A-Mark Precious Metals, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Jun. 30, 2016

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Income from operations before provision for income taxes is shown below:



in thousands
Years Ended June 30,	2016		2015
U.S.	$	15,453	$	8,952
Foreign	111		196
Income before provision for income taxes	$	15,564	$	9,148

The Company files a consolidated federal income tax return based on a June 30^th tax year end. The provision for (benefit from) income taxes for the years ended June 30, 2016 and 2015 consists of the following:



in thousands
Years Ended June 30,	2016			2015
Current:
Federal	(668		)	3,498
State and local	100			(464		)
Foreign	52			49
	(515		)	3,083
Deferred:
Federal	6,325			(182		)
State and local	483			(804		)
	6,808			(986		)

Provision for income taxes	$	6,293		$	2,097

A reconciliation of the income tax provisions to the amounts computed by applying the statutory federal income tax rate (35% for 2016, and 2015) to income before income tax provisions for the years ended June 30, 2016 and 2015, are set forth below:



in thousands
Years Ended June 30,	2016			2015
Federal income tax	$	5,447		$	3,202
State tax, net of federal benefit	437			193
162(m) limitation	—			53
Uncertain tax positions	79			(352		)
Reallocation of deferred state net operating loss from Former Parent related to tax settlement	—			(564		)
Change in valuation allowance	(70		)	(215		)
Other	400			(220		)
Total provision for income taxes	$	6,293		$	2,097

Transition of Tax Filing Obligation Due to the Spinoff

The Company files income tax returns in the U.S., various states and Austria. Prior to the Distribution, the Company was included in the consolidated federal and state tax filings of the Former Parent. In connection with the spinoff, the Company entered into a tax separation agreement with the Former Parent (the "Tax Separation Agreement"). The Tax Separation Agreement governs the respective rights, responsibilities and obligations of the Former Parent and the Company with respect to, among other things, liabilities for U.S. federal, state, local and other taxes. In addition to the allocation of tax liabilities, the Tax Separation Agreement addresses the preparation and filing of tax returns for such taxes and disputes with taxing authorities regarding such taxes. Pursuant to the Tax Separation Agreement, A-Mark may be responsible for any tax amount related to A-Mark that is incurred as the result of adjustments made during the Internal Revenue Service examination or other tax jurisdictions' examinations of the Former Parent. Under the terms of the Tax Separation Agreement, the Former Parent has the responsibility to prepare and file tax returns for tax periods ending prior to the Distribution date and for tax periods which include the Distribution date but end after the Distribution date, which includes A-Mark and its subsidiaries.

The Company's consolidated financial statements recognized the current and deferred income tax consequences that result from the Company's activities during the current and preceding periods, as if the Company were a separate taxpayer during the period prior to the Distribution rather than a member of the Former Parent's consolidated income tax return group. Current income tax payable due to the Former Parent reflects balances due to the Former Parent for taxable income generated as if the Company were a separate taxpaying entity prior to the Distribution, net of amounts related to balances due from the Former Parent for its share of income tax assets of the group. Current income tax receivable due from the Former Parent reflects balances due to A-Mark for its share of the income tax assets of the group.

As of June 30, 2016 and June 30, 2015, the amount receivable under the Company's income tax sharing obligation due from Former Parent totaled $0.2 million, and $1.1 million, respectively, and is shown on the face of the consolidated balance sheets as income taxes receivable from Former Parent.

