13. INCOME TAXES

The current and deferred income tax provision was as follows (in thousands):

	Year Ended December 31,
	2011			2010		2009
Current:
Federal	$	12		$	194	$	153
State		140			351		356
Foreign		—			—		—
		152			545		509
Deferred:
Federal		(6,002	)		—		—
State		—			1		4
Foreign		238			406		(156	)
		(5,764	)		407		(152	)
Net income tax provision	$	(5,612	)	$	952	$	357

During 2011, a deferred tax benefit of $6.1 million was recorded as a result of Voxel purchase price accounting, of which $6.0 million was related to a federal tax benefit for our U.S. entities. This deferred tax liability resulted in a deferred tax benefit once consolidated with our balance sheet, as it lowered our consolidated net deferred tax asset resulting in the release of our valuation allowance.

We account for income taxes under the liability method. We determine deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, and we measure the tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We provide a valuation allowance to reduce our deferred tax assets to their estimated realizable value.

A reconciliation of the effect of applying the federal statutory rate and the effective income tax rate on our income tax provision is as follows:


	Year Ending December 31,
	2011			2010			2009
Federal income tax at statutory rates		(34	)%		(34	)%		(34	)%
Goodwill impairment		—			—			24
Foreign income tax (benefit)		6			(10	)		—
Stock-based compensation		—			—			1
State income tax		(3	)		8			—
Other permanent differences		4			2			—
Statutory tax rate change		2			3			—
Compensation		2			7			—
Change in valuation allowance		(49	)		55			8

Effective tax rate		(72	)%		31	%		(1	)%

Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred taxes related to the following (in thousands):

	December 31,
	2011			2010
Current deferred income tax assets:
Provision for doubtful accounts	$	3,691		$	2,211
Accrued compensation		1,251			1,470
Other accrued expenses		45			186
Deferred revenue		758			1,200
Restructuring liability		1,029			1,023
Other		116			115
Current deferred income tax assets		6,890			6,205
Less: valuation allowance		(6,890	)		(6,205	)
Net current deferred income tax assets		—			—

Long-term deferred income tax assets:
Property and equipment		36,093			32,009
Goodwill		4,790			5,257
Intangible assets		(2,605	)		4,538
Deferred revenue, less current portion		779			752
Restructuring liability, less current portion		1,856			2,004
Deferred rent		6,304			6,566
Stock-based compensation		1,660			1,417
U.S. net operating loss carryforwards		60,972			72,898
Foreign net operating loss carryforwards, less current portion		3,650			4,254
Capital loss carryforwards		2,271			2,271
Tax credit carryforwards		968			915
Other		1,881			2,046
Long-term deferred income tax assets		118,619			134,927
Less: valuation allowance		(116,523	)		(132,488	)
Net long-term deferred income tax assets		2,096			2,439

Net deferred tax assets	$	2,096		$	2,439

As of December 31, 2011, we had U.S. net operating loss carryforwards for federal tax purposes of $180.7 million that will expire beginning 2018 through 2026. Of the total U.S. net operating loss carryforwards, $20.3 million of net operating losses related to the deduction of stock-based compensation that will be tax-effected and the benefit credited to additional paid-in capital when realized. In addition, we have alternative minimum tax and research and development tax credit carryforwards of approximately $1.0 million. Alternative minimum tax credits have an indefinite carryforward period while our research and development credits will begin to expire in 2026. Finally, we have foreign net operating loss carryforwards of $13.6 million that will begin to expire in 2012.

We determined that through December 31, 2011, no further ownership changes have occurred since 2001. Therefore, as of December 31, 2011, no additional material limitations exist on the U.S. net operating losses related to Section 382 of the Internal Revenue Code. However, if we experience subsequent changes in stock ownership as defined by Section 382 of the Internal Revenue Code, we may have additional limitations on the future utilization of our U.S. net operating losses.

A deferred tax asset is also created by accelerated depreciable lives of fixed assets for financial reporting purposes compared to income tax purposes. Network equipment and leasehold improvements comprise the majority of the income tax basis differences. These assets are deductible over a shorter life for financial reporting than for income tax purposes. As we retire assets in the future, the income tax basis differences will reverse and become deductible for income taxes.

We periodically evaluate the recoverability of the deferred tax assets and the appropriateness of the valuation allowance. We established a valuation allowance of $119.7 million and $3.7 million against the U.S. and foreign deferred tax assets, respectively, that we do not believe are more likely than not to be realized. We will continue to assess the requirement for a valuation allowance on a quarterly basis and, at such time when we determine that it is more likely than not that the deferred tax assets will be realized, we will reduce the valuation allowance accordingly.

Changes in our deferred tax asset valuation allowance are summarized as follows (in thousands):

	Year Ended December 31,
	2011			2010		2009
Balance, January 1,	$	138,693		$	128,978	$	124,755
(Decrease) increase in deferred tax assets		(15,279	)		9,715		4,223
Balance, December 31,	$	123,414		$	138,693	$	128,978

As discussed in note 3, we acquired Voxel on December 30, 2011. The purchase price accounting resulted in the addition of $6.1 million in deferred tax liabilities. As the acquisition of Voxel was a stock acquisition, the tax attributes, tax positions and tax elections of Voxel were unaffected. The difference between the tax basis and the fair market value of Voxel’s assets and liabilities is primarily due to intangible property that consists of customer relationships, software for sale, internally used software and trade names. This deferred tax liability resulted in a deferred tax benefit once consolidated with our balance sheet, as it lowered our consolidated net deferred tax asset due to the release of our valuation allowance. Additionally, during the year ended December 31, 2011, we reduced our valuation allowances by $11.7 million for available net operating losses that we determined to be incurred prior to the 2001 ownership change date in accordance with the Section 382 limitation, offset by the current period movement of $2.4 million.

We intend to reinvest future earnings indefinitely within each country; however, it is not practicable to determine the amount of the unrecognized deferred income tax liability related to future foreign earnings. Accordingly, we have not recorded deferred taxes for the difference between our financial and tax basis investment in foreign entities. Based on limited cumulative earnings from foreign operations, we expect the unrecognized deferred assets or liabilities to be an immaterial component of our consolidated financial statements.

Our accounting for uncertainty in income taxes requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in the financial statements.

Changes in our unrecognized tax benefits are summarized as follows (in thousands):

	Year Ended December 31,
	2011		2010		2009
Unrecognized tax benefits balance, January 1,	$	—	$	—	$	—
Additions for tax positions of current year		283		—		—
Foreign exchange (loss)		—		—		—
Lapse of statute of limitations		—		—		—
Unrecognized tax benefits balance, December 31,	$	283	$	—	$	—

The changes in the liability for unrecognized tax benefits had no impact on our effective income tax rate in the respective periods of change as amounts were recorded through purchase accounting. We expect $0 unrecognized tax benefits to reverse over the next 12 months.

We classify interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations as a component of “General and administrative” expenses. As of December 31, 2011 and 2010, we had accrued $48,000 and $0, respectively, for interest and penalties related to uncertain tax positions. We did not recognize any interest and penalties from unrecognized tax benefits as the total amount was recorded through purchase accounting. Future release or recognition will be fully offset by a tax indemnification clause within the Voxel purchase agreement. A corresponding receivable was recorded to account for the potential offset of the unrecognized tax benefit. Our federal income tax returns remain open to examination for the tax years 2008 through 2010; however, tax authorities have the right to adjust the net operating loss carryovers for years prior to 2008. Returns filed in other jurisdictions are subject to examination for years prior to 2008.