Income Taxes

The domestic and foreign components of income before provision for income taxes were as follows (in thousands):



	Year Ended December 31,
	2011		2010			2009
Domestic	$	215,437	$	202,522		$	178,610
Foreign	65		(71		)	(102		)
	$	215,502	$	202,451		$	178,508

The provision for income taxes was comprised of the following components (in thousands):



	Year Ended December 31,
	2011			2010			2009
Current provision (benefit):
Federal	$	75,505		$	63,195		$	57,773
State	10,601			9,108			7,668
Foreign	293			348			313
	86,399			72,651			65,754
Deferred provision (benefit):
Federal	(3,209		)	3,894			723
State	(97		)	983			(996		)
	(3,306		)	4,877			(273		)
Non-current provision (benefit) resulting from allocating tax benefits directly to additional paid in capital and changes in liabilities:
Federal	(787		)	(474		)	1,067
State	(116		)	274			288
Foreign	6			27			(92		)
	(897		)	(173		)	1,263
Total provision for income taxes	$	82,196		$	77,355		$	66,744

For the year ended December 31, 2011, the non-current provision for income taxes includes $0.2 million for amounts arising from the exercise of stock options allocated as equity; $(0.4) million arising from the cancellation of vested stock options allocated to equity and valuation differences between grant and vesting dates on restricted stock allocated to equity; and $(0.7) million related to liabilities for uncertain tax positions (including $(0.2) million for use of a state net operating loss). For the year ended December 31, 2010, the non-current provision for income taxes includes $0.1 million for amounts arising from the exercise of stock options allocated as equity; $(0.5) million arising from the cancellation of vested stock options allocated to equity; and $0.2 million related to liabilities for uncertain tax positions. For 2009, the non-current provision for income taxes includes $1.1 million from amounts arising from the exercise of stock options allocated as equity, and $0.2 million related to liabilities for uncertain tax positions.

The provision for income taxes varies from the amount of income tax determined by applying the applicable U.S. statutory tax rate to pre-tax income and the following:



	Year Ended December 31,
	2011		2010		2009
Statutory U.S. Federal tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in rate resulting from:
State taxes—net of Federal benefit	3.1	%	3.3	%	3.1	%
Other, net	—	%	(0.1	)%	(0.7	)%
Effective tax rate	38.1	%	38.2	%	37.4	%

The Company paid income taxes, net of refunds, of $92.9 million, $77.2 million and $68.9 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. A summary of the tax effect of the significant components of deferred income taxes follows (in thousands):



	December 31,
	2011			2010
Gross deferred tax liabilities:
Unbilled receivables	$	3,560		$	9,673
Goodwill and other assets	71,979			59,708
Property and equipment	—			2,324
Total deferred tax liabilities	75,539			71,705

Gross deferred tax assets:
Property and equipment	(2,753		)	—
Capital and state operating loss carryforwards	(86		)	(138		)
Retirement and other liabilities	(28,823		)	(26,220		)
Allowance for potential contract losses and other contract reserves	(3,728		)	(3,316		)
Total deferred tax assets	(35,390		)	(29,674		)
Net deferred tax liabilities	$	40,149		$	42,031

The net deferred tax liabilities were increased by adjustments to the purchase accounting on the acquisition of MTCSC, acquired on December 23, 2010, and WINS, acquired on November 15, 2011, by $1.3 million in the year ended December 31, 2011.

The tax benefits associated with nonqualified stock options and disqualifying dispositions of incentive stock options reduced the current taxes payable by $0.2 million in the year ended December 31, 2011 and $0.1 million in year ended December 31, 2010. Such benefits were recorded as an increase to additional paid-in capital.

At December 31, 2011, we had state net operating losses of approximately $0.1 million that expire beginning 2014 through 2030.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):



	December 31,
	2011			2010			2009
Gross unrecognized tax benefits at beginning of year	$	2,519		$	1,680		$	1,516
Increases in tax positions related to prior years	87			508			—
Decreases in tax positions for prior years	(71		)	(26		)	(8		)
Increases in tax positions for current year	269			481			343
Settlements	(508		)	—			—
Lapse in statute of limitations	(961		)	(124		)	(171		)
Acquisitions - increase in tax position for prior years	105			—			—
Gross unrecognized tax benefits at end of year	$	1,440		$	2,519		$	1,680

The total liability for gross unrecognized tax benefits as of December 31, 2011, 2010 and 2009 was $1.4 million, $2.5 million and $1.7 million, respectively. That amount includes $1.1 million, $2.1 million and $1.4 million, respectively, of unrecognized net tax benefits which, if ultimately recognized, would reduce the Company's annual effective tax rate in a future period.

The Company is subject to income taxes in the U.S., various state and foreign jurisdictions. Tax statutes and regulations within each jurisdiction are subject to interpretation and require significant judgment to apply. The Company is no longer subject to U.S., state or non-U.S. income tax examinations by tax authorities for the years before 2007. A German audit, relating to pre-2007 years, was settled in 2009. The Company believes it is reasonably possible that $0.2 million of gross unrecognized tax benefits will be settled within the next year due to expirations of statute of limitations.

The Company recognizes interest accrued, related to net unrecognized tax benefits, in interest expense; and penalties, in general and administrative expenses; for all periods presented. At December 31, 2011, 2010 and 2009, accrued interest and penalties relating to net unrecognized tax benefits were $0.2 million, $0.4 million and $0.3 million, respectively.