Note 12 — Income Taxes from Continuing Operations

The income tax provision (benefit) from continuing operations consisted of the following (in thousands):

	Current		Deferred			Total
Year ended December 31, 2015
Federal	$	116,375	$	(41,477	)	$	74,898
State	11,113		(2,620		)	8,493
Foreign	—		(2,033		)	(2,033		)

	$	127,488	$	(46,130	)	$	81,358

Year ended December 31, 2014 (as Restated)
Federal	$	26,114	$	(14,222	)	$	11,892
State	2,347		(2,090		)	257
Foreign	4		(1,199		)	(1,195		)

	$	28,465	$	(17,511	)	$	10,954

Year ended December 31, 2013
Federal	$	27,985	$	(3,050	)	$	24,935
State	4,145		2,051			6,196
Foreign	—		(598		)	(598		)

	$	32,130	$	(1,597	)	$	30,533

Income tax expense differs from the “expected” tax expense computed by applying the U.S. Federal corporate income tax rates of 35% to income from continuing operations before income taxes, as follows (in thousands):

	Years Ended December 31,
	2015			2014 (as Restated)			2013
Computed “expected” tax expense	$	81,255		$	8,870		$	29,013
Change in income taxes resulting from:
State income taxes, net of Federal income tax	5,520			167			4,027
Foreign income tax expense (benefit)	(1,130		)	482			622
Deduction for domestic production activities	(6,882		)	(1,323		)	(1,361		)
R&D tax credits	(677		)	(508		)	(1,652		)
Nondeductible acquisition fees	165			2,823			—
Other expense (benefit), net	682			(673		)	(116		)
Valuation allowance change	2,425			1,116			—

Income tax expense	$	81,358		$	10,954		$	30,533

The geographical allocation of the Company’s income from continuing operations before income taxes between U.S. and foreign operations was as follows (in thousands):

	2015			2014 (as Restated)			2013
Pre-tax income from continuing U.S. operations	$	241,665		$	33,320		$	86,382
Pre-tax loss from continuing foreign operations	(9,509		)	(7,978		)	(3,487		)

Total pre-tax income from continuing operations	$	232,156		$	25,342		$	82,895

Net deferred income taxes at December 31, 2015 and 2014 include (in thousands):

	December 31, 2015						December 31, 2014 (as Restated)
	Current			Noncurrent			Current			Noncurrent
Deferred tax assets:
Net operating loss carry-forward	$	982		$	22,344		$	1,470		$	14,390
Stock-based compensation	—			9,032			—			6,618
Chargeback reserves	83			—			2,276			—
Reserve for product returns	17,932			—			16,932			—
Inventory valuation reserve	7,819			—			7,854			—
Long-term debt	—			9,448			—			—
Other	19,085			1,236			13,491			807

Total deferred tax assets	$	45,091		$	42,072		$	42,023		$	21,815
Valuation allowance	—			(8,807		)	—			(1,116		)

Net deferred tax assets	$	45,091		$	33,265		$	42,023		$	20,669

Deferred tax liabilities:
Prepaid expenses	$	(2,877	)	$	—		$	(1,993	)	$	—
Inventory step-up	—			—			(1,619		)	—
Unamortized discount — convertible notes	—			(267		)	—			(1,776		)
Depreciation & amortization — tax over book	—			(260,622		)	—			(286,267		)
Other	—			(1		)	—			—

Total deferred tax liabilities	$	(2,877	)	$	(260,890	)	$	(3,612	)	$	(288,043	)

Net deferred income tax asset (liability)	$	43,024		$	(227,625	)	$	38,411		$	(267,344	)

The Company records a valuation allowance to reduce net deferred income tax assets to the amount that is more likely than not to be realized. In performing its analysis of whether a valuation allowance to reduce the deferred income tax asset was necessary, the Company evaluated the data and determined that as of December 31, 2015 and 2014 it could not conclude that it was more likely than not that certain of the net operating losses of its Indian subsidiary and deferred tax assets relating to net operating losses and certain employee benefit obligations of its Swiss subsidiary would be realized. Accordingly, the Company established a valuation allowance of $8.8 million and $1.1 million against its deferred tax assets as of December 31, 2015 and 2014, respectively. The Company had concluded that all of its deferred tax assets were more likely than not to be realized as of December 31, 2013; accordingly, no valuation allowance was in place as of that date.

