INCOME TAXES

Acacia’s provision for income taxes consists of the following (in thousands):



	2011		2010		2009

Current:
Federal	$	179	$	—	$	—
State taxes	943		1,473		209
Foreign taxes	7,586		267		—
	$	8,708	$	1,740	$	209

The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following at December 31, 2011 and 2010 (in thousands):



	2011			2010

Deferred tax assets:
Net operating loss and capital loss carryforwards and credits	$	7,626		$	13,988
Amortization and depreciation	6,252			5,702
Stock compensation	2,665			1,595
Basis of investments in affiliates	1,375			1,344
Accrued liabilities and other	471			550
Unrealized loss on short-term investments	746			—
State taxes	124			5
Intangibles	—			100
Other	278			—
Total deferred tax assets	19,537			23,284
Less: valuation allowance	(19,537		)	(23,284		)
Net deferred taxes	$	—		$	—

A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows:



	2011		2010		2009

Statutory federal tax rate	35	%	34	%	34	%
State income and foreign taxes, net of federal tax effect	27	%	5	%	(4	)%
Foreign tax credit	(25	)%	—		—
Noncontrolling interests in operating subsidiaries	(1	)%	(3	)%	40	%
Equity compensation	—		(1	)%	(1	)%
Non deductible permanent items	4	%	—		—
Expired net operating loss carryforwards	1	%	1	%	—
Valuation allowance	(12	)%	(32	)%	(73	)%
	29	%	4	%	(4	)%

At December 31, 2011, Acacia has established a full valuation allowance against its net deferred tax assets, due to management’s determination that the criteria for recognition have not been met. At December 31, 2011, Acacia had U.S. federal and state income tax NOLs totaling approximately $69,062,000 and $61,493,000, expiring between 2020 and 2030, and 2015 and 2030, respectively, for which $11,302,000 and $3,911,000 of federal and state net operating losses are included as a deferred tax asset which will be credited to additional paid-in capital when realized as a reduction of taxes payable on Acacia's tax return. In addition, $57,760,000 and $33,108,000 of federal and state net operating losses are not included as a deferred tax asset and will be credited to additional paid-in capital when realized as a reduction of taxes payable on Acacia's tax return as they relate to unrecognized excess tax benefits. As of December 31, 2011, $3,956,000 and $228,000 of the valuation allowance related to the tax benefits of stock option deductions included in Acacia's federal and state NOLs deferred tax asset, respectively.

The Company has elected to utilize the “with-and-without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit has reduce taxes payable. Under this approach, the windfall tax benefits would be recognized in additional paid in capital only if an incremental tax benefit is realized after considering all other tax benefits presently available to the Company. Accordingly, the Company has $7,625,000 of foreign tax credits (expiring between 2020 and 2021) at December 31, 2011, and $6,300,000 of these credits have not been recorded as a deferred tax asset as the benefit will be credited to additional paid in capital when realized as a reduction of tax payable on Acacia's tax returns.

The increase in the Company's effective tax rate for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily reflects the impact of foreign withholding taxes totaling $7.6 million, which were withheld by the applicable foreign tax authority pursuant to the requirements of the applicable income tax convention, on payments in connection with certain licensing arrangements executed during fiscal year 2011. In general, foreign taxes withheld may be claimed as a deduction on future U.S. corporate income tax returns, or as a credit against future U.S. income tax liabilities, subject to certain limitations.

The increase in the Company's tax expense for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily reflects the impact of the suspension of the use of NOLs in California and the calculation of tax expense for financial reporting purposes without the excess tax benefit related to the exercise and vesting of equity-based incentive awards during the year ended December 31, 2010.

The deductions related to the exercise and vesting of equity-based incentive awards during the periods presented are, in general, available to offset taxable income on Acacia's consolidated tax returns (subject to suspension of use for certain tax years in California, as described below). Accordingly, the excess tax benefit related to the exercise and vesting of equity-based incentive awards for the periods presented, was credited to additional paid-in capital, not taxes payable. The actual tax benefit realized for excess tax deductions resulting from the exercise and vesting of equity-based incentive awards (noncash tax expense) totaled $583,000 and $1,302,000 for the years ended December 31, 2011 and 2010, respectively.

In October 2010, the State of California passed a state budget including provisions furthering the suspension of the use of NOLs, for the 2010 and 2011 tax years. As a result, California State NOLs are not available to offset California taxable income for the 2010 or 2011 tax years.

In connection with a review of historical NOLs during the year ended December 31, 2011, Acacia has reduced NOLs related to the 2000 tax year by approximately $10 million due to uncertainty of realization in future periods. Acacia retroactively corrected its deferred tax asset balances and the related valuation allowance in the table above by approximately $3.5 million. There was no other impact to the financial statements for this correction. Management concluded this correction was not material to the annual financial statements.

The U.S. Internal Revenue Service is auditing our 2009 Federal consolidated income tax return. The audit is in process and no findings or adjustments have been proposed by the IRS.