NOTE 10: INCOME TAXES

Income (loss) before income taxes consists of the following (in thousands):

	Year Ended December 31,
	2015			2014			2013
Income (loss) before income taxes
United States	$	(6,331	)	$	(20,892	)	$	12,273
Foreign		13,993			15,040			4,832

Total	$	7,662		$	(5,852	)	$	17,105

Income tax expense (benefit) for 2015, 2014 and 2013 consists of the following (in thousands):

	Year Ended December 31,
	2015			2014			2013
Current:
Federal	$	(8,459	)	$	(6,735	)	$	9,121
State		(187	)		(362	)		1,849
Foreign		2,700			3,120			1,542

Total current		(5,946	)		(3,977	)		12,512

Deferred:
Federal		14,006			2,599			(4,687	)
State		11,103			(3,270	)		(1,724	)
Foreign		437			133			(106	)

Total deferred		25,546			(538	)		(6,517	)

Total income tax expense (benefit)	$	19,600		$	(4,515	)	$	5,995

The jurisdictions where we generate income (or loss) before income taxes have a significant effect on our effective tax rate. The income (or loss) earned in the United States will be subject to an approximate 41% combined statutory federal and state tax rate. Our foreign-sourced income (or loss), which is earned primarily in the United Kingdom, will be subject to a statutory rate of approximately 21%. In 2014, the significantly higher tax rate in computing the tax benefit on the U.S. losses than the tax rate used in computing the tax expense on the foreign income results in an overall effective tax rate that is not customary.

The following is a summary of our income tax expense (benefit) and resulting effective tax rate by jurisdiction (in thousands):

	Year Ended December 31,
	2015			2014			2013
Income tax expense (benefit) by jurisdiction:
United States	$	16,463		$	(7,768	)	$	4,559
Foreign		3,137			3,253			1,436

Consolidated income tax expense (benefit)	$	19,600		$	(4,515	)	$	5,995

Effective income tax rate by jurisdiction:
United States		(260.0	)%		37.2	%		37.1	%
Foreign		22.4	%		21.6	%		29.7	%
Consolidated effective tax rate		255.8	%		77.2	%		35.0	%

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 (in thousands):

	Year Ended December 31,
	2015			2014			2013
Income tax expense (benefit) at the statutory rate	$	2,682		$	(2,048	)	$	5,987
Change in taxes resulting from:
Valuation allowances		16,794			1,095			707
State income taxes, net of federal tax effect		654			(2,796	)		(85	)
Foreign income taxes		(1,593	)		(2,253	)		(863	)
Permanent differences		1,335			1,189			797
Uncertain tax positions		(133	)		(112	)		447
Research and development credits		(770	)		(513	)		(676	)
Nondeductible compensation		(20	)		411			—
Share-based compensation		491			469			—
Domestic production activities deduction		—			(5	)		(422	)
Other		160			48			103

Total income tax expense (benefit)	$	19,600		$	(4,515	)	$	5,995

In December 2015, the Protecting Americans from Tax Hikes Act was passed and permanently extended the research credit retroactively to January 1, 2015. Accordingly, a research tax benefit of approximately $0.6 million is reflected our 2015 results.

In April 2015, New York City passed comprehensive corporate income tax reform with most changes effective for years 2015 and beyond. The impact of these changes was not material to the Consolidated Financial Statements.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):

	As of December 31,
	2015			2014
Deferred tax assets:(1)
U.S. net operating loss carryforwards	$	15,175		$	2,305
Foreign net operating loss carryforwards		767			831
Income tax credit carryforwards		2,969			1,274
Share-based compensation		5,068			6,206
Intangible assets		2,109			11,747
Deferred rent		812			426
Accrued liabilities		10,211			4,765
Cash flow hedges		1,600			1,067
Allowance for doubtful accounts		646			1,379
Other		658			195
Valuation allowances		(19,230	)		(1,903	)

Total deferred tax assets		20,785			28,292

Deferred tax liabilities:(1)
Prepaid expenses		(3,837	)		(1,875	)
Goodwill		(47,343	)		(42,994	)
Property and equipment and software development costs		(15,216	)		(11,324	)
Deferred debt discharge income		(1,336	)		(1,985	)

Total deferred tax liabilities		(67,732	)		(58,178	)

Net deferred tax liability	$	(46,947	)	$	(29,886	)


(1)	Temporary differences related to net operating loss carryforwards, income tax credit carryforwards, intangible assets and goodwill as of December 31, 2014 have been reclassified to conform to current year presentation.

The net deferred tax liability is presented on the Consolidated Balance Sheets as follows (in thousands):

	As of December 31,
	2015			2014
Other long-term assets	$	89		$	139
Long-term deferred income tax liability		(47,036	)		(30,025	)

Net deferred tax liability	$	(46,947	)	$	(29,886	)

We assess whether valuation allowances should be established against our deferred tax assets based on the consideration of all positive and negative available evidence, using a "more likely than not" standard. In making such assessments, significant weight is to be given to evidence that can be objectively verified such as historical operating results and current trends. During the year ended December 31, 2015, we concluded that a valuation allowance was required due to three years of historical cumulative losses in the U.S. that began during the third quarter of 2015. We had positive cumulative earnings in the U.S. for the three year period ended June 30, 2015. The recent continuing U.S. loss is a significant factor in our assessment as it is objectively verifiable, and therefore, is considered significant negative evidence.

Other evidence evaluated is our expectation of future taxable income by jurisdiction, which includes forecasted revenue growth and other factors such as strategic initiatives and industry trends. However, three-year historical cumulative losses are one of the most objectively verifiable forms of negative evidence and although estimating future earnings would be positive evidence, such forecasts are not objectively verifiable and are accordingly given less weight when compared to a three-year historical cumulative loss and recent continuing loss.