The deferred tax balances have been reflected gross on the balance sheet, and are netted only if they are in the same jurisdiction.

The Company’s net operating loss (“NOL”) carry-forwards as of December 31, 2015 consist of four component pieces: (i) U.S. Federal NOL carry-forwards valued at $7.0 million, (ii) Illinois NOL carry-forwards valued at $0.6 million, (iii) foreign (Indian) NOLs of $11.2 million and (iv) foreign (Swiss) NOLs of $4.5 million. The U.S. Federal NOL carry-forwards were obtained through the Merck Acquisition completed in the fourth quarter of 2013. The Illinois NOL carry-forwards relate to the Company’s tax losses in the decade of the 2000s and have not yet been fully utilized due to the State of Illinois’s suspension of the use of NOLs for the years 2011, 2012 and 2013. These NOLs would be due to expire from 2021 to 2025, and are expected to be utilized well before their expiration dates. The Indian NOL carry-forwards relate to operating losses by the Company’s subsidiary in India, which was acquired in 2012. Of the $11.2 million Indian NOL, $2.4 million expire beginning in 2022; the Company has established a valuation allowance against this entire amount. The remaining $8.8 million of the Indian NOLs can be carried forward indefinitely, and the Company has concluded that they are more likely than not to be utilized and therefore has not established a valuation allowance against them. The Swiss NOL was obtained through the Hettlingen Acquisition completed in the first quarter of 2015. It begins to expire in 2016 and, accordingly, the Company has established a valuation allowance against the entire amount. The Company previously had valued NOL carry-forwards in the State of New Jersey. However, due to changes in the tax law, the Company determined that these NOLs would never be utilized and wrote them off during 2013.

The Company is currently undergoing an examination of its Federal income tax return for the year ended December 31, 2013 by the Internal Revenue Service. The Company’s VersaPharm Pharmacal subsidiary is currently undergoing an examination by the Internal Revenue Service for its tax years ended December 31, 2013 and August 12, 2014. The Company’s Hi-Tech Pharmacal subsidiary has also been notified that its Federal income tax return for the year ended April 17, 2014 will be examined beginning in 2016. Additionally, the Company is undergoing examinations by Illinois and Massachusetts for various tax years. The Company’s U.S. Federal income tax returns filed for years 2011 through 2014 are open for examination by the Internal Revenue Service. The majority of the Company’s state and local income tax returns filed for years 2012 through 2014 remain open for examination as well.

In accordance with ASC 740-10-25 - Income Taxes — Recognition, the Company performs reviews of its tax positions to determine whether it is “more likely than not” that its tax positions will be sustained upon examination, and if any tax positions are deemed to fall short of that standard, the Company reserves based on the financial exposure and the likelihood of its tax positions not being sustained. Based on its review as of December 31, 2015, the Company determined that it would not recognize tax benefits as follows (in thousands):

Balance at December 31, 2012	$	1,485
Additions relating to current year	589
Terminations of exposures relating to prior years	(1,229		)

Balance at December 31, 2013	$	845
Additions relating to current year (as Restated)	709
Additions relating to acquired entities (as Restated)	456

Balance at December 31, 2014 (as Restated)	$	2,010
Additions relating to current year	356
Payments of amounts relating to prior years	(81		)

Balance at December 31, 2015	$	2,285

If recognized, $1.9 million of the above positions will impact the Company’s effective rate, while the remaining $0.4 million will result in a reduction of the Company’s goodwill. Due to the uncertainty of both timing and resolution of potential income tax examinations, the Company is unable to determine whether any amounts included in the December 31, 2015 balance of unrecognized tax benefits represent tax positions that could significantly change during the next twelve months. The Company accounts for interest and penalties as income tax expense.