liability is comprised of:



Year Ended December 31,	2015			2014
Deferred income taxes:
Gross assets	70,106			69,287
Gross liabilities	(118,586		)	(117,947		)
	(48,480		)	(48,660		)
Valuation allowance	(14,548		)	(16,509		)
Net deferred income tax liability	$	(63,028	)	$	(65,169	)

The valuation allowances against deferred tax assets at December 31, 2015 and 2014 are related to state net operating losses from certain domestic subsidiaries. Certain state tax statutes significantly limit the utilization of net operating losses for domestic subsidiaries. Furthermore, these net operating losses cannot be used to offset the net income of other subsidiaries. In 2014, the valuation also includes valuation of foreign tax credit.

The tax effect of significant temporary differences representing deferred tax liabilities is:



Year Ended December 31,	2015			2014
Difference in financial reporting and income tax depreciation methods	$	(2,695	)	$	(3,637	)
Reserves not currently deductible	245			209
Capitalized software currently deductible for tax purposes, net of amortization	(111,174		)	(118,841		)
State deferred income taxes	1,444			(420		)
Revenue and expense recognized in different periods for financial reporting and income tax purposes	5,534			6,212
Unrealized holding loss (gain) on investments	772			(475		)
Stock-based compensation expense	34,739			38,989
State net operating loss carryforward	19,580			24,150
Valuation allowance on deferred tax assets	(14,548		)	(16,509		)
Federal benefit of state tax deduction for uncertain tax positions	3,014			2,913
Foreign tax credit	—			2,327
Foreign deferred	61			(87		)
Net deferred income tax liability	$	(63,028	)	$	(65,169	)

The Company recognizes uncertain tax positions in accordance with the applicable accounting guidance and adjusts these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. The Company’s total unrecognized tax benefit, not including interest and penalties, as of December 31, 2015 was $14,517, of which $12,898 would affect the effective tax rate if the Company were to recognize the tax benefit. The gross amount of uncertain tax liability of $4,512 which is expected to be paid within one year is netted against the current payable account while the remaining amount of $11,397 is included in Other long-term liabilities on the accompanying Consolidated Balance Sheets. During the year ended December 31, 2015, the Company recognized $1,752 of previously unrecognized tax benefits relating to the lapse of the statute of limitation.

The Company files a consolidated federal income tax return and separate income tax returns with various states. Certain subsidiaries of the Company file tax returns in foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examination for years before 2012 and is no longer subject to state, local or foreign income tax examinations by authorities for years before 2008.

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



	2015			2014			2013
Balance as of January 1	$	14,018		$	12,028		$	11,553
Tax positions related to current year:
Gross additions	1,954			1,957			1,834
Gross reductions	—			—			—
	1,954			1,957			1,834
Tax positions related to prior years:
Gross additions	297			1,369			3,435
Gross reductions	—			—			—
	297			1,369			3,435
Settlements	—			—			(3,772		)
Lapses on statute of limitations	(1,752		)	(1,336		)	(1,022		)
Balance as of December 31	$	14,517		$	14,018		$	12,028

The above reconciliation of the gross unrecognized tax benefit will differ from the amount which would affect the effective tax rate because of the recognition of the federal and state tax benefits.

The Company classifies all interest and penalties as income tax expense. The Company has recorded $1,391, $1,066 and $754 in liabilities for tax related interest and penalties in 2015, 2014 and 2013, respectively.

The Company estimates it will recognize $4,512 of unrecognized tax benefits within the next twelve months due to lapses on the statute of limitation.

The Company includes its direct and indirect subsidiaries in its U.S. consolidated federal income tax return. The Company’s tax sharing allocation agreement provides that any subsidiary having taxable income will pay a tax liability equivalent to what that subsidiary would have paid if it filed a separate income tax return. If the separately calculated federal income tax provision for any subsidiary results in a tax loss, the current benefit resulting from such loss, to the extent utilizable on a separate return basis, is accrued and paid to that subsidiary.