SGI received a written opinion from Kramer Levin Naftalis & Frankel LLP that the spinoff qualifies as a tax-free transaction under Section 355 of the Internal Revenue Code and that for U.S. federal income tax purposes, (i) no gain or loss shall be recognized by SGI upon the distribution of our common stock in the spinoff, and (ii) no gain or loss shall be recognized by, and no amount will be included in the income of, holders of SGI common stock upon the receipt of shares of our common stock in the spinoff. If, notwithstanding the conclusions included in the opinion, it is ultimately determined that the distribution does not qualify as tax-free for U.S. federal income tax purposes, each SGI shareholder that is subject to U.S. federal income tax and that received shares of our common stock in the distribution could be treated as receiving a taxable distribution in an amount equal to the fair market value of such shares. In addition, if the distribution were not to qualify as tax-free for U.S. federal income tax purposes, then SGI would recognize gain in an amount equal to the excess of the fair market value of our common stock distributed to SGI shareholders on the date of the distribution over SGI’s tax basis in such shares. Also, we could have an indemnification obligation to SGI related to its tax liability. The Company considers this possible outcome as remote, and as a result, no liability has been recorded.

Tax Balances and Activity

The tax returns filed by the Company since the spinoff have been prepared on a basis consistent with past practices. Income taxes receivable represents amounts paid to federal and state jurisdictions in excess of amounts due to taxing authorities based upon taxable income generated following the close of the transaction. Our deferred tax assets and liabilities represent tax effected balances that were assumed in the spinoff and generated since the spinoff.

As of June 30, 2016 and June 30, 2015, the income tax receivable totaled $7.3 million and $7.8 million, respectively. As of June 30, 2016 and June 30, 2015, the deferred tax assets (non-current) totaled $0.4 million and $0.8 million, respectively, and the deferred tax liabilities (non-current) totaled $7.2 million and $0.9 million.

Deferred Tax Assets and Liabilities

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized by evaluating both positive and negative evidence. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of June 30, 2016 and June 30, 2015, management concluded that with the exception of certain state net operating losses, it was more likely than not that the Company would be able to realize the benefit of the U.S. federal and state deferred tax assets. We based this conclusion on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets.

The consolidated balance sheet reflects the deferred tax items for each tax-paying component (i.e., federal and state), resulting in a state deferred tax asset of $0.4 million and a federal deferred tax liability of $7.2 million. The schedule of deferred taxes presented below summarizes the components of deferred taxes that have been classified as deferred tax assets and deferred tax liabilities for taxable temporary differences as of June 30, 2016 and June 30, 2015:



in thousands
June 30,	2016			2015
Accrued compensation	$	110		$	102
Deferred rent	194			30
Unrealized loss on futures and forward contracts	5,179			—
Unrealized loss on open purchase and sale commitments	—			1,894
Stock-based compensation	206			159
State tax accrual	2			23
Net operating loss carry forwards	929			982
Other	215			132
Deferred tax assets	6,835			3,322
Less: valuation allowances	(44		)	(114		)
Deferred tax assets after valuation allowances	6,791			3,208

Intangible assets	(1,221		)	(1,059		)
Unrealized gain on open purchase and sale commitments	(7,228		)	—
Unrealized gain on futures and forward contracts	—			(2,029		)
Fixed assets	(87		)	(134		)
Inventories	(4,815		)	(110		)
Earnings from equity method investment	(261		)	—
Other	—			(2		)
Deferred tax liabilities	(13,612		)	(3,334		)

Net deferred tax liability	$	(6,821	)	$	(126	)

Net Operating Loss Carryforwards and Valuation Allowances

As of June 30, 2016 and June 30, 2015, the Company's state and city net operating loss carryforwards totaled approximately $16.6 million and $17.6 million, respectively. As shown in the table above, the Company's tax-effected net operating loss carryforwards totaled, as of June 30, 2016 and June 30, 2015, $0.9 million and $1.0 million, respectively. These net operating loss carryforwards start to expire in the year ending June 30, 2030. As of June 30, 2016 and June 30, 2015, the Company had $44,000 and $114,000, respectively, of valuation allowance for certain state and city net operating loss carryforwards, based on the Company's annual assessment of the realizability of its deferred tax assets.

