Income Taxes

Income from continuing operations before income taxes is categorized geographically as follows:



	Year Ended December 31,
	2014		2013		2012
	(In thousands)
United States	$	270,373	$	250,041	$	245,745
Foreign	212,938		206,730		166,950
Total income from continuing operations before income taxes	$	483,311	$	456,771	$	412,695

The provision for income taxes consisted of the following:



	Year Ended December 31,
	2014			2013			2012
	(In thousands)
Continuing Operations:
Current (expense) benefit:
Federal	$	(4,643	)	$	(1,104	)	$	(13,553	)
State	14			(8,150		)	(7,960		)
Foreign, including foreign witholding tax	(69,614		)	(13,613		)	(8,498		)
	(74,243		)	(22,867		)	(30,011		)
Deferred (expense) benefit:
Federal	(76,614		)	53,629			(67,700		)
State	(15,402		)	66,701			(6,760		)
Foreign	38,208			(9,784		)	4,261
	(53,808		)	110,546			(70,199		)
Total income tax expense (benefit) from continuing operations	$	(128,051	)	$	87,679		$	(100,210	)
Income tax (expense) benefit from discontinued operations	$	—		$	—		$	(3,594	)

The difference between income tax expense and the amount resulting from applying the federal statutory rate of 35% to Income from continuing operations before income taxes is attributable to the following:



	Year Ended December 31,
	2014			2013			2012
	(In thousands)
Income tax expense at federal statutory rate	$	(169,159	)	$	(159,870	)	$	(144,443	)
State taxes, net of federal benefit	(11,308		)	(13,821		)	(10,003		)
Differences between statutory rate and foreign effective tax rate	57,876			51,016			51,780
Reorganization of certain non-U.S. operations	(14,474		)	—			—
Tax (expense) benefit from worthless stock deduction	(14,497		)	1,717,466			—
Change in valuation allowance	41,700			(1,195,303		)	5,760
Repatriation of foreign earnings	4,164			(167,115		)	—
Accrual for uncertain tax positions	(22,719		)	(140,596		)	(306		)
Other	366			(4,098		)	(2,998		)
	$	(128,051	)	$	87,679		$	(100,210	)

During 2014 the Company completed the previously disclosed repatriation of $740.9 million of cash held by foreign subsidiaries, net of $28.1 million of foreign withholding taxes which were accrued during 2013. The Company utilized the majority of the remaining deferred tax asset for net operating loss carryforwards generated from the 2013 worthless stock deduction to offset the income tax resulting from current year income and the repatriation. The repatriation amount utilized substantially all of the available capital reserves of the Company’s foreign subsidiaries that were legally distributable under applicable foreign statutes. During the fourth quarter of 2013, the Company recorded income tax expense of $167.1 million related to taxable income generated in the U.S. as a result of the intended repatriation. For funds remaining in the foreign subsidiaries after the repatriation that have not been previously taxed in the U.S., the Company’s intention remains to indefinitely reinvest those funds outside of the U.S. and accordingly deferred U.S. taxes have not been provided. As of December 31, 2014, the amount of undistributed earnings of foreign subsidiaries for which deferred income taxes have not been provided was $447.0 million. As a result of the completion of the repatriation during 2014 and changes to estimates related to the 2013 worthless stock deduction, the Company recognized a net income tax benefit of $8.6 million during 2014. The components of this net benefit are included in the table above for changes in valuation allowances, adjustments to the benefit from the worthless stock deduction, changes to the accrual for uncertain tax positions and the repatriation of foreign earnings.

The Company qualifies for two tax holidays in Switzerland. The tax holidays provide reduced rates of taxation on certain types of income and also require certain thresholds of foreign source income. One of the tax holidays is effective through December 31, 2016, and upon expiration may be subject to renewal if certain criteria are satisfied. The other tax holiday in Switzerland expired on December 31, 2014, and has not been extended. These two tax holidays increased the Company’s earnings per share by $0.50, $0.18 and $0.11 in 2014, 2013, and 2012, respectively. The Company qualifies for an additional tax holiday in Switzerland which will take effect beginning in 2015. This tax holiday is indefinite, unless the required thresholds are no longer met, or there is a law change which eliminates the holiday. In the fourth quarter of 2014, the Company incurred a charge of $14.5 million in non-US income taxes as a result of a reorganization of certain international operations. As a result of the tax holiday which becomes effective in 2015, and the reorganization, the Company believes it will not have a significant change to its international tax rate after the expiration of the tax holiday in Switzerland.

During 2013, the Company liquidated for tax purposes one of its domestic subsidiaries, which allowed the Company to claim a worthless stock deduction on its 2013 federal income tax return. During the fourth quarter of 2013 the Company recorded an income tax benefit of $375.3 million related to the worthless stock deduction, net of valuation allowances and accrual for uncertain tax positions. The financial statement carrying value of this subsidiary was not material. The worthless stock deduction may be subject to audit and adjustment by the IRS, which could result in reversal of all, part or none of the income tax benefit, or could result in a benefit higher than the net amount recorded. If the IRS rejects or reduces the amount of the income tax benefit related to the worthless stock deduction, the Company may have to pay additional cash income taxes, which could adversely affect the Company’s results of operations, financial condition and cash flows. The Company cannot guarantee what the ultimate outcome or amount of benefit it receives, if any, will be.

