INCOME TAXES

(Loss) income before income taxes for the years ended December 31, 2014, 2013 and 2012 was derived from the following sources:



(In thousands)	2014			2013		2012
Domestic	$	(118,917	)	$	29,066	$	49,056
Foreign	105,525			67,129		50,647
(Loss) income before income tax (benefit) expense and equity in net loss (income of affiliates	$	(13,392	)	$	96,195	$	99,703

Income tax (benefit) expense for the years ended December 31, 2014, 2013, and 2012 is summarized as follows:



(In thousands)	2014			2013			2012
Current:
Federal	$	1,574		$	854		$	5,797
State	111			772			654
Foreign	21,459			12,937			11,183
	23,144			14,563			17,634
Deferred (net of valuation allowance):
Federal	(41,484		)	6,003			11,165
State	(1,545		)	(650		)	168
Foreign	(1,687		)	1,753			1,914
	(44,716		)	7,106			13,247
Income tax (benefit) expense	$	(21,572	)	$	21,669		$	30,881

Income tax (benefit) expense differs from the expected amounts based upon the statutory federal tax rates for the years ended December 31, 2014, 2013, and 2012 as follows:



(In thousands)	2014			2013			2012
Expected federal income tax at statutory rate	$	(4,687	)	$	33,668		$	34,896
State income taxes before valuation allowance, net of federal tax effect	(2,115		)	(357		)	440
Income (losses) without tax expense (benefit)	(72		)	22			(40		)
Effect of foreign source income	(19,996		)	(10,583		)	(5,314		)
Tax contingencies	1,379			1,383			1,374
Valuation allowance	2,106			445			358
Non-deductible acquisition costs	2,176			—			—
U.S. federal research credit	(2,085		)	(3,233		)	(790		)
Other items, net	1,722			324			(43		)
Income tax (benefit) expense	$	(21,572	)	$	21,669		$	30,881

As a result of commitments made by the Company related to investments in tangible property and equipment, the establishment of a research and development center in 2006 and certain employment commitments, income from certain manufacturing activities in Malaysia is exempt from tax for years up through 2015. The income tax benefits attributable to the tax status of this subsidiary are estimated to be $8 million ($0.06 cents per diluted share), $5.4 million ($0.04 cents per diluted share), and $2.4 million ($0.02 cents per diluted share) for the years ended December 31, 2014, 2013, and 2012, respectively. The 2014 effective tax rate reflects an additional benefit of $3.3 million due to a lower tax rate than the U.S.

In 2012, ATMI's Korea subsidiary made commitments to produce a certain line of products. In return for this commitment, the Company has a tax holiday on income earned on sales of these products for five years and a partial holiday for two additional years. The income tax benefit attributable to this tax holiday are $0.2 million ($0.0 cents per diluted share) for the year ended December 31, 2014. The 2014 effective tax rate reflects an additional benefit of $0.2 million due to a lower tax rate than the U.S.

The Company also made employment and spending commitments to Singapore. In return for those commitments, the Company has been granted a partial tax holiday for five years and an additional partial tax holiday for an additional two years if the requirements are met. The income tax benefits attributable to the tax status are estimated to be $1.2 million ($0.01 cents per diluted share), $0.5 million ($0.00 cents per diluted share), $0 million ($0.00 cents per diluted share) for the years ending December 31, 2014, 2013, and 2012 respectively. The 2014 effective tax rate reflects an additional benefit of $3.7 million due to a lower tax rate than the U.S.

The 2014 effective tax rate reflects a $2.6 million benefit related to foreign tax credits.

The significant components of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 are as follows:



(In thousands)	2014			2013
Deferred tax assets attributable to:
Accounts receivable	$	243		$	269
Inventory	5,663			2,853
Accruals not currently deductible for tax purposes	9,915			8,844
Net operating loss and credit carryforwards	12,183			3,972
Capital loss carryforward	3,088			2,779
Depreciation	10,498			1,070
Equity compensation	3,662			3,157
Asset impairments	732			732
Purchased intangible assets	—			1,439
Other, net	5,549			2,976
Gross deferred tax assets	51,533			28,091
Valuation allowance	(11,104		)	(5,435		)
Total deferred tax assets	40,429			22,656
Deferred tax liabilities attributable to:
Depreciation	—			(3,245		)
Purchased intangible assets	(77,149		)	(601		)
Total deferred tax liabilities	(77,149		)	(3,846		)
Net deferred tax (liabilities) assets	$	(36,720	)	$	18,810

