Note 15. Income Taxes

The U.S. and foreign components of income before income taxes and the provision for income taxes are presented in this table:



	52 Weeks Ended		52 Weeks Ended		52 Weeks Ended
	April 26, 2013		April 27, 2012		April 29, 2011
Income before income taxes:
Domestic	$	74,949,502	$	63,865,045	$	50,330,220
Foreign		325,123		(3,443,617)		(1,665,289)
	$	75,274,625	$	60,421,428	$	48,664,931
Provision for current income tax expense:
Federal	$	13,987,217	$	779,690	$	242,547
State and local		1,692,119		772,013		530,089
Foreign		101,281		125,738		64,822
	$	15,780,617	$	1,677,441	$	837,458
Provision for deferred income tax expense:
Federal	$	13,066,858	$	21,583,269	$	18,254,023
State and local		69,648		1,082,986		9,804
Discrete items (1)		0		0		(17,162,064)
	$	13,136,506	$	22,666,255	$	1,101,763
Total provision for income tax expense	$	28,917,123	$	24,343,696	$	1,939,221

(1)	The discrete items in fiscal year 2011 were primarily, (i) a worthless stock deduction and (ii) the release of valuation allowance against our deferred tax assets, which resulted in fully releasing the valuation allowance against our regular net operating loss carryforward.

The following is a reconciliation of the statutory federal income tax rate to our effective income tax rate expressed as a percentage of income before income taxes:



	52 Weeks Ended		52 Weeks Ended		52 Weeks Ended
	April 26, 2013		April 27, 2012		April 29, 2011
U.S. statutory rate	35.0	%	35.0	%	35.0	%
Change in deferred tax valuation allowance	(0.1)		0		0
Shortfall on settlement of options and restricted stock	0		1.4		2.6
Reduction in valuation allowance due to shortfall	0		0		(1.7)
Foreign taxes	0.1		0.2		0.1
State and local tax provision, net of federal benefit	2.3		2.6		2.8
Research and development tax credit (1)	(1.4)		(1.1)		(1.2)
Gain on warrant liability	(0.6)		0		0
Contingency for uncertain tax positions (2)	1.8		0		4.5
Other, net	1.3		2.2		1.3
Discrete items (3)	0		0		(39.5)
Effective tax rate	38.4	%	40.3	%	3.9	%

(1)

The research and development tax credit (“R&D tax credit”) expired as of December 31, 2011 and January 2, 2013 and was extended by the United States Congress on January 1, 2013 to December 31, 2013 prior to our fiscal year end of April 26, 2013. Therefore, the R&D tax credit recognized for the 52 weeks ended April 26, 2013 included the impact of the retroactive enactment of the R&D Tax Credit covering the period January 1, 2012 to April 26, 2013, which includes four months from the prior fiscal year ended April 27, 2012.

(2)	The contingency in fiscal year 2013 related to the uncertain tax position associated with the NeuroVista debt obligation impairment. The contingency in fiscal year 2011 related to the uncertain tax position associated with the worthless stock deduction.

(3)	The discrete items in fiscal year 2011 were a worthless stock deduction and the release of valuation allowance against our regular net operating loss carryforward deferred tax asset.

Significant components of our deferred tax assets are as follows:



	April 26, 2013		April 27, 2012
Deferred tax assets (liabilities):
Federal net operating loss carryforwards	$	11,652,605	$	36,967,643
Foreign net operating loss carryforwards		12,309,347		12,957,928
State net operating loss carryforwards		882,678		1,785,714
Tax credit carryforwards		7,084,538		4,780,962
Deferred compensation		6,119,515		7,877,434
Accruals and reserves		2,102,427		2,213,570
Licensing income and expense		776,467		1,214,115
Property and equipment		(789,106)		(145,692)
Other		4,166,569		1,460,454
Total deferred tax assets		44,305,040		69,112,128
Deferred tax valuation allowance		(26,181,763)		(37,852,345)
Net deferred tax assets	$	18,123,277	$	31,259,783



