NOTE 11 — Income Taxes

The following table summarizes our U.S. and foreign income (loss) from continuing operations before income taxes:


	Year Ended December 31,
	2012			2011		2010
	(In thousands)
U.S.	$	(20,097	)	$	112,210	$	286,326
Foreign		370,154			289,862		139,513

Total	$	350,057		$	402,072	$	425,839

Provision for Income Taxes

The following table summarizes our provision for income taxes from continuing operations:


	Year Ended December 31,
	2012			2011			2010
				(In thousands)
Current income tax expense:
Federal	$	56,501		$	23,933		$	72,807
State		(24	)		7,803			7,351
Foreign		45,721			34,053			21,003


Current income tax expense		102,198			65,789			101,161

Deferred income tax (benefit) expense:
Federal	$	(33,724	)	$	19,837		$	25,122
State		578			322			(2,353	)
Foreign		(21,974	)		(10,217	)		(3,588	)

Deferred income tax (benefit) expense:		(55,120	)		9,942			19,181


Income tax expense	$	47,078		$	75,731		$	120,342

We reduced our current income tax payable by $64 million, $21 million and $23 million for the years ended December 31, 2012, 2011 and 2010, for tax deductions attributable to stock-based compensation.

Deferred Income Taxes

As of December 31, 2012 and 2011, the significant components of our deferred tax assets and deferred tax liabilities were as follows:


	December 31,
	2012			2011
	(In thousands)
Deferred tax assets:
Provision for accrued expenses	$	76,538		$	48,382
Occupancy tax reserve		52,624			15,322
Net operating loss and tax credit carryforwards		32,765			28,430
Stock-based compensation		29,330			45,149
Other		31,683			23,546

Total deferred tax assets		222,940			160,829
Less valuation allowance		(12,695	)		(23,422	)

Net deferred tax assets	$	210,245		$	137,407


Deferred tax liabilities:
Prepaid merchant bookings and prepaid expenses	$	(49,859	)	$	(59,333	)
Intangible assets		(282,570	)		(249,729	)
Investment in subsidiaries		(8,009	)		(9,603	)
Unrealized gains		(15,396	)		(13,106	)
Property and equipment		(93,867	)		(69,581	)
Other		(1,276	)		(534	)

Total deferred tax liabilities	$	(450,977	)	$	(401,886	)

Net deferred tax liability	$	(240,732	)	$	(264,479	)

As of December 31, 2012, we had federal, state and foreign net operating loss carryforwards (“NOLs”) of approximately $5 million, $17 million and $97 million. If not utilized, the federal and state NOLs will expire at various times between 2013 and 2031. Foreign NOLs of $76 million may be carried forward indefinitely, and foreign NOLs of $21 million will expire at various times between 2013 and 2031.

As of December 31, 2012, we had a valuation allowance of approximately $13 million related to certain NOL carryforwards for which it is more likely than not the tax benefit will not be realized. The valuation allowance decreased by $11 million from the amount recorded as of December 31, 2011 due to the release of a valuation allowance on foreign net operating losses for which realization is no longer uncertain.

We have not provided deferred U.S. income taxes on undistributed earnings of certain foreign subsidiaries indefinitely reinvested outside of the United States. The total amount of such earnings was $651 million as of December 31, 2012. To date, we have permanently reinvested the majority of these foreign earnings outside of the United States and we do not intend to repatriate these earnings to fund U.S. operations. In the event we distribute such earnings in the form of dividends or otherwise, we may be subject to U.S. income taxes. Due to complexities in tax laws, uncertainties related to the timing and source of any potential distribution of such earnings, and other important factors such as the amount of associated foreign tax credits, it is not practicable to estimate the amount of unrecognized deferred U.S. taxes on these earnings.

Reconciliation of U.S. Federal Statutory Income Tax Rate to Effective Income Tax Rate

A reconciliation of amounts computed by applying the statutory federal income tax rate to income from continuing operations before income taxes to total income tax expense is as follows:


	Year Ended December 31,
	2012			2011			2010
				(In thousands)
Income tax expense at the federal statutory rate of 35%	$	122,520		$	140,725		$	149,050
Foreign rate differential		(78,094	)		(74,431	)		(27,921	)
State income taxes, net of effect of federal tax benefit		1,280			5,262			4,290
Unrecognized tax benefits and related interest		16,038			8,297			(6,514	)
Change in valuation allowance		(11,838	)		(7,740	)		(3,000	)
Other, net		(2,828	)		3,618			4,437

Income tax expense	$	47,078		$	75,731		$	120,342

Our effective tax rate in 2012, 2011 and 2010 was lower than the 35% federal statutory income tax rate primarily due to earnings in foreign jurisdictions, primarily Switzerland, where our effective tax rate is lower.

Uncertain Tax Positions

We account for uncertain tax positions based on a two-step process of evaluating recognition and measurement criteria. The first step assesses whether the tax position is more likely than not to be sustained upon examination by the taxing authority, including resolution of any appeals or litigation, on the basis of the technical merits of the position. If the tax position meets the more likely than not criteria, the portion of the tax benefit greater than 50% likely to be realized upon settlement with the relevant tax authority is recognized in the financial statements. Gross unrecognized tax benefits, interest, and penalties not expected to be settled within one year are included in other long-term liabilities on the consolidated balance sheet.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:


	2012			2011			2010
				(In thousands)
Balance, beginning of year	$	81,682		$	68,536		$	187,075
Increases to tax positions related to the current year		20,453			15,679			12,414
Increases to tax positions related to prior years		4,837			1,047			1,207
Decreases to tax positions related to prior years		(304	)		(2,142	)		(95,687	)
Reductions due to lapsed statute of limitations		(5,061	)		(3,352	)		(25,048	)
Settlements during current year		(607	)		—			(913	)
Interest and penalties		1,305			1,914			(10,512	)

Balance, end of year	$	102,305		$	81,682		$	68,536

As of December 31, 2012, we had $102 million of gross unrecognized tax benefits, $83 million of which, if recognized, would affect the effective tax rate. As of December 31, 2011, we had $82 million of gross unrecognized tax benefits, $75 million of which, if recognized, would affect the effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2012 and 2011, total gross interest and penalties accrued was $18 million and $14 million, respectively. In connection with our unrecognized tax benefits, we recognized interest expense in 2012 and 2011 of $1 million and $2 million, respectively, and an interest benefit in 2010 of $11 million.

We file a U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The IRS is currently examining our U.S. federal income tax returns for the periods ended December 31, 2009 through December 31, 2010. During 2010, the IRS concluded its audit of our consolidated federal tax return for the periods ended December 31, 2005 through December 31, 2007. As a result, we decreased our liability for unrecognized tax benefits by $152 million, $16 million of which decreased our provision for income taxes, $112 million increased additional paid-in capital and the remaining amount was primarily a decrease to deferred tax assets. The increase in additional paid-in capital is attributable to excess tax benefits related to certain exercises of stock options during 2005 and 2007, the cash benefits of which were recognized during those years.

Expedia believes its annual tax provisions have included amounts considered sufficient to pay assessments that may result from tax authority examinations. However, the final settlement of tax authority examinations is uncertain, and tax provisions may have to be adjusted in the period the examinations are concluded.