Deferred tax assets are generally required to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

As of December 31, 2014 and 2013, the Company had a net U.S. deferred tax liability of $24.8 million and a net U.S. deferred tax asset of $16.0 million, respectively, which are composed of temporary differences and various tax credit carryforwards. Management believes that it is more likely than not that the benefit from certain state net operating loss carryforwards, state credits, and a federal capital loss carryforward will not be realized. In recognition of this risk, management has provided a valuation allowance of $10.6 million and $5.4 million as of December 31, 2014 and 2013, respectively, on the related deferred tax assets. If the assumptions change and management determines the assets will be realized, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets at December 31, 2014 will be recognized as a reduction of income tax expense.

As of December 31, 2014 and 2013, the Company had a net non-U.S. deferred tax liability of $1.4 million and a net non-U.S. deferred tax asset of $8.2 million, respectively, for which management determined based upon the available evidence a valuation allowance of $0.5 million as of December 31, 2014 was required against the non-U.S. gross deferred tax assets. For other non-U.S. jurisdictions, management is relying upon projections of future taxable income to utilize deferred tax assets.

At December 31, 2014, there were approximately $618.0 million of accumulated undistributed earnings of subsidiaries outside the United States, all of which are considered to be reinvested indefinitely. Management has considered its future cash needs and affirms its intention to indefinitely invest such earnings overseas to be utilized for working capital purposes, expansion of existing operations, possible acquisitions and other international items. No U.S. tax has been provided on such earnings. If they were remitted to the Company, applicable U.S. federal and foreign withholding taxes may be partially offset by available foreign tax credits. Management has concluded that it is impracticable to compute the full actual tax impact, but it estimates that $12 million of withholding taxes would be incurred if the $618.0 million were distributed.

At December 31, 2014, the Company had state operating loss carryforwards of approximately $42.4 million, which begin to expire in 2015; foreign tax credit carryforwards of approximately $7.2 million, which begin to expire in 2019; federal research and development credit carryforwards of approximately $3.6 million, which begin to expire in 2033; and foreign operating loss carryforwards of $2.7 million, which begin to expire in 2023. The Company will need approximately $31.0 million of certain types of domestic income between 2015 and 2033 to fully utilize the credit carryforwards.

Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax positions will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that fail to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The provisions also provide guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

Reconciliations of the beginning and ending balances of the total amounts of gross unrecognized tax benefits for the years ended December 31, 2014 and 2013 are as follows:



(In thousands)	2014			2013
Gross unrecognized tax benefits at beginning of year	$	4,277		$	5,419
Increase from acquisition	2,431			—
Increases in tax positions for prior years	—			28
Decreases in tax positions for prior years	(246		)	—
Increases in tax positions for current year	2,409			1,879
Settlements	(1,385		)	(2,298		)
Lapse in statute of limitations	(1,502		)	(751		)
Gross unrecognized tax benefits at end of year	$	5,984		$	4,277

The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $4.3 million at December 31, 2014.

Penalties and interest paid or received are recorded in other income, net, in the consolidated statements of operations. For the years ended December 31, 2014 and 2013, the Company has accrued interest and penalties related to unrecognized tax benefits of $0.5 million and $0.8 million, respectively. Benefits of $0.4 million, $0.1 million and $0.0 million were recognized as interest and penalties in the consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012, respectively.

The Company files income tax returns in the U.S. and in various state, local and foreign jurisdictions. The statutes of limitations related to the consolidated Federal income tax return and state returns are closed for all years up to and including 2010 and 2010, respectively. With respect to foreign jurisdictions, the statute of limitations varies from country to country, with the earliest open year for the Company’s major foreign subsidiaries being 2008.

Due to the potential for resolution of a foreign examination and the expiration of various statutes of limitations, it is reasonably possible that the Company’s gross unrecognized tax benefit balance may decrease within the next twelve months by approximately $0.2 million.