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Income Taxes
 6 Months Ended
Jun. 30, 2020
Income Tax Disclosure [Abstract]  
Income Taxes
22. Income Taxes
Effective Income Tax Rate – Three and Six Months Ended June 30, 2020
The Company’s effective income tax rate during the three months ended June 30, 2020 of 5.7% resulted in an income tax benefit of $804. The effective income tax rate differs from the federal statutory tax rate of 21%
primarily
due to a
non-deductible
loss on revaluation of deferred consideration. This
loss
was partly offset by a tax benefit of $2,842 recognized in connection with the release of a deferred tax asset valuation allowance on interest carryforwards arising from our debt previously held in the United Kingdom and a lower tax rate on foreign earnings.
The Company’s effective income tax rate for
the six months ended June 30,
2020 of 12.7% resulted in an income tax benefit of $3,175. The effective income tax rate differs from the federal statutory rate of 21% primarily due to a valuation allowance on capital losses, a
non-deductible
loss on revaluation of deferred consideration and tax shortfalls associated with the vesting and exercise of stock-based compensation awards. These items were partly offset by a $5,981 reduction in unrecognized tax benefits, a $2,877
non-taxable
gain recognized upon sale of
the
Canadian ETF business in the first quarter, a tax benefit of $2,842 recognized in connection with the release of a deferred tax asset valuation allowance on interest carryforwards arising from our debt previously held in the United Kingdom and a lower tax rate on foreign earnings.
Effective Income Tax Rate – Three and Six Months Ended June 30, 2019
The Company’s effective income tax rate during the three months ended June 30, 2019 of 59.1% resulted in income tax expense of $3,587. The effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a valuation allowance on foreign net operating losses,
non-deductible
executive compensation, a
non-deductible
loss on revaluation of deferred consideration and state and local income taxes, partly offset by a lower tax rate on foreign earnings.
The Company’s effective income tax rate during the six months ended June 30, 2019 of 18.3% resulted in income tax expense of $2,538. The effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a $4,309 reduction in unrecognized tax benefits, a lower tax rate on foreign earnings and a
non-taxable
gain on revaluation of deferred consideration, partly offset by a valuation allowance on foreign net operating losses, tax shortfalls associated with the vesting and exercise of stock-based compensation awards,
non-deductible
executive compensation and state and local income taxes.
Deferred Tax Assets
A summary of the components of the Company’s deferred tax assets at June 30, 2020 and December 31, 2019 are as follows:
 
  
June 30,
2020
 
  
December 31,
2019
 
Deferred tax assets:
   
 
Capital losses
  $
16,789
    $
8,226
 
Operating lease liabilities
   
5,196
     
5,529
 
Interest carryforwards
   
3,116
     
2,615
 
NOLs – International
   
1,880
     
6,721
 
Goodwill and intangible assets
   
1,574
     
1,671
 
Stock-based compensation
   
1,247
     
1,754
 
Accrued expenses
   
1,044
     
4,054
 
NOLs – U.S.
   
514
     
642
 
Outside basis differences
   
123
     
123
 
Other
   
113
     
218
 
                 
Deferred tax assets
   
31,596
     
31,553
 
                 
Deferred tax liabilities:
   
 
Right of use assets – operating leases
   
4,114
     
4,400
 
Fixed assets and prepaid assets
   
1,370
     
1,326
 
Allocated equity component of convertible note
   
1,004
     
—  
  
Unrealized gains
   
776
     
744
 
                 
Deferred tax liabilities
   
7,264
     
6,470
 
                 
Total deferred tax assets less deferred tax liabilities
   
24,332
     
25,083
 
Less: valuation allowance
   
(18,792
)     
(17,685
)
                 