In establishing a valuation allowance against our U.S. net deferred tax assets during the period, approximately $47.3 million of deferred tax liabilities related to indefinite lived assets (goodwill) that are not amortized for financial reporting purposes were excluded from measurement. Because the deferred tax liability remains on the balance sheet indefinitely until such asset is impaired or disposed, the liability cannot be scheduled to reverse or be considered as a source of future taxable income. As a result, these deferred tax liabilities are excluded from the measurement of the net deferred tax asset requiring a valuation allowance. In addition, tax amortization of the underlying indefinite lived assets results in an increase to the related deferred tax liabilities and an increase to tax expense recognized for each period until the assets are fully amortized for tax purposes.

On the basis of this evaluation, as of December 31, 2015, we recorded a valuation allowance of $17.0 million against our applicable U.S. net deferred tax assets, including U.S. federal and state loss carryforwards.

In accordance with U.S. GAAP, certain deferred tax assets related to stock awards were excluded from the table of deferred tax assets and liabilities disclosed above. These deferred tax assets were the result of amounts deductible in our tax returns in excess of share-based compensation expense recognized in our Consolidated Statements of Operations. If and when such deferred tax assets are ultimately realized, our total equity balance will increase by $0.3 million. We use tax law ordering for the purpose of determining when excess tax benefits have been realized.

We have both U.S. federal and state net operating losses which are carried forward 20 years for federal tax purposes and from 1 to 20 years for state tax purposes. As of December 31, 2015, our cumulative U.S. federal net operating loss was $28.6 million and if not used, would otherwise expire in 2035. The state loss carryforwards arise from both combined and separate state tax filings and were $115.8 million at December 31, 2015. The loss carryforwards expire as follows (in thousands):

Calendar Years	Amount
2016 - 2020	$	2,955
2021 - 2025		17,906
2026 - 2030		22,518
2031 - 2035		72,410

Total	$	115,789

We have recorded a valuation allowance against all of our combined and separate state loss carryforwards.

We also have federal research tax credit carryforwards of $1.3 million that begin to expire in 18 years, and a $0.5 million alternative minimum tax credit carryforward that does not expire. Since this $0.5 million credit does not expire, we have not recorded a valuation allowance against this deferred tax asset. Additionally, we recorded a $1.5 million valuation allowance related to $1.5 million of net state tax credits of which most will expire beginning in 14 years.

Our foreign net operating loss carryforwards at December 31, 2015, were $2.9 million of which $1.0 million and $0.4 million will fully expire in 2022 and 2023 respectively. A $0.8 million deferred tax asset has been recorded for the expected tax benefit of these losses which will reduce our foreign income tax payable in future years. We have recorded a $0.7 million valuation allowance against these losses as they have been generated in jurisdictions where insufficient positive evidence exists to support that these losses will be fully utilized.

As of December 31, 2014, our valuation allowance of $1.9 million included a $0.9 million valuation allowance related to $1.2 million of state tax credits that have a remaining carryforward period of 13 years; a $0.2 million valuation allowance related to $4.7 million of state net operating loss carryforwards that expire in varying amounts in years 2015 through 2034 and a $0.8 million valuation allowance related to $2.3 million of foreign net operating losses of which $2 million expire by 2023 that have an indefinite remaining carryforward period.

Prior to our acquisition of Encore Legal Solutions, Inc. ("Encore") and, 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 of 1986, as amended. For each year 2013 through 2017, we will include approximately $1.8 million of deferred debt discharge income in taxable income.

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 $35.3 million at December 31, 2015. It is not practicable to estimate the amount of any deferred tax liability related to this amount.

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

	2015			2014			2013
Unrecognized tax benefits as of January 1	$	5,120		$	5,326		$	4,639
Gross increases for prior year tax positions		206			190			243
Gross decreases for prior year tax positions		—			(60	)		(53	)
Gross increase for current year tax positions		135			197			530
Settlements		—			—			(33	)
Lapse of statute of limitations		(795	)		(533	)		—

Unrecognized tax benefits at December 31	$	4,666		$	5,120		$	5,326

As of December 31, 2015, 2014 and 2013, the gross amount of unrecognized tax benefits, including penalty and interest, was approximately $5.9 million, $6.3 million and $6.4 million, respectively. If recognized, approximately $4.8 million, $5.1 million and $5.2 million would have affected our effective tax rate in 2015, 2014, and 2013, respectively.

During the year ended December 31, 2015, our unrecognized tax benefits increased by $0.2 million related to Iris (defined in Note 13 to the Consolidated Financial Statement) and the increase is included in "Gross increases for prior year tax positions" in the table of gross unrecognized tax benefits.

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

During 2015, we were notified by the Internal Revenue Service that our 2014 federal income tax return would be examined. The exam is in the preliminary stages and we do not believe that an adjustment, if any, would be material. As of December 31, 2015, the 2012 - 2014 and subsequent federal, state and foreign tax returns are subject to examination. In addition, the 2011 statute of limitations remains open in certain state and foreign jurisdictions. Due to the 2014 federal income tax examination currently underway, we are unable to determine the amount of unrecognized tax benefits that may be recognized in the next twelve months.

Estimated interest and penalties classified as a component of income tax expense during 2015, 2014, and 2013 totaled $0.1 million, $0.2 million and $0.2 million, respectively. Accrued interest and penalties, included in "Other long-term liabilities" on the Consolidated Balance Sheets totaled $1.1 million and $0.2 million, respectively, as of December 31, 2015. As of December 31, 2014, the accrued interest and penalties were $1.0 million and $0.2 million, respectively.