Note 9. Income Taxes

The Company’s income (loss) before income tax provision was subject to taxes in the following jurisdictions for the following periods (in thousands):



	Years Ended December 31,
	2016⁽¹⁾		2015		2014
United States	$	38,268	$	6,864	$	6,981
Foreign	20,125		13,199		14,658
	$	58,393	$	20,063	$	21,639

The expense (benefit) for income taxes is comprised of (in thousands):



	Years Ended December 31,
	2016⁽²⁾			2015			2014
Current tax provision:
Federal	$	541		$	271		$	496
State	543			431			612
Foreign	7,289			4,393			4,930
	8,373			5,095			6,038
Deferred tax expense (benefit):
Federal	(129,405		)	(41		)	(1,549		)
State	(10,693		)	113			70
Foreign	(836		)	328			1,072
	(140,934		)	400			(407		)
Income tax provision	$	(132,561	)	$	5,495		$	5,631


(1)	Income before income taxes in 2016 includes a gain of $17,662,000 that was recognized in connection with the sale of preferred shares of the Company's investment in Topgolf. See Note 6 for further discussion.


(2)	The income tax benefit for 2016 includes the reversal of a significant portion of the valuation allowance on the Company's deferred tax assets in the U.S. See further discussion below.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows (in thousands):



	December 31,
	2016			2015
Deferred tax assets:
Reserves and allowances not currently deductible for tax purposes	$	15,506		$	14,292
Basis difference related to fixed assets	9,697			10,170
Compensation and benefits	9,273			8,964
Basis difference for inventory valuation	2,100			1,764
Compensatory stock options and rights	5,715			3,659
Deferred revenue and other	226			169
Operating loss carryforwards	75,110			96,067
Tax credit carryforwards	32,730			19,787
Basis difference related to intangible assets with a definite life	13,993			16,617
Other	389			(162		)
Total deferred tax assets	164,739			171,327
Valuation allowance for deferred tax assets	(16,515		)	(164,616		)
Deferred tax assets, net of valuation allowance	$	148,224		$	6,711
Deferred tax liabilities:
Prepaid expenses	(1,082		)	(868		)
Basis difference related to intangible assets with an indefinite life	(34,031		)	(33,974		)
Total deferred tax liabilities	(35,113		)	(34,842		)
Net deferred tax liabilities	$	113,111		$	(28,131	)
Net deferred tax assets (liabilities) are shown on the accompanying consolidated balance sheets as follows:
Non-current deferred tax assets	$	114,707		$	6,962
Non-current deferred tax liabilities	(1,596		)	(35,093		)
Net deferred tax assets (liabilities)	$	113,111		$	(28,131	)

The net change in net deferred taxes in 2016 of $141,242,000 is comprised of a net deferred tax benefit of $148,100,000 related to the change in valuation allowance, a net deferred tax expense of $6,511,000 related to current year deferred tax changes, and an expense of $348,000 related to foreign currency translation adjustments. The $148,100,000 change in the valuation allowance is comprised of a $156,600,000 one-time benefit related to the valuation allowance reversal, offset by $8,500,000 of current year generated valuation allowance and certain adjustments.

Deferred tax assets and liabilities result from temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are anticipated to be in effect at the time the differences are expected to reverse. The realization of the deferred tax assets, including loss and credit carry forwards, is subject to the Company generating sufficient taxable income during the periods in which the temporary differences become realizable. In accordance with the applicable accounting rules, the Company maintains a valuation allowance for a deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all available positive and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. These estimates are based on the Company’s best judgment at the time made based on current and projected circumstances and conditions.

In 2011, the Company established a valuation allowance against its U.S. deferred tax assets. During the fourth quarter of 2016, the Company evaluated all available positive and negative evidence, including the Company's improved profitability in 2015 and 2016 (which resulted in the Company having three years of cumulative income on its U.S. business as of December 31, 2016), combined with future projections of profitability. As a result, the Company determined that the majority of its U.S. deferred tax assets were more likely than not to be realized and reversed a significant portion of the valuation allowance against those deferred tax assets accordingly. The remaining valuation allowance on the Company's U.S. deferred tax assets as of December 31, 2016 relate primarily to state net operating loss carryforwards and credits the Company estimates it may not be able to utilize in future periods. With respect to non-U.S. entities, there continues to be sufficient positive evidence to conclude that realization of its deferred tax assets is more likely than not under applicable accounting rules, and no significant allowances have been established.

