Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

Income Taxes

14. Income Taxes

        The Company's provision for income taxes from continuing operations for 2011 and 2010 consisted of the following:

	Year Ended December 31,
	2011		2010
	(Dollars in thousands)
U.S. state current income tax expense	$	158	$	682
Foreign current income tax expense		3,164		1,419
Foreign deferred income tax expense		380		151
Total	$	3,702	$	2,252

        The following table reconciles the Company's provision for income taxes to the expected income tax expense at the U.S. federal statutory income tax rate (computed by applying the U.S. federal income tax rate of 35% to earnings before income taxes and non-controlling interest):

	Year Ended December 31,
	2011			2010
	(Dollars in thousands)
Computed expected tax based on federal statutory rate	$	9,936		$	5,164
Increase (decrease) in taxes resulting from:
Expired capital loss carryforward		17,701			—
Expired net operating loss carryforward		—			14,653
Change in valuation allowance		(27,637	)		(20,567	)
Inclusion of income attributable to noncontrolling interest in an 80%-owned subsidiary		220			1,226
Other		(220	)		(476	)
U.S. state and foreign income tax		3,702			2,252
	$	3,702		$	2,252

        The following table displays the significant components of our U.S. deferred tax assets, deferred tax liabilities, and valuation allowance as of December 31, 2011 and 2010:

	December 31,
	2011			2010
	(Dollars in thousands)
Deferred tax assets (liabilities):
Basis difference in Acquisition Partnership investments	$	17,982		$	19,018
Intangibles, principally due to differences in amortization		283			291
Basis difference in property and equipment		128			208
Foreign non-repatriated earnings		162			(2,839	)
Federal net operating loss carryforwards		8,621			19,394
Capital loss carryforwards		—			16,013
Other		67			2,795
Total deferred tax assets, net		27,243			54,880
Valuation allowance		(27,243	)		(54,880	)
Net deferred tax assets	$	—		$	—

        The amounts reported in the table above for "Total deferred tax assets, net" and "Valuation allowance" at December 31, 2010 have each been adjusted by $6.6 million upon management's determination in 2011 that adjustments to the deferred tax asset (liability) amounts previously disclosed for Acquisition Partnership investment basis difference, foreign non-repatriated earnings and other were required. These disclosure-only adjustments did not affect the amount reported in the table above for "Net deferred tax assets" at December 31, 2010, and did not affect the Company's net earnings, total assets, stockholders' equity or cash flows for the years ended December 31, 2011 and 2010.

        At December 31, 2011 and 2010, the Company had deferred foreign tax liabilities of $0.1 million and $0.3 million, respectively, included in "Other liabilities" in its consolidated balance sheets. These deferred tax liabilities were attributable primarily to our consolidated foreign operations, and unrealized holding gains from investment securities held by a consolidated foreign subsidiary.

        The Company recognizes deferred tax assets and liabilities in both the U.S. and non-U.S. jurisdictions based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates, if any, would be recognized in earnings in the period that includes the enactment date. We reduce the carrying amounts of deferred tax assets through a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically by the Company based on the more-likely-than-not realization threshold criterion. In this assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other factors, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, excess of appreciated asset value over the tax basis of net assets, impact of gains or charges from one-time events, the duration of statutory carryforward periods, the Company's experience with utilizing available operating loss and tax credit carryforwards, and tax planning strategies. In making such assessments, significant weight is given to evidence that can be objectively verified. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws between our projected operating performance, our actual results and other factors.

        For purposes of evaluating the need for a deferred tax valuation allowance, significant weight is given to evidence that can be objectively verified. At December 31, 2011 and 2010, the Company established a full valuation allowance for its U.S. deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable future. Regardless of the deferred tax valuation allowance established at December 31, 2011, the Company continues to retain net operating loss carryforwards for federal income tax purposes of approximately $24.6 million available to offset future federal taxable income, if any, through the year 2027. To the extent that the Company generates taxable income in the future to utilize the tax benefits of the related deferred tax assets, subject to certain potential limitations, it may be able to reduce its effective tax rate by reducing the valuation allowance. The Company's net operating loss carryforwards of $24.6 million expire in various years from 2020 through 2027.

        The Company accounts for income tax uncertainty using the "more-likely-than-not" criteria incorporated in the FASB's authoritative guidance on accounting for uncertainty in income taxes. Accordingly, we account for uncertain tax positions using a two-step approach whereby we recognize an income tax benefit if, based on the technical merits of a tax position, it is more likely than not (a probability of greater than 50%) that the tax position would be sustained upon examination by the taxing authority. We then recognize a tax benefit equal to the largest amount of tax benefit that is greater than 50% likely to be realized upon settlement with the taxing authority, considering all information available at the reporting date. Once a financial statement benefit for a tax position is recorded, we adjust it only when there is more information available or when an event occurs necessitating a change. The difference between the benefit recognized for a position in accordance with this accounting model and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit. The gross amount of the Company's unrecognized tax benefits at December 31, 2010 approximated $0.3 million, which was reversed in 2011, along with $0.1 million of accrued interest and penalties related to the income tax uncertainties. The Company did not have any unrecognized tax benefits at December 31, 2011. The Company records interest and penalties related to income tax uncertainties in the provision for income taxes.

        FirstCity currently files tax returns in approximately 35 U.S. states, and one of its consolidated subsidiaries is currently being examined in one state for the year 2004. Tax year 1996 and subsequent years are open to U.S. federal examination, and tax year 2007 and subsequent years are open to U.S. state examination.