Taxes

12 Months Ended

Dec. 31, 2019

TAXES

Our income tax provision (benefit) consists of the following components for 2019, 2018 and 2017 (in thousands):



	2019			2018			2017
Current
Federal	$	(11,436	)	$	(3,148	)	$	3,656
State	207			239			(1		)
Foreign source withholding tax	19,850			25,187			47,592
	8,621			22,278			51,247
Deferred
Federal	(21,735		)	(63,030		)	21,671
State	2,457			(1,554		)	(1,074		)
Foreign source withholding tax	21,648			14,889			49,832
	2,370			(49,695		)	70,429
Total	$	10,991		$	(27,417	)	$	121,676

The deferred tax assets and liabilities were comprised of the following components at December 31, 2019 and 2018 (in thousands):



	2019			2018
	Total			Total
Net operating losses	$	131,501		$	126,946
Deferred revenue, net	33,131			39,711
Tax credit carryforward	11,744			—
Stock compensation	3,307			5,037
Patent amortization	18,522			18,520
Depreciation	443			246
Goodwill	(1,933		)	—
Other-than-temporary impairment	1,138			490
Other accrued liabilities	785			2,981
Other employee benefits	7,520			6,405
Right of use asset	(4,913		)	—
Lease liability	5,760			—
	207,005			200,336
Less: valuation allowance	(133,797		)	(125,158		)
Net deferred tax asset	$	73,208		$	75,178

Note: Included within the balance sheet, but not reflected in the tables are deferred tax assets primarily related to foreign withholding taxes that are expected to be paid within the next twelve months of $0.1 million and $1.5 million as of December 31, 2019 and December 31, 2018, respectively.

The following is a reconciliation of income taxes at the federal statutory rate with income taxes recorded by the Company for the years ended December 31, 2019, 2018 and 2017:



	2019		2018		2017
Tax at U.S. statutory rate	21.0	%	21.0	%	35.0	%
State tax provision (a)	10.2	%	(8.9	)%	—	%
Effects of rates different than statutory	(2.8	)%	(1.4	)%	—	%
Change in valuation allowance	23.3	%	8.5	%	0.5	%
Research and development tax credits	(4.5	)%	(4.3	)%	(0.8	)%
Uncertain tax positions	(0.8	)%	3.9	%	(2.4	)%
Permanent differences	2.3	%	4.9	%	1.0	%
Domestic production activities deduction	—	%	—	%	(2.0	)%
Stock compensation	(0.6	)%	(5.0	)%	(4.0	)%
Rate change (b)	—	%	—	%	14.6	%
Foreign derived intangible income deduction (c)	—	%	(56.3	)%	—	%
Amended return benefit	(8.4	)%	(49.4	)%	—	%
Other	2.7	%	1.5	%	(0.3	)%
Total tax provision (benefit)	42.4	%	(85.5	)%	41.6	%

(a) In 2019, we determined that we would not be able to utilize our state deferred tax assets for our parent company in Delaware and Pennsylvania, therefore we put a full valuation allowance on these assets.

(b) In 2017, the inclusion of the revaluation of the deferred tax assets attributable to the TCJA signed into law in December 2017 increased the tax provision by 14.6%.

(c) In 2018, the new Foreign Derived Intangible Income ("FDII") deduction that was enacted as part of the TCJA decreased the tax provision by 56.3%.

Valuation Allowances and Net Operating Losses

We establish a valuation allowance for any portion of our deferred tax assets for which management believes it is more likely than not that we will be unable to utilize the assets to offset future taxes. We believe it is more likely than not that the majority of our state net operating losses and net operating losses in certain subsidiaries in France and the United Kingdom will not be utilized; therefore we have maintained a near full valuation allowance against our state, French and United Kingdom net operating losses as of December 31, 2019. All other deferred tax assets are fully benefited.

Uncertain Income Tax Positions

As of December 31, 2019, 2018 and 2017, we had 4.5 million, 4.4 million and 3.3 million, respectively, of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate. The total amount of unrecognized tax benefits could change within the next twelve months for a number of reasons including audit settlements, tax examination activities and the recognition and measurement considerations under this guidance.

During 2019, we established a reserve of $0.3 million related to an additional deduction related to the issuance cost of the convertible debt that is recorded through equity.

