Income Taxes

The components of income before provision for income taxes for the years ended December 31, 2012, 2011, and 2010 are as follows (in millions):



	Year Ended December 31,
	2012			2011			2010
Domestic	$	1,062		$	1,819		$	1,027
Foreign	(568		)	(124		)	(19		)
Income before provision for income taxes	$	494		$	1,695		$	1,008

The provision for income taxes consisted of the following (in millions):



	Year Ended December 31,
	2012			2011			2010
Current:
Federal	$	559		$	664		$	325
State	45			60			57
Foreign	22			8			1
Total current tax expense	626			732			383
Deferred:
Federal	(172		)	(34		)	13
State	(6		)	(3		)	6
Foreign	(7		)	—			—
Total deferred tax expense (benefit)	(185		)	(37		)	19
Provision for income taxes	$	441		$	695		$	402

A reconciliation of the U.S. federal statutory income tax rate of 35% to our effective tax rate is as follows (in percentages):



	Year Ended December 31,
	2012		2011		2010
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	6.2		2.2		4.0
Research tax credits	—		(1.0	)	(0.8	)
Share-based compensation	19.2		1.5		0.3
Foreign losses not benefited	26.9		3.3		0.8
Other	2.0		—		0.6
Effective tax rate	89.3	%	41.0	%	39.9	%

Excess tax benefits associated with stock option exercises and other equity awards are credited to stockholders' equity. The income tax benefits resulting from stock awards that were credited to stockholders' equity were $1.03 billion, $433 million and $107 million for the years ended December 31, 2012, 2011, and 2010.

Our deferred tax assets (liabilities) are as follows (in millions):



	December 31,
	2012			2011
Deferred tax assets:
Net operating loss carryforward	$	10		$	3
Tax credit carryforward	37			9
Share-based compensation	233			79
Accrued expenses and other liabilities	83			58
Other	16			—
Total deferred tax assets	379			149
Less: valuation allowance	(37		)	(9		)
Deferred tax assets, net of valuation allowance	342			140

Deferred tax liabilities:
Depreciation and amortization	(97		)	(69		)
Purchased intangible assets	(92		)	(10		)
Deferred foreign taxes	(15		)	(1		)
Total deferred tax liabilities	(204		)	(80		)
Net deferred tax assets	$	138		$	60

The valuation allowance was approximately $37 million and $9 million as of December 31, 2012 and 2011, respectively, related to state tax credits that we do not believe will ultimately be realized.

As of December 31, 2012, the U.S. federal and state net operating loss carryforwards were approximately $5.83 billion and $7.62 billion, which will expire in 2027 and 2021, respectively, if not utilized. If realized, $2.17 billion of net operating loss carryforwards will be recognized as a benefit through additional paid in capital. We also have state tax credit carryforwards of $181 million, which carry forward indefinitely.

Utilization of our net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization. The events that may cause ownership changes include, but are not limited to, a cumulative stock ownership change of greater than 50% over a three-year period.

Our net foreign pretax losses include jurisdictions with both pretax earnings and pretax losses. Our consolidated financial statements provide taxes for all related tax liabilities that would arise upon repatriation of earnings in the foreign jurisdictions where we do not intend to indefinitely reinvest those earnings outside the United States, and the amount of taxes provided for has been insignificant.

The following table reflects changes in the gross unrecognized tax benefits (in millions):



	Year Ended December 31,
	2012			2011			2010
Gross unrecognized tax benefits-beginning of period	$	63		$	18		$	9
Increase related to prior year tax positions	13			5			1
Decreases related to prior year tax positions	(16		)	(2		)	(2		)
Increases related to current year tax positions	104			42			10
Gross unrecognized tax benefits-end of period	$	164		$	63		$	18

During all years presented, we recognized interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of income. For the year ended December 31, 2012, we recognized interest of $3 million and penalties of $1 million. The amount of interest and penalties accrued as of December 31, 2012 and 2011 was $10 million and $6 million, respectively.

If the remaining balance of gross unrecognized tax benefits of $164 million as of December 31, 2012 was realized in a future period, this would result in a tax benefit of $70 million within our provision of income taxes at such time.

We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2008 through 2010 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. Our 2011 and 2012 tax years remain subject to examination by the IRS and all tax years starting in 2008 remain subject to examination in Ireland. We remain subject to possible examinations or are undergoing audits in various other jurisdictions that are not material to our financial statements.

Although the timing of the resolution, settlement, and closure of any audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.