INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES

INCOME TAXES

NOTE 10: INCOME TAXES

        Income before income taxes consisted of the following:

	Year Ended December 31,
	2011		2010		2009
	(in thousands)
Income before income taxes
United States	$	18,406	$	23,880	$	27,561
Foreign		2,501		2,690		(700	)
Total	$	20,907	$	26,570	$	26,861

        The provision for income taxes included the following:

	Year Ended December 31,
	2011			2010			2009
	(in thousands)
Provision for income taxes
Currently payable income taxes
Federal	$	3,062		$	6,247		$	6,536
State		2,408			5,366			4,205
Foreign		927			1,115			249
Total		6,397			12,728			10,990
Deferred income taxes
Federal		2,333			1,325			1,909
State		323			(1,368	)		(421	)
Foreign		(226	)		(44	)		(212	)
Total		2,430			(87	)		1,276
Provision for income taxes	$	8,827		$	12,641		$	12,266

        A reconciliation of the provision for income taxes at the statutory rate of 35% to the provision for income taxes at our effective rate is shown below:

	Year Ended December 31,
	2011			2010			2009
	(in thousands)
Computed at the statutory rate	$	7,318		$	9,300		$	9,402
Change in taxes resulting from:
State income taxes, net of federal tax effect		1,747			2,599			2,460
Non-deductible compensation		20			587			935
Permanent differences		450			178			238
Foreign tax and change in foreign valuation allowance		(175	)		129			281
Research and development credits		(490	)		(437	)		(846	)
Other		(43	)		285			(204	)
Provision for income taxes	$	8,827		$	12,641		$	12,266

        The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities on the accompanying Consolidated Balance Sheets are as follows:

	December 31,
	2011			2010
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	1,686		$	1,305
Share-based compensation		9,655			7,919
Intangible assets		959			848
Deferred rent		1,075			1,223
Accrued liabilities		3,324			1,872
Foreign loss carryforwards		140			176
State net operating loss carryforwards		798			204
Valuation allowances		(172	)		(176	)
Total deferred tax assets		17,465			13,371
Deferred tax liabilities:
Prepaid expenses		(1,548	)		(1,484	)
Intangible assets		(31,971	)		(20,414	)
Property and equipment and software development costs		(16,730	)		(12,518	)
Deferred debt discharge income		(3,285	)		—
Other		(466	)		(162	)
Total deferred tax liabilities		(54,000	)		(34,578	)
Net deferred tax liability	$	(36,535	)	$	(21,207	)

        Prior to our acquisition of Encore, as part of a debt restructuring in 2009, Encore elected to defer recognition of approximately $8.9 million of debt discharge income pursuant to Section 108(i) of the Internal Revenue Code. Accordingly, we have recorded a deferred tax liability of approximately $3.3 million. We will include the debt discharge income in taxable income over a 5 year period beginning in 2014.

        As of December 31, 2011, we had as filed federal and state operating loss carryforwards of $2.1 million and $7.1 million, respectively. These carryforwards expire in varying amounts in years 2014 through 2031. Of these carryforwards, $0.9 million was generated in a state in which Epiq no longer maintains a presence or a filing obligation resulting in a $0.1 million deferred tax asset. A $0.1 million valuation allowance was recorded relating to these losses. Management believes that it is more likely than not that we will be able to utilize the remaining carryforwards and, therefore, no additional valuation allowance is necessary.

        Included in the operating loss carryforward amounts listed above are loss carryforwards related to the Encore acquisition. As of December 31, 2011, we had acquired federal net operating loss carryforwards of $2.1 million which will begin to expire in 2026. In addition, we acquired $0.5 million of research credits which will begin to expire in 2023 and $0.1 million of minimum tax credits which can be carried forward indefinitely. Excluding the loss carryforward in which we recorded a full valuation allowance, we also acquired state net operating loss carryforwards of $5.7 million which will begin to expire in 2016. All of these items are subject to Section 382 and 383 limitations of the Internal Revenue Code or similar state limitations. However, these credit and loss carryforwards are anticipated to be fully utilized within the allowable carryforward period.

During 2011, we recorded a $0.1 million valuation allowance relating to net operating losses generated by our Hong Kong operations. The cumulative $0.1 million valuation allowance offsets a $0.1 million deferred tax asset associated with a $0.8 million net operating loss carryforward. The valuation allowance will be released when management believes it is more likely than not that based on the available positive and negative evidence the deferred tax asset will be realizable. Hong Kong net operating losses have an unlimited carryover period.