Deferred tax assets, net
  $
5,540
    $
7,398
 
                 
Net Operating and Capital Losses – U.S
.
The Company’s tax effected net operating losses (“NOLs”) at June 30, 2020 were $514 which expire in 2024. The net operating loss carryforwards have been reduced by the impact of annual limitations described in the Internal Revenue Code Section 382 that arose as a result of an ownership change.
The Company’s tax effected capital losses at June 30, 2020 and December 31, 2019 were $16,789 and $8,226, respectively. The change in capital losses is due to the impairment recognized on the Company’s financial interests in AdvisorEngine (Note 7) and a capital loss recognized upon sale of the Canadian ETF business.
Net Operating Losses and Interest Carryforwards – International
Certain of the Company’s European subsidiaries generated NOLs and interest carryforwards outside the U.S. These tax effected NOLs and interest carryforwards were $4,996 and $9,336 at June 30, 2020 and December 31, 2019, respectively. All of these amounts are carried forward indefinitely. The reduction in NOLs was due to the sale of the Company’s Canadian ETF business, which occurred on February 19, 2020 (Note 25).
Valuation Allowance
During the three and six months ended June 30, 2020, the Company reduced the valuation allowance on its deferred tax assets by $2,842 associated with interest carryforwards in the United Kingdom. The Company has determined that it is more likely than not that these interest carryforwards will be utilized as the Company extinguished its term loan on June 16, 2020 and is therefore no longer accumulating
non-deductible
interest carryforwards in the United Kingdom. The Company also generates profits in that jurisdiction and unused amounts are carried forward indefinitely.
The Company’s remaining valuation allowance has been established on its net capital losses, international net operating losses and outside basis differences as it is
more-likely-than-not
that these deferred tax assets will not be realized.
Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”)
On March 27, 2020, the CARES Act was enacted in response to the
COVID-19
pandemic which included temporary changes to income and
non-income
based tax laws including: (i) the elimination of the 80% of taxable income limitation by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 and 2020; (ii) allowing NOLs originating in 2018, 2019 and 2020 to be carried back five years; (iii) increasing the net interest expense deduction limit to 50% of adjusted taxable income from 30% for tax years beginning January 1, 2019 and 2020; and (iv) other related provisions. The CARES Act did not have a material impact on the Company’s consolidated financial statements.
Uncertain Tax Positions
Tax positions are evaluated utilizing a
two-step
process. The Company first determines whether any of its tax positions are more-
likely-than-not
to be sustained upon examination, based solely on the technical merits of the position. Once it is determined that a position meets this recognition threshold, the position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
In connection with the ETFS Acquisition, the Company accrued a liability for uncertain tax positions and interest and penalties at the acquisition date. The table below sets forth the aggregate changes in the balance of these gross unrecognized tax benefits during the three and six months ended June 30, 2020:
 
   
Total
 
  
Unrecognized
Tax Benefits
 
  
Interest and
Penalties
 
Balance on January 1, 2020
  $
32,101
     $
25,998
     $
6,103
  
Decrease - Lapse of statute of limitations
(1)
    
(5,981
 )    
(4,620
 )    
(1,361
 )
Increases
   
76
     
—  
      
76
 
Foreign currency translation
(2)
    
(1,767
 )    
(1,432
 )    
(335
 )
                         
Balance at March 31, 2020
  $
24,429
    $
19,946
    $
4,483
 
Increases
   
76
     
—  
      
76
 
Foreign currency translation
(2)
    
(141
 )    
(115
 )    
(26
 )
                         
Balance at June 30, 2020
  $
24,364
    $
19,831
    $
4,533
 
  
 
 
     
 
 
     
 
 
  
 
(1) Recorded as an income tax benefit of $5,981 during the six months ended June 30, 2020, along with an equal and offsetting amount recorded in other gains and losses, net, to recognize a reduction in the indemnification asset. During the six months ended June 30, 2019, an income tax benefit of $4,309 was recorded along with an equal and offsetting amount in other gains and losses, net.
(2) The gross unrecognized tax benefits were accrued in British pounds sterling.
The Company also recorded an offsetting indemnification asset provided by ETFS Capital as part of its agreement to indemnify the Company for any potential claims, for which an amount is being held in escrow. ETFS Capital has also agreed to provide additional collateral by maintaining a minimum working capital balance up to a stipulated amount.
The gross unrecognized tax benefits and interest and penalties totaling $24,364 and $32,101 at June 30, 2020 and December 31, 2019, respectively, are included in other
non-current
liabilities on the Consolidated Balance Sheets. It is reasonably possible that the total amount of unrecognized tax benefits will decrease by $4,527 (including interest and penalties of $1,338) in the next 12 months upon lapsing of the statute of limitations.
At June 30, 2020, there were $24,364 of unrecognized tax benefits (including interest and penalties) that, if recognized, would impact the effective tax rate. The recognition of any unrecognized tax benefits would result in an equal and offsetting adjustment to the indemnification asset which would be recorded in income before taxes due to the indemnity for any potential claims.
Income Tax Examinations
The Company is subject to U.S. federal income tax as well as income tax of multiple state, local and certain foreign jurisdictions. The Company’s federal tax return and ManJer’s tax return (a Jersey-based subsidiary) for the year ended December 31, 2016 and the Company’s New York state tax return for the years ended December 31, 2015 through 2018 are currently under review by the relevant tax authorities. The Company is indemnified by ETFS Capital for any potential exposure associated with ManJer’s tax return under audit.
The Company is not currently under audit in any other income tax jurisdictions. As of June 30, 2020, with few exceptions, the Company was no longer subject to income tax examinations by any taxing authority for years before 2015.
Undistributed Earnings of Foreign Subsidiaries
Due to the imposition of the Global Intangible
Low-Taxed
Income (“GILTI”) provisions, all unremitted earnings are no longer subject to U.S. federal income tax; however, there could be U.S. state and/or foreign withholding taxes upon distribution of such unremitted earnings. The Company recognizes deferred tax liabilities for withholding taxes that may become payable, where applicable, upon the distribution of earnings and profits from foreign subsidiaries unless considered permanent in duration. As of June 30, 2020, the Company considers all undistributed foreign earnings and profits to be permanent in duration.