Note 12. Income Taxes

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


	Year Ended December 31,
	2012			2011			2010
United States	$	(134,384	)	$	(105,841	)	$	(46,365	)
Foreign		16,338			15,580			10,803

	$	(118,046	)	$	(90,261	)	$	(35,562	)

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


	Year Ended December 31,
	2012			2011		2010
Current tax provision (benefit):
Federal	$	(357	)	$	19,908	$	(18,494	)
State		130			580		361
Foreign		6,804			4,964		5,743

		6,577			25,452		(12,390	)

Deferred tax expense (benefit):
Federal		(1,448	)		43,948		117
State		92			10,987		(2,988	)
Foreign		(321	)		1,172		(1,497	)

		(1,677	)		56,107		(4,368	)

Income tax provision (benefit)	$	4,900		$	81,559	$	(16,758	)

Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related asset or liability. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows (in thousands):


	December 31,
	2012			2011
Deferred tax assets:
Reserves and allowances not currently deductible for tax purposes	$	15,617		$	14,161
Basis difference related to fixed assets		10,711			7,891
Compensation and benefits		3,808			3,932
Basis difference for inventory valuation		2,502			2,252
Compensatory stock options and rights		5,238			9,927
Deferred revenue and other		101			2,151
Operating loss carryforwards		105,748			66,332
Tax credit carryforwards		6,024			9,402
Correlative effects of global income allocations		363			424
Federal impact of state taxes		808			—
Basis difference related to intangible assets with a definite life		6,165			2,725

Total deferred tax assets		157,085			119,197
Valuation allowance for deferred tax assets		(151,097	)		(110,844	)

Deferred tax assets, net of valuation allowance	$	5,988		$	8,353

Deferred tax liabilities:
State taxes, net of federal income tax benefit		(33	)		(1,472	)
Prepaid expenses		(1,102	)		(2,582	)
Deferred revenue		(330	)		—
Other		(69	)		(108	)
Basis difference related to intangible assets with an indefinite life		(32,834	)		(34,313	)

Total deferred tax liabilities		(34,368	)		(38,475	)

Net deferred tax assets	$	(28,380	)	$	(30,122	)

Net deferred tax assets are shown on the accompanying consolidated balance sheets as follows:
Current deferred tax assets	$	4,170		$	4,029
Non-current deferred tax assets		1,910			1,386
Current deferred tax liabilities		(927	)		(4,108	)
Non-current deferred tax liabilities		(33,533	)		(31,429	)

Net deferred tax assets (liabilities)	$	(28,380	)	$	(30,122	)

The current year change in net deferred taxes of $1,742,000 is comprised of a net deferred expense of $1,479,000 related to the change in the basis difference of intangible assets with an indefinite life, a net deferred expense of $191,000 related to foreign and separate state jurisdictions for which no valuation allowance has been provided, and a $72,000 expense related to foreign currency translation 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 the loss and credit carry forwards listed above, 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 performed an analysis to determine the likelihood that its deferred tax assets relating to its U.S. business would be realized. The Company considered its taxable loss in the U.S. in each of the past three years, the reasons for such loss, the Company’s projected financial forecast for its U.S business, and the dates on which the deferred tax assets were expected to expire. This evidence suggested that the Company should establish a valuation allowance. As a result, in 2011, the Company recorded a $52,455,000 increase to income tax expense in order to establish a valuation allowance against its U.S. deferred tax assets and discontinued recognizing income tax benefits related to its U.S. net operating losses. At December 31, 2012 and 2011, the valuation allowance against the Company’s U.S. deferred tax assets was $151,097,000 and $110,844,000, respectively. If sufficient positive evidence arises in the future, such as a sustained return to profitability, any existing valuation allowance could be reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached. The Company has concluded that with respect to non-U.S. entities, there is sufficient positive evidence to conclude that realization of its deferred tax assets is more likely than not under applicable accounting rules, and no allowances have been established.

The non-cash charge to establish the valuation allowance in 2011 did not have any impact on the Company’s consolidated cash flows, nor will such an allowance preclude the Company from using loss carry forwards or other deferred tax assets in the future, except as described below. Until the Company re-establishes a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the consolidated statement of operations for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the consolidated statement of operations.

At December 31, 2012, the Company has federal and state income tax credit carryforwards of $4,354,000 and $6,985,000 respectively, which will expire at various dates beginning in 2020. Such credit carryforwards (in thousands) expire as follows:


U.S. foreign tax credit	2,776	2020 - 2022
U.S. research tax credit	1,578	2030 - 2032
State investment tax credits	197	Do not expire
State research tax credits	6,788	Do not expire

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


U.S. loss carryforwards	$	272,861	2031 - 2032
State loss carryforwards	$	186,344	2013 - 2035
Foreign loss carryforwards	$	492	2019

The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013. Included within this legislation was an extension of the research and development credit which had previously expired on December 31, 2011. This legislation retroactively reinstates and extends the credit from the previous expiration date through December 31, 2013. As the legislation was not enacted until after the close of the year ended December 31, 2012, the income tax impact of the retroactive reinstatement and extension will not be recognized until 2013. If the tax impact of the research and development credit was recognized, the Company does not anticipate any federal income tax benefit due to the valuation allowance against the Company’s U.S. deferred tax assets.

