Note 10. Income Taxes

The provision for income taxes is based on income (loss) from operations before income taxes as follows (in thousands):


	Year Ended December 31,
	2015		2014		2013
U.S.	$	110,560	$	(48,506)	$	(82,848)
Non-U.S.		(103,004)		(41)		—
Income (loss) before income taxes	$	7,556	$	(48,547)	$	(82,848)

A reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows (in thousands):


	Year Ended December 31,
	2015		2014		2013
Provision (benefit) at U.S. federal statutory rate	$	2,645	$	(16,992)	$	(28,997)
Unbenefitted net operating losses and tax credits		(29,424)		13,432		18,215
Non-deductible amortization of debt discount		1,087		2,294		6,645
Non-deductible interest expense		122		1		747
Non-deductible debt exchange expense and loss on repurchase of senior notes		—		—		7,985
Deferred tax impact of law change		—		—		(5,549)
Foreign tax rate differential		21,443		—		—
Non-deductible officer compensation		4,696		830		976
Other		456		369		277
Provision (benefit) for income taxes	$	1,025	$	(66)	$	299

The provision for income taxes for the years ended December 31, 2015, 2014 and 2013 were for current state income taxes.

Significant components of our deferred tax assets and liabilities are as follows (in thousands):


	December 31,
	2015		2014
Deferred tax assets:
Federal and state net operating loss carry forwards	$	329,984	$	504,267
Federal and state research credits		201,151		165,352
Capitalized research and development		13,017		2,475
Deferred revenue and accruals		11,212		15,799
Non-cash compensation		39,034		31,248
Deferred financing obligation		20,328		20,383
Other		3,125		8,306
Total gross deferred tax assets		617,851		747,830
Less valuation allowance for deferred tax assets		(542,936)		(669,168)
Net deferred tax assets	$	74,915	$	78,662

Deferred tax liabilities:
Property and equipment	$	(25,787)	$	(19,925)
Equity component of 2018 Notes and 2020 Notes		(49,128)		(58,737)
Total gross deferred tax liabilities		(74,915)		(78,662)
Net deferred income taxes	$	—	$	—

In January 2015, we licensed certain intellectual property rights related to our non-partnered clinical programs to our wholly-owned subsidiary in Switzerland. Although the license of intellectual property rights did not result in any gain or loss in the condensed consolidated statements of operations, the transaction generated a taxable gain in the United States, and we utilized available federal and state net operating loss carryforwards to offset the majority of this gain. Any taxes incurred related to intercompany transactions are treated as prepaid tax in our condensed consolidated balance sheets and amortized to income tax expense over the life of the intellectual property. Any cash taxes anticipated to be paid related to this intercompany transaction are immaterial.

The valuation allowance for deferred tax assets decreased by approximately $126.2 million during the year ended December 31, 2015, increased by approximately $42.2 million during the year ended December 31, 2014 and decreased by approximately $50.0 million during the year ended December 31, 2013. During 2015, we realized tax benefits of $106.4 million due to the utilization of U.S. net operating loss carryforwards related to the inclusion of a taxable gain on the transfer of intellectual property rights to its subsidiary in Switzerland. Management believes the uncertainty regarding the realization of net deferred tax assets requires a full valuation allowance against such net asset. We believe that a full valuation allowance continues to be appropriate given our history of net operating losses, cumulative book losses and uncertainties surrounding the timing and amount of future taxable income.

As of December 31, 2015, we had federal and state net operating loss carryforwards (NOLs) of approximately $1.6 billion. The federal and state NOLs will expire at various dates from 2022 through 2035, if not utilized. Additionally, we had federal and state research and development tax credit and orphan drug credit carryforwards of approximately $201.2 million that will expire at various dates from 2018 through 2035, if not utilized. For foreign income tax purposes, we had $22.3 million of net operating loss carryforwards, which begin to expire in 2021.

Our ability to utilize these NOLs may be limited under Internal Revenue Code Section 382 (“Section 382”). Section 382 imposes annual limitations on the utilization of NOL carryfowards and other tax attributes upon an ownership change. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in our stock by more than 50 percentage points over a testing period (generally three years). These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. We completed a Section 382 analysis through the year ended December 31, 2013. Based on this analysis, our NOLs and other tax attributes accumulated through 2013 should not be limited under Section 382. We have not updated our Section 382 analysis through 2015.

The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the year ended December 31, 2015 is as follows (in thousands):


	December 31,
	2015
Balance at beginning of period	$	—
Additions based on tax positions related to the current year		836
Additions for tax positions of prior years		—
Balance at end of period	$	836

Our policy is to recognize interest and penalties related to uncertain tax positions, if any, in income tax expense. As of December 31, 2015 and 2014, we did not accrue any interest related to uncertain tax positions. Due to NOL and tax credit carry forwards that remain unutilized, income tax returns for tax years 1997 through 2014 remain subject to examination by the taxing jurisdictions.

In connection with the adoption of stock‑based compensation guidance in 2006, we elected to follow the with‑and‑without approach to determine the sequence in which deductions and NOL carryforwards are utilized. Accordingly, there have only been de minimis excess tax benefits related to stock option exercises in any year as a result of the utilization of NOL carryforwards to offset any taxable income. The table of deferred tax assets shown above does not include certain deferred tax assets at December 31, 2015 and 2014 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for book purposes. Additional paid in capital will be increased by approximately $394.7 million if and when such deferred tax assets are ultimately realized.

The American Tax Relief Act of 2012, enacted January 2, 2013, retroactively reinstated the research and development credit for 2012 and 2013. Accordingly, in 2013 we recorded credits of approximately $5.5 million related to 2012 as a result of the retroactive reinstatement. The Tax Increase Prevention Act of 2014, enacted December 19, 2014, reinstated the research and development credit for 2014. The Consolidated Appropriations Act, 2016 (the “Act”), enacted December 18, 2015, reinstated the research and development credit retroactively for 2015. The Act has made the research credit permanent.