15. Income Taxes

The domestic and international components of income (loss) before provision for (benefit from) income taxes for the years ended October 29, 2011, October 30, 2010 and October 31, 2009 are presented as follows (in thousands):


	Fiscal Year Ended
	October 29, 2011 (1)			October 30, 2010		October 31, 2009
United States	$	(42,118	)	$	36,015	$	(139,156	)
International		121,546			70,955		62,581

Total	$	79,428		$	106,970	$	(76,575	)

(1)	Excludes the impact of repatriation of $200 million from offshore operations to the United States.

The income tax provision (benefit) for the years ended October 29, 2011, October 30, 2010 and October 31, 2009 consisted of the following (in thousands):


	Fiscal Year Ended
	October 29, 2011			October 30, 2010			October 31, 2009
U.S. federal taxes:
Current	$	774		$	(30,768	)	$	15,008
Deferred		28,111			19,390			(13,411	)

Total U.S. federal taxes		28,885			(11,378	)		1,597

State taxes:
Current		1,250			4,282			3,173
Deferred		(9,187	)		(10,506	)		(9,409	)

Total state taxes		(7,937	)		(6,224	)		(6,236	)

Non-U.S. taxes:
Current		7,854			8,964			10,436
Deferred		16			(915	)		817

Total non-U.S. taxes		7,870			8,049			11,253

Total	$	28,818		$	(9,553	)	$	6,614

The difference between the U.S. federal statutory income tax rate and the Company's effective tax rate for the years ended October 29, 2011, October 30, 2010 and October 31, 2009 consisted of the following:


	Fiscal Year Ended
	October 29, 2011			October 30, 2010			October 31, 2009
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal tax benefit		3.3			4.0			(2.6	)
Foreign income taxed at other than U.S. rates		(48.2	)		(32.6	)		7.6
Stock-based compensation		11.8			12.6			(13.1	)
Research and development credit		(17.6	)		(10.4	)		22.2
Acquisition-related impairment		—			—			(33.3	)
Permanent items		1.2			0.9			(1.9	)
Change in liabilities for uncertain tax positions		2.5			(29.0	)		(26.0	)
Repatriation from offshore operations		62.6			—			—
Audit settlement and reinstated tax credit		(11.7	)		10.2			—
Other		(2.6	)		0.4			3.5

Effective tax rate		36.3	%		(8.9	)%		(8.6	)%

In the fourth fiscal quarter of 2011, we repatriated $200.0 million from our offshore operations, with which we repurchased approximately 46.5 million shares of our Company's stock. The Company recorded tax expense of $49.7 million related to this one-time cash repatriation to fund the stock repurchase program. U.S. federal income taxes and foreign withholding taxes were not provided for on a cumulative total of $266.2 million of undistributed earnings of the Company's foreign subsidiaries. The Company intends to reinvest current and accumulated earnings of its foreign subsidiaries for expansion of its business operations outside the United States for an indefinite period of time. Our existing cash, cash equivalents and short-term investments totaled $415.0 million as of October 29, 2011. Of this amount, approximately 75% was held by our foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company could be subject to additional U.S. income taxes, net of foreign tax credits, and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

The components of deferred tax assets and deferred tax liabilities for the years ended October 29, 2011 and October 30, 2010 are presented as follows (in thousands):


	October 29, 2011			October 30, 2010
Net operating loss carry forwards	$	132,765		$	155,556
Stock option expense		28,513			37,406
Tax credit carry forwards		141,209			93,450
Reserves and accruals		104,135			128,283
Non-U.S. stock option expense		373			643
Capitalized research and development expenditures		8,475			14,970
Net unrealized losses on investments		330			327

Gross deferred tax assets		415,800			430,635
Less: Valuation allowance		(22,566	)		(22,319	)

Total deferred tax assets		393,234			408,316
Acquired intangibles and goodwill		(92,481	)		(131,402	)
Fixed assets		(34,992	)		—
Other		(2,129	)		(2,342	)

Total deferred tax liabilities		(129,602	)		(133,744	)

Total net deferred tax assets	$	263,632		$	274,572

The Company believes that sufficient positive evidence exists from historical operations and projections of taxable income in future years to conclude that it is more likely than not that the Company will realize its deferred tax assets. Accordingly, the Company applies a valuation allowance only on the deferred tax assets relating to capital loss carryforwards, due to limited carryforward periods and the character of such tax attributes. As part of the 2011-2012 budget, the Governor of the State of California has introduced tax proposals affecting future state income tax apportionment that may have a significant impact on the Company's ability to realize certain California deferred tax assets. The Company will reevaluate the realization of its California deferred tax assets if and when the current law changes.

