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, 2015

INCOME TAXES

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, 2015 and 2014 consists of the following:



in thousands
Years Ended June 30,	2015			2014
Current:
Federal	3,498			(1,788		)
State and local	(464		)	130
Foreign	49			—
	3,083			(1,658		)
Deferred:
Federal	(182		)	6,405
State and local	(804		)	525
	(986		)	6,930

Provision for income taxes	$	2,097		$	5,272

A reconciliation of the income tax provisions to the amounts computed by applying the statutory federal income tax rate (35% for 2015, and 2014) to income before income tax provisions for the years ended June 30, 2015 and 2014, are set forth below:



in thousands
Years Ended June 30,	2015			2014
Federal income tax	$	3,202		$	4,736
State tax, net of federal benefit	193			212
Compensation in excess of $1 million	53			—
Uncertain tax positions	(352		)	22
Reallocation of deferred state net operating loss from Former Parent related to tax settlement	(564		)	—
Valuation allowance	(215		)	329
Other	(220		)	(27		)
Total provision for income taxes	$	2,097		$	5,272

Significant components of the Company's net deferred tax assets and liabilities as of June 30, 2015 and 2014 are as follows:



in thousands
June 30,	2015			2014
Accrued compensation	$	102		$	236
Deferred rent	30			—
Unrealized loss on futures and forward contracts	—			3,170
Unrealized loss on open purchase and sale commitments	1,894			—
Stock-based compensation	159			133
State tax accrual	23			349
Net operating loss carry forwards	982			775
Other	132			34
Deferred tax assets	3,322			4,697
Less: valuation allowances	(114		)	(329		)
Deferred tax assets after valuation allowances	3,208			4,368

Intangible assets	(1,059		)	(913		)
Unrealized gain on open purchase and sale commitments	—			(2,533		)
Unrealized gain on futures and forward contracts	(2,029		)	—
Fixed assets	(134		)	(224		)
Inventories	(110		)	(2,164		)
Other	(2		)	(23		)
Deferred tax liabilities	(3,334		)	(5,857		)

Net deferred tax liability	$	(126	)	$	(1,489	)

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. 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. During the year ended 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 in the future. 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. As of June 30, 2015 and 2014, the Company had $0.1 million and $0.3 million, respectively, of valuation allowance for its realizability of deferred tax assets. The Company will continue to assess the need for a valuation allowance in the future by evaluating both positive and negative evidence that may exist.

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 tax receivable from Former Parent reflects balances due from the Former Parent to A-Mark for its share of the income tax assets of the group. Income taxes receivable represents amounts paid to federal and state jurisdictions due to taxable income generated following the close of the transaction.

As of June 30, 2015, the Company has state and city net operating loss carryforwards of approximately $17.6 million, which expire beginning with the year ending June 30, 2030. The tax effect of the state and city net operating loss carryforwards included in the Company's deferred tax assets is $0.9 million. Due to limitations on the ability to use certain state and city net operating loss carryforwards, the Company has recorded a valuation allowance of $0.1 million against these assets as the Company believes that it is not more likely than not that they will realize the benefit of these carryforwards.

A reconciliation of the net unrecognized tax benefits for the years ended June 30, 2015 and 2014 is as follows:



in thousands
June 30,	2015			2014

Beginning balance	$	730		$	733
Reductions due to lapse of statute of limitations	(147		)	(3		)
Additions reductions as a result of tax positions taken during current period	4			—
Reductions as a result of tax positions of prior years	(134		)	—
Settlements	(210		)	—
Ending balance	$	243		$	730

As of June 30, 2015, the Company had $0.2 million of unrecognized tax benefits and $0.1 million of liabilities for interest expense related to uncertain tax positions.. Of the total unrecognized tax benefits, $0.2 million would reduce the Company's effective tax rate, if recognized. As of June 30, 2014, the Company had $0.7 million of unrecognized tax benefits and $0.2 million of liabilities for interest expense related to uncertain tax positions. Of the total unrecognized tax benefits, $0.7 million would reduce the Company's effective tax rate, if recognized. For the years ended June 30, 2015 and 2014, the Company recognized approximately $(80,000) of interest benefit and $40,000 of interest expense related to uncertain tax positions, respectively. As of June 30, 2015 and 2014, the Company recognized approximately $72,000 and $195,000 of accrued tax penalties, respectively.

The Company files income tax returns in the U.S. and various states. Prior to the Distribution, the Company was included in the consolidated federal and state tax filing 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. The Former Parent remains in appeals with the IRS for the years ended June 30, 2008 through 2013 and in examination with other taxing jurisdictions on certain tax matters, including challenges to certain positions the Former Parent has taken. The Former Parent is unable to determine the outcome of these audits at this time. With few exceptions, 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 Former Parent for the years through 2003.

In connection with the spinoff, the Company entered into a Tax Separation Agreement with SGI. The Tax Separation Agreement governs the respective rights, responsibilities and obligations of SGI and us 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, SGI will have 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 will include A-Mark and its subsidiaries. These tax returns will be prepared on a basis consistent with past practices. The Company will cooperate in the preparation of these tax returns and have an opportunity to review and comment on these returns prior to filing. A-Mark will pay all taxes attributable to A-Mark and its subsidiaries, and will be entitled to any refund with respect to taxes it has paid.

The amounts receivable under the Company's income tax sharing obligation due from SGI totaled $1.1 million, and $3.1 million as of June 30, 2015 and June 30, 2014, respectively, and is shown on the face of the consolidated balance sheets as income taxes receivable from Former Parent. Based on the terms to the Tax Separation Agreement, payment is due to the Company after SGI files its tax return and is in receipt of its tax refund from the IRS. Furthermore, pursuant to the terms of the Tax Separation Agreement, the Company has been allocated approximately $15.7 million of state net operating losses. These net operating losses resulted in a deferred tax asset of $0.9 million.

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.