Unrecognized Tax Benefits

The Company has taken or expects to take certain tax deductions on its income tax return filings that it has not recognized a tax benefit (i.e., an unrecognized tax benefit) on its consolidated statements of income. The Company's measurement of its uncertain tax positions is based on management's assessment of all relevant information, including, but not limited to prior audit experience, audit settlement, or lapse of the applicable statute of limitations. Below, is a reconciliation of the net unrecognized tax benefits for the years ended June 30, 2016 and 2015:



in thousands
June 30,	2016			2015

Beginning balance	$	243		$	730
Reductions due to lapse of statute of limitations	(16		)	(147		)
Additions as a result of tax positions taken during current period	53			4
Reductions as a result of tax positions of prior years	—			(134		)
Settlements	—			(210		)
Ending balance	$	280		$	243

In addition to the $280,000 of accrued tax expense related to unrecognized tax positions, as shown in the table above, the Company accrued of $123,000 of interest and $92,000 of penalties related to its uncertain tax positions. As of June 30, 2016, the amount of this accrued liability (inclusive of the uncertain tax deductions and the associated interest and penalty accrual) totaled $496,000, and, if recognized, would reduce the Company's effective tax rate. For the years ended June 30, 2016 and 2015, the Company recognized approximately $24,000 of interest expense and $84,000 of interest benefit, as well as expense related to penalties of $20,000 and benefit related to reduction in accrued penalties of $124,000 related to its uncertain tax positions, respectively.

Tax Examinations

With exception of the items noted below, either prior federal, state or local examinations have been completed by the tax authorities or the statute of limitations have expired for U.S. federal, state and local income tax returns filed by the for the years through June 30, 2007.

Internal Revenue Service - June 30, 2004 through June 30, 2007

Prior to the Distribution, the Company was included in the consolidated federal and state tax filings of the Former Parent. The Former Parent has been under examination by the IRS for the years ended June 30, 2004 through 2013; however, during the year ended June 30, 2015, the Former Parent was notified that it had successfully resolved the June 30, 2004 through June 30, 2007 tax years. As a result of the IRS exam, the Former Parent amended the state tax filings for the applicable periods. The amended state tax filings resulted in a tax benefit of approximately $0.6 million related to state net operating loss apportioned to the Company under intrastate apportionment rules for the year ended June 30, 2013.

Internal Revenue Service - June 30, 2008 through June 30, 2013

The Former Parent remains in appeals with the IRS for the years ended June 30, 2008 through 2013 related to challenges to certain positions the Former Parent has taken. The Former Parent and the Company, as a subsidiary in a consolidated tax filing.The Company is unable to determine the outcome of this appeal at this time.

Internal Revenue Service Examination June 30, 2015

Subsequent to fiscal 2016, the Internal Revenue Service notified the Company of an examination for the year ended June 30, 2015. The Company is unable to determine the outcome of the exam at this time (see Note 19.)

New York State

During the year ended June 30, 2015, the Former Parent reached a settlement with the state of New York for the tax the years ended June 30, 2008 through 2013. The Company agreed to pay $1.0 million of tax plus interest of $0.1 million related to this settlement and pursuant to the terms of the Tax Separation Agreement, the Former Parent has compensated the Company for its obligation. This audit has been closed.

City of New York Examination

During the year ended June 30, 2016, the Former Parent reached a settlement with the city of New York for the tax years ended June 30, 2010 through 2011. The Company agreed to pay $0.2 million of tax plus interest of $0.1 million related to this settlement and pursuant to the terms of the Tax Separation Agreement, the Former Parent will compensate the Company for its obligation. This audit has been closed.

Utah State

The Former Parent remains under exam with the state of Utah for the years ended June 30, 2011 through 2013. The Former Parent and the Company, as a subsidiary in a consolidated tax filing, are unable to determine the outcome of this exam at this time.

Foreign Jurisdiction - June 30, 2012 through June 30, 2014

During the year ended June 30, 2016, the Company reached a settlement with the country of Austria for the tax years ended June 30, 2012 through 2014, agreeing to pay approximately $0.05 million related to adjustments to the income previously reported on the Austrian tax return. This audit has been closed.