As of October 29, 2011, the Company had federal net operating loss carryforwards of $805.8 million, California state net operating loss carryforwards of $112.1 million and other significant states net operating loss carryforwards of approximately $249.8 million. Additionally, the Company had $134.4 million of federal tax credits and $146.2 million of state tax credits. The federal net operating loss and other tax credit carryforwards expire on various dates between 2011 through 2031. The state net operating loss and credit carryforwards expire on various dates between 2012 through 2031. Under the current tax law, net operating loss and credit carryforwards available to offset future income in any given year may be limited by statute or upon the occurrence of certain events, including significant changes in ownership interests.

As a result of the McDATA and Foundry acquisitions, all the tax attributes from both companies are subject to an annual limitation, but the Company expects to use all the tax attributes before expiration.

The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken on a tax return. Recognition of a tax position is determined when it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority.

A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits, excluding accrued net interest and penalties of $3.4 million, for the year ended October 29, 2011, is as follows (in thousands):


	October 29, 2011			October 30, 2010
Unrecognized tax benefits, beginning balance	$	136,812		$	170,947
Gross increases for tax positions taken in prior periods		9,066			2,666
Gross decreases for tax positions taken in prior periods		(1,730	)		(4,618	)
Gross increases for tax positions taken in current period		9,601			7,805
Changes due to settlements with taxing authorities		(1,051	)		(37,366	)
Reductions resulting from lapses of statutes of limitations		(3,268	)		(2,622	)

Unrecognized tax benefits, ending balance	$	149,430		$	136,812

As of October 29, 2011, the Company had net unrecognized tax benefits of $140.3 million, all of which, if recognized, would result in a reduction of the Company's effective tax rate.

For the fiscal year ended October 29, 2011, the Company recorded an income tax expense of $28.8 million, primarily as a result of a cash repatriation from our foreign subsidiary and foreign tax expenses offset by discrete benefits from the retroactive reinstatement of the federal research and development tax credit provision as a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Tax Relief Act"), reserve releases from the settlement of the research and development tax credit issues with the IRS regarding the Company's fiscal year 2007 and 2008 audits, and reserve release from the expiration of the statute of limitation.

For the fiscal year ended October 30, 2010, the Company recorded an income tax benefit of $9.6 million, primarily as a result of foreign taxes, offset by discrete benefits from the release of certain reserves mainly relating to the settlement of the Company's fiscal year 2003 Internal Revenue Service ("IRS") audit and related remeasurements of various uncertain tax positions, concession from the IRS on treatment of intercompany gross receipts for the research and development credits, Franchise Tax Board ("FTB") research and development credits carried forward to fiscal year 2005, and statute expirations of tax years of foreign subsidiaries.

The IRS and other tax authorities regularly examine our income tax returns. We are currently under negotiations with the Appeals division of the IRS for the audit of fiscal years 2004 through 2008, and we expect to resolve fiscal years 2004 through 2006 during the next twelve months. In addition, we are in negotiations with foreign tax authorities to receive correlative relief on transfer pricing settlements with the IRS. We believe that our reserves for unrecognized tax benefits are adequate for all open tax years. The timing of the resolution of income tax examinations, as well as the amounts and timing of related settlements, is highly uncertain. The Company believes that before the end of fiscal year 2012, it is reasonably possible that either certain audits will conclude or the statute of limitations relating to certain income tax examination periods will expire, or both. As such, after we reach settlement with the IRS, we expect to record a corresponding adjustment to our unrecognized tax benefits. Given the uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, the range of estimated potential decreases in underlying uncertain tax positions is between $0 and $24 million in the next twelve months.

The Company classifies interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the fiscal year ended October 29, 2011, the Company expensed $0.4 million for net interest and penalties related to income tax liabilities through income tax expense. The total net interest and penalties accrued as of October 29, 2011 was $3.4 million. During the year ended October 30, 2010, the Company expensed $0.9 million for net interest and penalties related to income tax liabilities through income tax expense. The total net interest and penalties accrued as of October 30, 2010 was $3.0 million.

In May 2011, the Company received the IRS revenue agent's report for fiscal years 2007 and 2008. The IRS is contesting the Company's transfer pricing for the cost sharing and buy-in arrangements with its foreign subsidiaries. The IRS' proposed adjustment would offset approximately $317.4 million of the Company's net operating loss carryforwards. In June 2011, the Company filed a protest with the Appeals Office of the IRS to challenge the IRS' proposed adjustment and assessment. The Franchise Tax Board is auditing Foundry's California income tax returns for calendar years 2006 and 2007. These audits and appeal are still ongoing and the Company believes its reserves are adequate to cover any potential assessments and settlements that may result from these examinations. Due to the availability of net operating losses and credits, the Company does not expect a significant tax liability from the settlement of the audits.

Of the total tax benefits (detriments) resulting from the exercise of employee stock options and employee participation in the Company's equity compensation plans, the amounts recorded to stockholders' equity were approximately $(5.2) million in fiscal year 2011, $2.2 million in fiscal year 2010 and $(0.8) million in fiscal year 2009.