	April 26, 2013		April 27, 2012
Current deferred tax asset	$	17,992,339	$	27,971,835
Current valuation allowance		(7,622,378)		(10,663,030)
Non-current deferred tax asset		27,236,316		41,611,106
Non-current valuation allowance		(18,559,385)		(27,189,315)
		19,046,892		31,730,596
Current deferred tax liability		(71,969)		(314,596)
Non-current deferred tax liability		(851,646)		(156,217)
		(923,615)		(470,813)
Net deferred tax assets	$	18,123,277	$	31,259,783

At April 26, 2013, we had net operating loss carryforwards of $67.5 million for federal income tax purposes, expiring during the fiscal years 2020 through 2022, and net tax credit carryforwards of approximately $7.1 million for federal income tax purposes expiring during the fiscal years 2029 through 2033. At April 26, 2013, we had net operating loss carryforwards of approximately $24.4 million for state and local income tax purposes, expiring at various dates beginning in the fiscal year 2014. We believe it is more-likely-than-not that future operating results will generate sufficient net taxable income to utilize these net operating losses and tax credit carryforwards.

We have not provided U.S. income taxes on our undistributed earnings from our foreign subsidiaries as of April 26, 2013. These earnings, while not material to our consolidated statement of income, are intended to be permanently reinvested outside the United States.

At April 26, 2013, we had a valuation allowance of $26.2 million against our deferred tax assets based on the NOL’s from our foreign operations, our excess tax benefits from stock-based awards and other tax attributes. During the fiscal year 2013 we utilized $12.4 million of excess tax benefit NOL and released an equal amount of valuation allowance, which was recorded in additional paid-in capital on our consolidated balance sheet. The valuation allowance related to the excess tax benefit NOL is released as the NOL’s are utilized to reduce income taxes payable, with the tax benefit recorded in additional paid-in capital on our consolidated balance sheet. In addition, during fiscal year 2013, we released valuation allowance of $0.6 million related to the utilization and adjustment of NOL’s from foreign operations. The remaining valuation allowance related to foreign operations has not been released as it is not considered more-likely-than-not that the net operating losses will be able to be utilized. We will continue to evaluate whether to release the cumulative valuation allowance related to foreign NOL during fiscal year 2014.

The following is a roll-forward of our total gross unrecognized tax benefit:



	52 Weeks Ended		52 Weeks Ended		52 Weeks Ended
	April 26, 2013		April 27, 2012		April 29, 2011
Balance at beginning of year	$	6,075,693	$	6,326,041	$	4,703,172
Tax positions related to current year		1,339,561		0		2,260,226
Tax positions related to prior years		(335,903)		(250,348)		(757,792)
Change in effective tax rate (federal)		0		0		120,435
Balance at end of year	$	7,079,351	$	6,075,693	$	6,326,041

The total amount of unrecognized tax benefit, as of April 26, 2013, if recognized, would reduce our income tax expense by approximately $7.1 million. We are unable to estimate the amount of change in our unrecognized tax benefits over the next 12 months; however we do not expect a significant change. In fiscal year ended April 26, 2013, we recognized interest and penalties associated with unrecognized tax benefits in the approximate amounts of $6,000 and $11,000, respectively.

We are subject to income tax examinations for our U.S. federal income taxes, non-U.S. income taxes and state and local income taxes for the fiscal year 1992 and subsequent years with certain exceptions.

During the 52 weeks ended October 26, 2012, we finalized the IRS audit in connection with our fiscal years ended April 24, 2009 and April 30, 2010. The audit adjustments did not materially impact our consolidated statements of income, balance sheets or cash flows.

In addition, during the 52 weeks ended April 26, 2013, we were notified that our European subsidiary, Cyberonics Europe BVBA, was under examination by the Belgium tax authority with respect to transfer pricing for fiscal years 2011 and 2010. We are unable to assess the impact this examination may have on our consolidated financial statements, on our cumulative Belgium tax losses through fiscal year 2012 of €25.7 million, and on our U.S. tax position.