Income Taxes

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

12. Income Taxes

Income tax from continuing operations for 2012 and 2011 was as follows:

	2012		2011
U.S. Federal income tax expense	$	—	$	(13,000	)
State and local income tax expense	$	—	$	(1,000	)
Total income tax expense	$	—	$	(14,000	)

	2012		2011
Current income tax expense	$	—	$	(14,000	)
Deferred income tax expense	$	—	$	—
Total income tax expense	$	—	$	(14,000	)

The deferred tax assets as of December 31, 2011 have been restated to reflect the deferred tax assets for continuing operations only.  The tax effects of significant temporary differences representing deferred tax assets as of December 31, 2012 and 2011 are as follows:

	2012			2011
Deferred tax assets
Deferred rent	$	17,000		$	19,000
Accrued vacation		16,000			15,000
Tax credit/grants		82,000			82,000
Deferred compensation		16,000			—
Net operating loss carryforward		16,852,000			15,467,000
Accrued bonus		68,000			68,000
Stock based compensation		45,000			25,000
Accrued expenses		38,000			38,000
Property and equipment		19,000			—
Warrants		3,683,000			2,813,000
Other		1,000			5,000
Total deferred tax asset		20,837,000			18,532,000
Deferred tax liabilities
Property and equipment		—			(3,000	)
Change in accounting method - accrued bonus		—			(20,000	)
		—			(23,000	)
Valuation allowance		(20,837,000	)		(18,509,000	)
Net deferred tax asset	$	—		$	—

At December 31, 2012 and 2011, the Company had gross operating loss carryforwards for U.S. federal income tax purposes of approximately $41.4 million and $37.9 million, respectively, which will begin to expire in 2019.  At December 31, 2012 and 2011, the Company had gross operating loss carryforwards for state income tax purposes of approximately $51.6 million and $48.6 million, respectively, which will begin to expire in 2018.  Based on the Company’s historical losses and its accumulated deficit, the Company has provided a full valuation allowance against the net deferred tax assets.

Utilization of the net operating loss carryforwards and credit could be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions.  The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred.  The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change and could result in a reduction in the total net operating losses and research credits available.

Reconciliation between actual tax benefits and taxes computed at the statutory Federal rate of 34 percent for 2012 and 2011 are as follows:

	2012			2011
U.S. Federal income tax benefit at the statutory rate of 34%	$	982,000		$	(142,000	)
Effect of permanent differences		4,000			(9,000	)
Effect of permanent differences - Government Grant		-			4,000
Effect of permanent differences - Warrants		114,000			1,184,000
State income taxes benefit, net of federal tax benefit		99,000			251,000
Other		(1,000	)		(78,000	)
Change in valuation allowance		(1,198,000	)		(1,224,000	)
Income tax expense	$	-		$	(14,000	)

During 2010, the Company’s subsidiary, Biospherics Incorporated, received notice from the IRS that it had been awarded two grants under IRC Section 48D of the Internal Revenue Code’s “Qualifying Therapeutic Discovery Project.”  The amount received pursuant to the QTDP Grant was $0.3 million of which $0.1 million related to the income tax benefit associated with the realization or “monetization” of prior-period tax attributes for which the Company had previously established a valuation allowance.

Tax Uncertainties

The Company recognizes a tax benefit associated with an uncertain tax position when, in management’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority.  For a tax position that meets the more-likely-than-not recognition threshold, the Company initially and subsequently measures the tax benefit as the largest amount that it judges to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority.  The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation.  The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The Company has not recognized any such adjustments.  At December 31, 2012 and 2011, the Company had no material unrecognized income tax benefits and recognized no interest or penalties on income tax liabilities.

The Company is subject to U.S. federal income tax and state and local income tax in multiple jurisdictions.  The statute of limitations for the consolidated U.S. federal income tax return is closed for all tax years up to and including 2008, except for pre-2008 tax returns that generated net operating loss carry forwards that could be adjusted on audit.  Currently, no federal or state and local income tax returns are under examination by the respective taxing authorities.