During 2018, we established a reserve of 1.1 million related to the recognition of the 2006 to 2010 research and development credits and manufacturing deduction credits.

During 2017, we released a reserve of $6.5 million as a result of the IRS Joint Committee issuing a letter ruling in acceptance of the refund claims associated with the domestic production activities deduction and research and development credit. Additionally, we reduced the previously established reserve for the 2016 domestic production activities deduction and research and development credit by 1.6 million. These reductions in reserves were partially offset by the establishment of a 1.0 million reserve related to the 2017 research and development and manufacturing deduction credit, as well an increase for interest and penalty on previously recognized reserves.

The following is a roll forward of our total gross unrecognized tax benefits, which if reversed would impact the effective tax rate, for the fiscal years 2017 through 2019 (in thousands):



	2019			2018			2017
Balance as of January 1	$	4,352		$	3,252		$	10,397
Tax positions related to current year:
Additions	402			73			1,009
Reductions	—			—			—
Tax positions related to prior years:
Additions	34			1,054			—
Reductions	—			(27		)	(1,610		)
Settlements	—			—			(6,544		)
Lapses in statues of limitations	(332		)	—			—
Balance as of December 31	$	4,456		$	4,352		$	3,252

Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For certain positions that related to years prior to 2019, we have recorded approximately $0.1 million of accrued interest during 2019 and 2018.

The Company and its subsidiaries are subject to United States federal income tax, foreign income and withholding taxes and income taxes from multiple state jurisdictions. Our federal income tax returns for 2006 to the present, with the exception of 2011 and 2012, are currently open and will not close until the respective statutes of limitations have expired. The statutes of limitations generally expire three years following the filing of the return or in some cases three years following the utilization or expiration of net operating loss carry forwards. The statute of limitations applicable to our open federal returns will expire at the end of 2021. Excluding the Korea Competent Authority Proceeding and the Finland Competent Authority Proceeding described in the section below, specific tax treaty procedures remain open for certain jurisdictions for 2014 to the present. Many of our subsidiaries have filed state income tax returns on a separate company basis. To the extent these subsidiaries have unexpired net operating losses, their related state income tax returns remain open. These returns have been open for varying periods, some exceeding ten years. The total amount of state net operating losses is $1.6 billion. In November 2018, the Company received notice that its 2016 U.S. Federal income tax return will be subject to audit. In February 2020, the Company received a no change letter from the IRS indicating the audit is closed. In December 2018, the

Company received a notice of proposed assessment related to an ongoing audit of its California tax returns for 2013 through 2015. The Company filed a protest to the California assessment in February 2019.

Foreign Taxes

We pay foreign source withholding taxes on patent license royalties when applicable. We apply foreign source withholding tax payments against our United States federal income tax obligations to the extent we have foreign source income to support these credits. In 2019, 2018 and 2017, we paid $18.8 million, $25.1 million and $46.7 million in foreign source withholding taxes, respectively, and applied these payments as credits against our United States federal tax obligation.

Between 2006 and 2019, we paid approximately $177.4 million in foreign taxes to foreign governments that have tax treaties with the U.S., for which we have claimed foreign tax credits against our U.S. tax obligations, and for which the tax treaty procedures are still open. It is possible that as a result of tax treaty procedures, the U.S. government may reach an agreement with the related foreign governments that will result in a partial refund of foreign taxes paid with a related reduction in our foreign tax credits. Due to foreign currency fluctuations, any such agreement could result in foreign currency gain or loss.

On November 8, 2019, the Company received notification that its request for competent authority pertaining to Article 25 (Mutual Agreement Procedure) of the United States-Republic of Finland Income Tax Convention had been reviewed by the IRS and an agreement has been reached (the “Finland Competent Authority Proceeding”). As a result of this agreement, the Company does not anticipate any tax consequences.

On July 24, 2018, the Company received notification that its request for competent authority pertaining to Article 27 (Mutual Agreement 14 Table of Contents Procedure) of the United States-Republic of Korea Income Tax Convention had been reviewed by the IRS and an agreement had been reached (the "Korea Competent Authority Proceeding"). As a result of this agreement, the Company received refunds of $97.4 million, inclusive of interest. In addition, we have recorded a net tax benefit of $14.7 million in our full year 2018. In September 2019 the amended tax returns for tax years covered by this agreement were filed and an additional benefit of $2.2 million was recorded related to the final refund the Company expects to receive.