7. Income Taxes

The components of the provision for income taxes are as follows:


	Years Ended December 31,
	2011			2010			2009
*($ in thousands)*
Current
Federal	$	—		$	—		$	—
State		49			467			81

Total current tax expense		49			467			81

Deferred
Federal		(104,227	)		(172	)		—
State		(28,250	)		218			40

Total deferred tax expense (benefit)		(132,477	)		46			40

Total expense (benefit) for income taxes	$	(132,428	)	$	513		$	121

The following presents a reconciliation of the provision (benefit) for income taxes computed at the federal statutory rate to the provision (benefit) for income taxes recognized in the Consolidated Statements of Operations for the periods indicated:


	Years Ended December 31,
	2011					2010					2009
*($ in thousands)*
Tax at statutory rate	$	4,547		35	%	$	3,554		35	%	$	(2,227	)	(35	)%
State taxes, net of federal benefit		6,222		48	%		442		4	%		70		1	%
Affiliated stock loss		3,283		25	%		(72,397	)	(713	)%		—		—	%
Adjustments to tax accruals		—		—	%		—		—	%		1,313		21	%
Contingency reserve		27,911		215	%		—		—	%		—		—	%
Change in valuation allowance		(174,527	)	(1,343	)%		69,109		681	%		836		13	%
Other, net		136		1	%		(195	)	(2	)%		129		2	%

Income tax expense (benefit)	$	(132,428	)	(1,019	)%	$	513		5	%	$	121		2	%

Deferred taxes resulted from temporary differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities. The tax effects of temporary differences are as follows:


	December 31,
	2011			2010
*($ in thousands)*
Deferred tax assets:
Intangible assets	$	65,380		$	68,449
Net operating losses		63,886			16,506
Capital loss carryforward		1,760			94,353
Other		9,139			3,660

Gross deferred tax assets		140,165			182,968
Valuation allowance		(3,336	)		(177,863	)

Gross deferred tax assets after valuation allowance		136,829			5,105

Deferred tax liabilities:
Intangible assets		(12,131	)		(12,827	)
Other investments		(1,006	)		(1,063	)

Gross deferred tax liabilities		(13,137	)		(13,890	)

Deferred tax assets (liability), net	$	123,692		$	(8,785	)

In prior reporting periods, the Company maintained a valuation allowance on substantially all of its net deferred tax assets since the likelihood of realization of those assets were less than more likely than not. At each reporting date, the Company evaluates the positive and negative evidence used to determine the likelihood of realization of all its deferred tax assets. During 2011, the Company determined that historical operating results and future projections gave rise to sufficient positive evidence to conclude that it is more likely than not that a substantial portion of its deferred tax assets are realizable. As a result, the Company released valuation allowance of $174.5 million during the fourth quarter of fiscal year 2011. The Company maintained a valuation allowance in the amount of $3.3 million at December 31, 2011 relating to deferred tax assets on items of a capital nature as well as certain state deferred tax assets where the Company determined that at the current level of projected taxable income the realization of such assets prior to statutory expiration continued to be less than more likely than not.

During the year ended December 31, 2009, due to known changes in the Company's stockholder base, management conducted a study to evaluate whether a change of control had occurred as defined under Internal Revenue Code Section 382 ("Section 382"). Section 382 imposes limits on the amount of annual net operating losses and realized built in losses that can be used to offset taxable income in certain situations where a taxable entity experiences a greater than 50% change in ownership. Management concluded that a change of control occurred as of December 31, 2009. Based on the Company's filing position in 2010, the Section 382 limitations did not result in the loss or limitation in the availability of the use of pre-change federal net operating loss carryovers; however, the change in control did result in a reduction in the amount of intangible asset and realized built in loss amortization that the Company can deduct in computing future federal taxable income.

In 2011, the Internal Revenue Service ("IRS") issued a favorable private letter ruling ("PLR") to the Company concerning the treatment of a loss related to the dissolution of an inactive subsidiary. As a result of the PLR, the Company recharacterized the $93.0 million of deferred tax assets previously reported in 2010 as capital in character to $89.0 million in deferred tax assets relating to net operating losses and intangible assets, with $4.0 million being rendered not utilizable due to Internal Revenue Code Section 382 limitations. In connection with this, the Company derecognized approximately $32.0 million of previously recorded gross deferred tax assets and related offsetting valuation allowance to account for uncertainties related to the loss.

The PLR relies on certain facts, assumptions and representations from management regarding the past conduct of the Company's businesses and other matters. If any of these facts, assumptions or representations about the existence of a deductible loss are successfully challenged by the IRS, the Company could be subject to significant tax liabilities to the extent the reported loss represented a reduction to the Company's tax liability in any given year. Notwithstanding the PLR, the IRS could also recharacterize the ordinary loss as a capital loss should it successfully challenge the validity of the facts, assumptions, or representations made as part of the PLR request.

As of December 31, 2011, the Company had deferred tax assets of $52.8 and $0.4 million related to net operating losses and capital losses, respectively, for federal income tax purposes. The related federal net operating loss carryovers are scheduled to begin to expire in the year 2019. The related federal capital loss carryovers are scheduled to begin to expire beginning in year 2014. As of December 31, 2011, the Company had deferred tax assets of $11.0 million and $1.4 million related to net operating losses and capital losses, respectively, for state income tax purposes. The related state net operating loss carryovers are scheduled to begin to expire in the year 2013. The related state capital loss carryovers are scheduled to begin to expire in the year 2011.

The Company recorded a valuation allowance of $3.3 million and $177.9 million at December 31, 2011 and 2010, respectively, with respect to certain temporary differences because management believes it is more likely than not that the Company will not realize the deferred tax assets associated with those basis differences.

Activity in unrecognized tax benefits is as follows:


	Years Ended December 31,
	2011		2010		2009
*($ in thousands)*
Balance, beginning of year	$	—	$	—	$	—
Decrease related to tax positions taken in prior years		—		—		—
Increase related to positions taken in the current year		34,139		—		—

Balance, end of year	$	34,139	$	—	$	—

The Company's policy is to record interest and penalties related to income taxes as a component of income tax expense. The Company recorded no interest or penalties related to uncertain tax positions at December 31, 2011, 2010 and 2009. If recognized, $32.0 million of unrecognized tax benefits would impact the effective tax rate. Based upon the timing and status of its current examinations by taxing authorities, the Company does not believe that it is reasonably possible that any changes to the balance of unrecognized tax benefits occurring within the next 12 months will result in a significant change to the results of operations, financial condition or liquidity. In addition, the Company does not anticipate that there will be additional payments made or refunds received within the next 12 months with respect to the years under audit.

The earliest federal tax year open for examination is 2008. The earliest open years in the Company's major state tax jurisdictions are 1998 and 2005 for Connecticut and New York, respectively. The Company does not believe that any adjustment from any open tax year will result in a material change in the Company's financial position.