Note 16 — Income Taxes

The (loss) gain before income taxes was as follows for the years ended December 31 (dollar amounts in thousands):

	2012		2011			2010
Domestic	$(130,843	)	$	(4,653	)	$	(12,512	)
Foreign	249		1,400			1,661
Total	$(130,594	)	$	(3,253	)	$	(10,851	)

The provision for income taxes varied from the federal statutory rate applied to total income as follows for the years ended December 31 (dollar amounts in thousands):

	2012			2011			2010
Federal income tax (benefit) computed at statutory rate (35%)	$	(45,708	)	$	(1,139	)	$	(3,798	)
State income taxes, net of federal benefit	214			263			463
Other non-deductible items	258			334			384
Goodwill writeoff	29,057			-			-
Net change to valuation allowance, excluding change due to acquisitions	19,872			(2,080		)	3,785
Provision (benefit) for income taxes	$	3,693		$	(2,622	)	$	834

The provision for income taxes was as follows for the years ended December 31 (dollar amounts in thousands):

	2012		2011			2010
Current:
Federal	$	-	$	-		$	-
State	330		405			713
Foreign	107		229			121
	437		634			834
Deferred:
Federal	$	-	$	-		$	-
State	-		-			-
Foreign	3,256		(3,256		)	-
	3,256		(3,256		)	-

Total income tax provision (benefit)	$	3,693	$	(2,622	)	$	834

Deferred income taxes, which result from the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, consisted of the following at December 31 (dollar amounts in thousands):

	2012			2011			2010
Deferred tax assets:
Tax net operating loss and tax credit carryforwards	$	242,416		$	227,870		$	227,804
Reserves and accruals	1,893			3,290			3,195
Net deferred revenue	6,677			7,812			7,356
Other tax assets	8,634			8,208			9,811
Valuation allowance	(252,240		)	(232,368		)	(237,848		)
Total deferred tax assets	7,380			14,812			10,318

Deferred tax liabilities:
Tax over book depreciation/amortization	(7,380		)	(11,556		)	(10,318		)
Total deferred tax liabilities	(7,380		)	(11,556		)	(10,318		)

Net deferred tax asset	$	-		$	3,256		$	-

We evaluated the realization of deferred tax assets and reduced the carrying amount of these deferred tax assets by a valuation allowance. We considered various factors when assessing the future realization of our deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes and other relevant factors. Significant judgment is required in making this assessment. Our deferred tax assets decreased $3.3 million because the Company believes it is more likely than not that the deferred tax assets in Canada will not be realized due to changes in expectations and a revision of our forecasts during the fourth quarter of 2012. The remaining valuation allowance is primarily attributable to uncertainty regarding the realization of U.S. federal, state and other foreign net operating losses and tax credit carryforward benefits.

Our valuation allowance increased $19.9 million in 2012. This was primarily due to an increase in federal net operating losses and increases on other deferred tax assets.

At December 31, 2012, we had net operating loss carryforwards for United States federal income tax purposes aggregating approximately $658.6 million and $422.3 million for United States state and local income tax purposes. There were also approximately $3.3 million of Canadian federal net operating loss carryforwards. At December 31, 2012, combined federal alternative minimum tax credit carryforwards and foreign tax credits totaled $0.7 million, available to offset future regular tax liabilities. A portion of these loss carryforwards expire each year unless utilized. There are no tax loss carryforwards expiring in the next five years.

Current federal and state tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation. Accordingly, our ability to utilize net operating losses and tax credit carryforwards generated prior to the 2007 acquisition may be limited as a result of such “ownership change,” as defined. In addition, the recapitalization of the Company within the Chapter 11 reorganization plan may further limit the ability to utilize net operation losses and tax credit carry forwards.

The Company follows the provisions codified under FASB ASC Topic 740, “Income Taxes,” which clarify the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribed a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In instances where a company has taken or expects to take a tax position in its tax return, and the company believes it is more likely than not such tax position will be upheld by the relevant taxing authority, the company may record a benefit for such tax position in its consolidated financial statements. We are not currently under audit in any income tax jurisdiction and have not signed any extensions to extend the statute of limitations to complete an audit. The Company’s tax returns remain open for all tax years after 2007 and, therefore, may be subject to audit in future periods.

The impact - increase (decrease) - on our Consolidated Balance Sheets as of December 31, 2012 is as follows (dollars amounts in thousands):

	Beginning Balance		Additions		Deductions for lapse of statute of limitations			Ending Balance

Year Ended December 31, 2011:
Uncertain Tax Benefit	$	490	$	-	$	(150	)	$	340

Year Ended December 31, 2012:
Uncertain Tax Benefit	$	340	$	-	$	(270	)	$	70

Due to our net operating loss position, the unrecognized tax benefit has the effect of reducing our deferred tax asset and related valuation allowance. The total amount of unrecognized tax benefits which, if recognized, would affect the effective tax rate at December 31, 2012, is $70,000. Unrecognized tax benefits were reduced in 2011 and 2012 by $150,000 and $270,000, respectively, as a result of a tax position taken and the expiration of statutory periods of assessment. We recognize interest and penalties related to unrecognized tax benefits in tax expense.