Although the Company has set up a valuation allowance against the majority of its U.S. federal and state deferred tax assets, which include net operating loss carry forwards and other losses, such allowance does not preclude the Company from using the deferred tax assets in the future. However, the Company’s ability to utilize the losses 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 increase 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 determination of whether an ownership change has occurred for purposes of Section 382 is complex and requires significant judgment. The extent to which the Company’s ability to utilize the losses is limited as a result of such an ownership change depends on many variables, including the value of the Company’s stock at the time of the ownership change. Although the Company’s ownership has changed during the three-year period ended December 31, 2012, the Company does not believe there has been a cumulative increase in ownership in excess of 50 percentage points during that period. The Company continues to monitor changes in ownership. If such a cumulative increase did occur in any three year period and the Company was limited in the amount of losses it could use to offset taxable income, the Company’s results of operations and cash flows would be adversely impacted.

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


	Year Ended December 31,
	2012			2011			2010
Statutory U.S. tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of U.S. tax benefit		(0.8	)%		(0.8	)%		1.5	%
Federal and State tax credits, net of U.S. tax benefit		—			—			2.6	%
Expenses with no tax benefit		(0.9	)%		0.2	%		(2.4	)%
Foreign income taxed at other than U.S. statutory rate		2.0	%		(1.0	)%		1.5	%
Effect of foreign rate changes		—			(0.5	)%		—
Foreign tax credit		(1.2	)%		—			—
Basis differences of intangibles with an indefinite life		1.3	%		(1.0	)%		—
Release of prepaid taxes on intercompany profit		—			(24.0	)%		—
Change in deferred tax valuation allowance		(37.7	)%		(98.6	)%		2.2	%
Reversal of previously accrued taxes		0.1	%		—			1.4	%
Accrual for interest and income taxes related to uncertain tax positions		0.8	%		(0.6	)%		5.2	%
Other		(2.8	)%		0.9	%		0.1	%

Effective tax rate		(4.2	)%		(90.4	)%		47.1	%

In 2012, 2011 and 2010, the tax rate was impacted by favorable adjustments to previously estimated tax liabilities in the amount of $142,000, $2,000, and $515,000, respectively. The most significant adjustments in each year related to adjustments resulting from the finalization of the Company’s prior year U.S. and state income tax returns as well as agreements reached with the Internal Revenue Service and other major jurisdictions on certain issues necessitating a reassessment of the Company’s tax exposures for all open tax years, with no individual year being significantly affected.

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


	2012			2011			2010
Balance at January 1	$	9,875		$	9,121		$	15,831
Additions based on tax positions related to the current year		432			830			1,825
Additions for tax positions of prior years		96			370			110
Reductions for tax positions of prior years		(24	)		(39	)		(1,832	)
Settlement of tax audits		(768	)		—			(4,157	)
Reductions due to lapsed statute of limitations		(2,547	)		(407	)		(2,656	)

Balance at December 31	$	7,064		$	9,875		$	9,121

As of December 31, 2012, the liability for income taxes associated with uncertain tax benefits was $7,064,000 and can be reduced by $3,148,000 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 $748,000 of tax benefits associated with state income taxes and other timing adjustments, which are recorded as deferred income taxes pursuant to ASC Topic 740-25-6. The net amount of $3,168,000, if recognized, would affect the Company’s financial statements and favorably affect the Company’s effective income tax rate.

The Company does expect changes in the amount of unrecognized tax benefits in the next 12 months; however, the Company does not expect the changes 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. For the years ended December 31, 2012, 2011 and 2010, the Company recognized tax expense of approximately $44,000 and $242,000, and a net benefit of approximately $490,000, respectively, related to interest and penalties in the provision for income taxes. As of December 31, 2012 and 2011, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated balance sheets was $934,000 and $890,000, 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		2008 and prior
California (U.S.)		2006 and prior
Canada		2007 and prior
Japan		2007 and prior
South Korea		2008 and prior
United Kingdom		2008 and prior

As of December 31, 2012, the Company did not provide for United States income taxes or foreign withholding taxes on a cumulative total of $105,383,000 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 that are then available, 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 does not anticipate any federal or state income taxes due to the valuation allowance against the Company’s U.S. deferred tax assets offset. The Company estimates that it would have withholding taxes of less than $1,000,000 upon remittance.