Note 9 - Income Taxes

3 Months Ended

Mar. 31, 2013

Income Tax Disclosure [Text Block]

9.   Income Taxes

The income tax benefit for the three months ended March 31, 2013 was ($204,000), or (8.9)% of the Company’s profit before income taxes. This differs from the federal statutory rate of 34% primarily because the Company’s foreign income was taxed at lower rates and because of the benefit that the Company realized as a result of stock option exercises and releases of RSUs. The income tax provision for the three months ended March 31, 2012 was $309,000, or 9.4% of the income before income taxes. This differs from the federal statutory rate of 34% primarily because the Company’s foreign income was taxed at lower rates and because of the benefit the Company realized as a result of stock option exercises and the releases of RSUs.

The Company is subject to examination of its income tax returns by the IRS and other tax authorities. The Company’s U.S. Federal income tax returns for the years ended December 31, 2005 through December 31, 2007 are under examination by the IRS. In April 2011, the Company received from the IRS a Notice of Proposed Adjustment (“NOPA”) relating to a cost-sharing agreement entered into by the Company and its international subsidiaries on January 1, 2004. In the NOPA, the IRS objected to the Company’s allocation of certain litigation expenses between the Company and its international subsidiaries and the amount of “buy-in payments” made by the Company’s international subsidiaries to the Company in connection with the cost-sharing agreement, and proposed to increase the Company’s U.S. taxable income according to a few alternative methodologies. The methodology resulting in the largest potential adjustment, if the IRS were to prevail on all matters in dispute, would result in  potential federal and state income tax liabilities of up to $37.0 million, plus interest and penalties, if any. The Company believes that the IRS's position in the NOPA is incorrect and that its tax returns for those years were correct as filed. The Company is contesting these proposed adjustments vigorously. In February 2012, the Company received a revised NOPA from the IRS (Revised NOPA).  In this Revised NOPA, the IRS raised the same issues as in the NOPA issued in April 2011 but under a different methodology.  Under the Revised NOPA, the largest potential federal income tax adjustment, if the IRS were to prevail on all matters in dispute, has decreased to $10.5 million, plus interest and penalties, if any. The Company responded to the IRS Revised NOPA in May 2012, but has not yet received a response from the IRS. As of March 2013, the Company agreed to grant the IRS an extension of the statute of limitations for taxable years 2005 through 2007 to October 31, 2013.

Our French entity is currently under audit for taxable year 2009 and 2010 for which the Company is in the process of responding to questions raised.   Aside from the U.S. and France, there are no other material income tax audits.

The Company regularly assesses the likelihood of an adverse outcome resulting from such examinations to determine the adequacy of its provision for income taxes. Based on the technical merits of its tax return filing positions, the Company believes that it is more-likely-than-not the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows.

As of March 31, 2013, the Company had unrecognized tax benefits of approximately $13.7 million. Included in this balance is approximately $4.9 million of tax benefits that, if recognized, would result in an adjustment to the Company’s effective tax rate after considering the valuation allowance.  It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease in the next 12 months. Such changes could occur based on the normal expiration of statutes of limitations or the possible conclusion of ongoing tax audits. However, as of March 31, 2013 the Company does not expect to significantly change its unrecognized tax benefits within the next twelve months.

The Company classifies interest and penalties related to uncertain tax positions as a component of its provision for income taxes. The Company has accrued an insignificant amount of interest and penalties relating to the income tax on the unrecognized tax benefits as of March 31, 2013 and March 31, 2012.