Note 16. Income Taxes

Deferred income taxes result from differences in the recognition of expenses for tax and financial reporting purposes, as well as operating loss and tax credit carryforwards. Significant components of the Company's deferred income tax assets as of December 31, 2013 and 2012, are as follows (in thousands):

	2013			2012

Deferred tax assets:
Net operating loss carry forwards	$	202,289		$	154,865
Research and development credit carry forwards		16,659			13,192
Stock-based compensation		15,476			9,386
Accruals and other		18,927			5,528
Depreciation		218			185
Deferred revenue		4,009			420

		257,578			183,576
Valuation allowance		(257,578	)		(183,576	)

Total	$	—		$	—

The net increase in the valuation allowance for the years ended December 31, 2013, 2012 and 2011, was $74.0 million, $47.9 million and $22.6 million, respectively. As of December 31, 2013, the Company had no significant deferred tax liabilities.

For federal and state income tax reporting purposes, respective net operating loss, or NOL, carryforwards of approximately $545.1 million and $229.1 million are available to reduce future taxable income, if any. ASC 718 prohibits recognition of a deferred income tax asset for excess tax benefits due to stock option exercises that have not yet been realized through a reduction in income taxes payable. Post-adoption of ASC 718, the unrecognized deferred tax benefits totaled $18.1 million, of which $81,000 have been accounted for as a credit to additional paid-in capital, as they have been realized through a reduction in income taxes payable. For federal and state income tax reporting purposes, respective credit carryforwards of approximately $13.9 million and $4.3 million are available to reduce future taxable income, if any. These net operating loss and tax credit carryforwards, except for the California research and development credit, expire on various dates through 2033. The California research and development credits do not expire. The Internal Revenue Code of 1986, as amended, contains provisions that may limit the net operating loss and credit carryforwards available for use in any given period upon the occurrence of certain events, including a significant change in ownership interest. Utilization of the net operating loss and tax credit carry-forwards is subject to an annual limitation due to an ownership change, as defined by the IRS code section 382. The Company has not completed a recent study to assess whether any change of control has occurred or whether there have been multiple changes of control since the Company's formation, due to the significant complexity and cost associated with the study. The Company has completed studies in prior periods and concluded no adjustments were required. If the Company has experienced a change of control at any time since its formation, its NOL carryforwards and tax credits may not be available, or their utilization could be subject to an annual limitation under Section 382. A full valuation allowance has been provided against the Company's NOL carryforwards, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Accordingly, there would be no impact on the consolidated balance sheet or statement of operations.

The (benefit)/provision for income taxes is based upon (loss)/income from continuing operations before (benefit)/provision for income taxes as follows, for the years ended December 31, 2013, 2012 and 2011 (in thousands):

	2013			2012			2011

Loss before income taxes:
Domestic	$	(174,083	)	$	(138,599	)	$	(46,836	)
International		(766	)		(1,107	)		—

Loss before taxes	$	(174,849	)	$	(139,706	)	$	(46,836	)

The (benefit)/provision for income taxes consists of the following components for the years ended December 31, 2013, 2012 and 2011 (in thousands):

Continuing Operations:

	2013		2012		2011

Current
Federal	$	—	$	—	$	—
State		97		27		190
Foreign		—		—		—

Total current (benefit)/provision for income taxes	$	97	$	27	$	190


Deferred
Federal	$	—	$	—	$	—
State		—		—		—
Foreign		—		—		—

Total deferred benefit for income taxes	$	—	$	—	$	—


Total (benefit)/provision for income taxes from continuing operations	$	97	$	27	$	190

Reconciliation between the U.S. federal statutory tax rate and the Company's effective tax rate from continuing operations is as follows, for the years ended December 31, 2013, 2012 and 2011:



Tax at U.S. federal statutory rate	(35	)%	(35	)%	(35	)%
Change in valuation allowance	35		34		38
Permanent items	2		1		1
Tax credits	(1	)	—		(4	)
Other	(1	)	—		—

Effective tax rate	0	%	0	%	0	%

The total gross unrecognized tax benefits as of December 31, 2013, is $1.7 million and relates to state tax exposures, of which $160,000 would affect the effective tax rate if recognized.

A reconciliation of the beginning and ending amount of unrecognized tax benefits in 2013 and 2012, is as follows (in thousands):

	2013		2012		2011

Unrecognized tax benefits as of January 1	$	1,215	$	1,215	$	1,171
Gross increase/(decrease) for tax positions of prior years		447		—		44
Gross increase/(decrease) for tax positions of current year		—		—		—
Settlements		—		—		—
Lapse of statute of limitations		—		—		—

Unrecognized tax benefits balance at December 31	$	1,662	$	1,215	$	1,215

The total unrecognized tax benefits as of December 31, 2013, of $1.7 million includes approximately $1.5 million of unrecognized tax benefits that have been netted against the related deferred tax assets. The remaining balance recorded on the Company's consolidated balance sheets as of December 31, 2013 and 2012, is as follows (in thousands):

	2013			2012

Total unrecognized tax benefits	$	1,662		$	1,215
Amounts netted against deferred tax assets		(1,502	)		(1,055	)

Unrecognized tax benefits recorded on consolidated balance sheets	$	160		$	160

As of December 31, 2013, the Company had accrued $45,000 for payment of interest and penalties related to unrecognized tax benefits. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. During 2013, $6,000 of interest was recognized.

Although the Company files U.S. federal, various state, and foreign tax returns, the Company's only major tax jurisdictions are the U.S., California and New Jersey. The Company's income tax return for the year ended December 31, 2007, is currently under examination by the California Franchise Tax Board. Based on the progress of the audit to date, the Company believes adjustments may be made in early years that will reduce tax attributes available to offset tax due in 2007. Therefore, the Company has $160,000 of unrecognized tax benefits recorded on its consolidated balance sheets as of December 31, 2013.

The Internal Revenue Service completed its audit of the Company's income tax return for the years ended December 31, 2007 and 2008, with no adjustments. The Company is currently under examination by the State of New Jersey for the years ended December 31, 2007 through 2009. Because the Company used net operating loss carryforwards and other tax attributes to offset its taxable income on its 2007 income tax returns for U.S. federal and California, such attributes can be adjusted by these taxing authorities until the statute closes on the year in which such attributes were utilized. Tax years 1991 to 2013 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.

The Company is in various stages of the examination process in connection with all of its tax audits and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits. It is not possible to determine either the magnitude or range of any increase or decrease at this time.