At December 31, 2016, the Company had federal and state income tax credit carryforwards of $23,812,000 and $13,897,000, respectively, which will expire at various dates beginning in 2021. Such credit carryforwards expire as follows (in thousands):



U.S. foreign tax credit	$	15,793	2021 - 2026
U.S. research tax credit	$	7,819	2031 - 2036
U.S. business tax credits	$	21	2031 - 2036
U.S. AMT credits	$	179	Do not expire
State investment tax credits	$	820	Do not expire
State research tax credits	$	13,077	Do not expire

The Company has recorded a deferred tax asset reflecting the benefit of operating loss carryforwards. The net operating losses expire as follows (in thousands):



U.S. loss carryforwards	$	187,696	2032 - 2035
State loss carryforwards	$	146,674	2017 - 2036

The Company’s ability to utilize the losses and credits to offset future taxable income may be deferred or limited significantly if the Company were to experience an “ownership change” as defined in section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in ownership of the Company’s stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The Company determined that no ownership change has occurred for purposes of Section 382 for the period ended December 31, 2016.

A reconciliation of the effective tax rate on income or loss and the statutory tax rate is as follows:



	Years Ended December 31,
	2016		2015		2014
Statutory U.S. tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of U.S. tax benefit	3.1	%	3.5	%	1.9	%
Federal and State tax credits, net of U.S. tax benefit	(5.0	)%	(11.5	)%	(9.8	)%
Foreign income taxed at other than U.S. statutory rate	1.8	%	(2.4	)%	(13.4	)%
Effect of foreign rate changes	0.5	%	0.9	%	1.3	%
Foreign tax credit	(11.3	)%	(12.0	)%	(13.5	)%
Basis differences of intangibles with an indefinite life	0.1	%	0.1	%	0.1	%
Change in deferred tax valuation allowance	(262.4	)%	0.3	%	35.3	%
Accrual for interest and income taxes related to uncertain tax positions	2.9	%	(0.3	)%	(7.3	)%
Income (loss) from flowthrough entities	(0.2	)%	(2.0	)%	(1.9	)%
Meals and entertainment	1.5	%	3.4	%	3.3	%
Group loss relief	(1.6	)%	(3.7	)%	(2.6	)%
Stock option compensation	0.2	%	(1.9	)%	2.3	%
Foreign dividends and earnings inclusion	9.9	%	7.1	%	(0.9	)%
Foreign tax withholding	0.6	%	1.4	%	2.4	%
Executive compensation limitation	0.7	%	4.3	%	—	%
Other	(2.8	)%	5.2	%	(6.2	)%
Effective tax rate	(227.0	)%	27.4	%	26.0	%

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	2016			2015			2014
Balance at January 1	$	7,090		$	6,559		$	11,851
Additions based on tax positions related to the current year	969			1,120			638
Additions for tax positions of prior years	542			132			121
Reductions for tax positions of prior years	(80		)	(255		)	(3,691		)
Settlement of tax audits	—			—			(258		)
Reductions due to lapsed statute of limitations	(265		)	(466		)	(2,102		)
Balance at December 31	$	8,256		$	7,090		$	6,559

As of December 31, 2016, the gross liability for income taxes associated with uncertain tax benefits was $8,256,000. This liability could be reduced by $1,335,000 of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, which was recorded as a long-term income tax receivable, as well as $5,620,000 of deferred taxes. The net amount of $1,301,000, if recognized, would affect the Company’s financial statements and favorably affect the Company’s effective income tax rate.

The Company does not expect changes to the unrecognized tax benefits in the next 12 months to have a material impact on its results of operations or its financial position.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company recognized a tax expense of approximately $258,000 for the year ended December 31, 2016, and tax benefits of approximately $2,000 and $101,000 for the years ended December 31, 2015 and 2014, respectively, related to interest and penalties in the provision for income taxes. As of December 31, 2016 and 2015, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated balance sheets was $1,317,000 and $1,060,000, respectively.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions as follows:



Major Tax Jurisdiction	Years No Longer Subject to Audit
U.S. federal	2010 and prior
California (U.S.)	2008 and prior
Canada	2009 and prior
Japan	2009 and prior
South Korea	2011 and prior
United Kingdom	2012 and prior

As of December 31, 2016, the Company did not provide for United States income taxes or foreign withholding taxes on a cumulative total of $108,600,000 of undistributed earnings from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States. Upon remittance, certain foreign countries impose withholding taxes, subject to certain limitations, for use as credits against the Company’s U.S. tax liability, if any. If the foreign earnings were remitted, the Company would need to accrue an additional income tax liability. However, the Company would also be allowed a credit against the Company’s U.S. tax liability for the taxes paid in foreign jurisdictions. The Company expects the net impact on the Company’s U.S. tax liability to be insignificant.

In 2015 and 2014, the Company ceased its business operations in Thailand and Malaysia, respectively, and accordingly, the Company no longer maintains a permanent reinvestment assertion with respect to these two entities. The Company intends to repatriate the undistributed earnings from these two entities to the United States at the time that the winding-down process has been completed. The Company has accrued for the estimated incremental U.S. income taxes related to reversing its indefinite reinvestment assertion with respect to these two entities.