        In 2010 and 2011, we applied, and were certified, for the Kansas High Performance Incentive Program ("HPIP") tax credit in conjunction with investments made in our Kansas facilities. During these years, we accrued $0.7 million of HPIP credits that will be available to offset our 2011 and future Kansas income tax. The credit may be carried forward for a period of ten years provided we continue to meet the HPIP certification requirements.

        On December 31, 2011, the federal research credit expired. Although extending the credit beyond 2011 has been introduced into legislation, it has not been passed. If the credit is not extended, this would increase our effective tax rate in future tax periods.

        The net deferred tax liability is presented on the Consolidated Balance Sheets as follows:

	December 31,
	2011			2010
	(in thousands)
Other current assets	$	5,948		$	2,952
Other long-term assets		74			—
Long-term deferred income tax liability		(42,557	)		(24,159	)
Net deferred tax liability	$	(36,535	)	$	(21,207	)

        United States income and foreign withholding taxes have not been recognized on the excess of earnings for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. Generally, such earnings become subject to United States taxation upon the remittance of dividends or a sale or liquidation of the foreign subsidiary. The amount of such excess totaled approximately $6.6 million at December 31, 2011. It is not practicable to estimate the amount of any deferred tax liability related to this amount.

        As of December 31, 2011, 2010, and 2009, the gross amount of unrecognized tax benefits, including penalty and interest, was approximately $4.9 million, $2.9 million, and $7.8 million, respectively. If recognized, approximately $4.1 million, $2.3 million, and $6.6 million, would have affected our effective tax rate in 2011, 2010, and 2009, respectively.

        The following table summarizes the activity related to our gross unrecognized tax benefits excluding interest and penalties (in thousands):

	2011			2010			2009
Unrecognized Tax Benefits as of January 1	$	2,255		$	6,574		$	5,197
Gross increases for prior year tax positions		1,844			952			406
Gross decreases for prior year tax positions		(3	)		(836	)		(401	)
Gross increase for current year tax positions		363			368			2,384
Settlements		(23	)		(4,005	)		—
Lapse of statute of limitations		(272	)		(798	)		(1,012	)
Unrecognized Tax Benefits at December 31	$	4,164		$	2,255		$	6,574

        We file income tax returns in the United States federal jurisdiction, the United Kingdom, Hong Kong, and various state jurisdictions. We have also made an evaluation of the potential impact of assessments by state jurisdictions in which we have not filed tax returns.

        As of December 31, 2011, the 2008 through 2010 federal, state and foreign tax returns are subject to examination. In addition, the 2007 statute of limitations remains open in certain state and foreign jurisdictions. In January 2012, we were notified that our 2009 federal return will be examined by the Internal Revenue Service. At this time we cannot reasonably estimate the outcome of this audit, but we believe an assessment, if any, will be immaterial. Due to the examination we cannot reasonably estimate the amount of unrecognized tax benefits that otherwise would be recognized in the next twelve months.

        We have increased our unrecognized tax benefits relating to the Encore acquisition by $1.8 million and the increase is included in "Gross increases for prior year tax positions" in the table of gross unrecognized tax benefits. Encore generated federal and certain state net operating losses originating in 2006 on its separately filed income tax returns that had not been fully utilized as of December 31, 2011. Although the statute of limitations generally lapses after three years from filing the return, these net operating losses could still be adjusted if examined by federal or state income tax auditors.

        During 2010, we reached a final settlement with New York State relating to our 2003 - 2008 income tax returns. We also filed the 2009 New York State and 2003 - 2009 New York City tax returns reflecting the outcome of the state examination. We had previously accrued for these uncertain tax positions and, as a result, the resolution of these matters did not have a material effect on the provision for income taxes. The result of the settlement was comprised of approximately $4.0 million of gross unrecognized tax benefits and $0.9 million of accrued interest.

        In November 2010, we entered into a separate tentative settlement with New York State for investment tax credits and employer incentive credits relating to our New York operations for 2005 - 2008. As of December 31, 2011, we determined that the agreement was not considered to be effectively settled. In late January 2012, we received all of the settlement proceeds and as a result we will recognize $0.5 million of unrecognized tax benefits relating to this agreement during the first quarter of 2012, of which $0.3 million will affect our effective tax rate.

        We have classified interest and penalties as a component of income tax expense. Estimated interest and penalties classified as a component of income tax expense during 2011, 2010 and 2009 totaled $0.1 million, $0.4 million, and $0.1 million, respectively. Accrued interest and penalties, included as a component of "Other long-term liabilities" on the accompanying Consolidated Balance Sheets, totaled $0.5 million and $0.2 million, respectively, as of December 31, 2011. As of December 31, 2010, the accrued interest and penalties were $0.4 million and $0.2 million, respectively.