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows:



	As of December 31,
	2014			2013
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	61,059		$	260,253
Deductible goodwill and intangible assets	34,586			48,365
Tax credit carryforwards	100,190			4,432
Deferred revenue, accruals and reserves	103,794			99,934
Capital loss carryforwards and book impairment of investments	1,161,896			1,210,529
Other	4,956			5,060
Total deferred tax assets	1,466,481			1,628,573
Valuation allowance	(1,162,170		)	(1,203,870		)
Net deferred tax assets	304,311			424,703
Deferred tax liabilities:
Property and equipment	(16,115		)	(19,354		)
Unremitted foreign earnings	—			(167,115		)
Subordinated Convertible debentures	(494,625		)	(453,825		)
Other	(4,151		)	(5,656		)
Total deferred tax liabilities	(514,891		)	(645,950		)
Total net deferred tax liabilities	$	(210,580	)	$	(221,247	)

With the exception of deferred tax assets related to capital loss carryforwards, management believes it is more likely than not that the tax effects of the deferred tax liabilities together with future taxable income, will be sufficient to fully recover the remaining deferred tax assets.

As of December 31, 2014, the Company had federal, state and foreign net operating loss carryforwards of approximately $39.7 million, $1.6 billion, and $ 22.1 million, respectively, before applying tax rates for the respective jurisdictions. As of December 31, 2014, the Company had federal and state research tax credits of $41.3 million and $2.1 million, respectively, and alternative minimum tax credits of $22.4 million available for future years. Certain net operating loss carryforwards and credits are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be fully realized. In future periods, an aggregate, tax effected amount of $71.3 million will be recorded to Additional paid-in capital when carried forward excess tax benefits from stock-based compensation are utilized to reduce future cash tax payments. The federal and state net operating loss and federal tax credit carryforwards expire in various years from 2015 through 2034. The foreign net operating loss can be carried forward indefinitely. As of December 31, 2014, the Company had federal and state capital loss carryforwards of $3.0 billion and $3.1 billion, respectively, before applying tax rates for the respective jurisdictions. The capital loss carryforwards expire in 2018 and are also subject to annual limitations under Internal Revenue Code Section 382. The Company does not expect to realize any tax benefits from the capital loss carryforwards and accordingly has reserved the entire amount through valuation allowance and accrual for uncertain tax positions. There is a foreign tax credit carryforward of $187.7 million as a result of the repatriation. The repatriation generated foreign source income in the U.S. which should enable the Company to claim eligible foreign taxes paid in the current year and prior years as foreign tax credits instead of as deductions. The benefit from these foreign tax credits was included in the computation of the deferred tax liability on unremitted foreign earnings as of December 31, 2013. The majority of these foreign tax credits will expire in 2024.

The deferred tax liability related to the Subordinated Convertible Debentures is driven by the excess of the tax deduction taken for interest expense over the amount of interest expense recognized in the consolidated financial statements. The interest expense deducted for tax purposes is based on the adjusted issue price of the Subordinated Convertible Debentures, while the interest expense recognized in accordance with GAAP is based only on the liability portion of the Subordinated Convertible Debentures. The adjusted issue price of the Subordinated Convertible Debentures grows over the term due to the difference between the interest deduction taken for income tax, using a comparable yield of 8.5%, and the coupon rate of 3.25%, compounded annually.

In 2014, the Company adopted Accounting Standards Update (ASU) 2013-11, “Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, Or a Tax Credit Carryforward Exists.” This ASU generally requires that unrecognized tax benefits be presented as a reduction to a deferred tax asset for a net operating loss, similar tax loss or a tax credit carryforward that is available to settle additional income taxes that would result from the disallowance of a tax position, presuming disallowance at the reporting date. The amount of unrecognized tax benefits that were offset against deferred tax assets was $108.1 million and $140.6 million as of December 31, 2014 and 2013, respectively.

The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available including changes in tax regulations and other information. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:



	As of December 31,
	2014		2013
	(In thousands)
Gross unrecognized tax benefits at January 1	$	197,189	$	56,593
Increases in tax positions for prior years	22,538		83
Increases in tax positions for current year	181		140,513
Gross unrecognized tax benefits at December 31	$	219,908	$	197,189

As of December 31, 2014, approximately $210.3 million of unrecognized tax benefits, including penalties and interest, could affect the Company’s tax provision and effective tax rate. The IRS is examining the Company’s federal income tax returns for fiscal years 2010 through 2012. It is reasonably possible that during the next twelve months, the Company’s unrecognized tax benefits may change by a significant amount as a result of the audit. However the timing of completion and ultimate outcome of the audit remains uncertain. Therefore, the Company cannot currently estimate the impact on the balance of unrecognized tax benefits.

In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. These accruals were not material in any period presented.

The Company’s major taxing jurisdictions are the U.S., the state of Virginia, and Switzerland. As stated previously, the Company’s federal income tax returns are currently under examination by the Internal Revenue Service for the years ended December 31, 2010, 2011 and 2012. The Company’s other tax returns are not currently under examination by their respective taxing jurisdictions. Because the Company uses historic net operating loss carryforwards and other tax attributes to offset its taxable income in current and future years’ income tax returns for the U.S. and Virginia, such attributes can be adjusted by these taxing authorities until the statute closes on the year in which such attributes were utilized. The open years in Switzerland are the 2013 tax year and forward.