9. Income Taxes

Income Tax Provision/(Benefit). The components of net income from continuing operations before income taxes are as follows (in thousands):


	2011			2010			2009
Domestic	$	89,791		$	35,861		$	63,369
Foreign		(13,819	)		(2,188	)		—

Total	$	75,972		$	33,673		$	63,369

The income tax provision related to continuing operations consists of the following (in thousands):


	2011		2010			2009
Current:
Federal	$	25,096	$	5,984		$	1,745
State		111		1,802			940
Foreign		3,554		210			—

		28,761		7,996			2,685

Deferred:
Federal		3,190		1,514			16,253
State		384		1,926			2,569
Foreign		1,355		(192	)		—

		4,929		3,248			18,822

Total income tax provision	$	33,690	$	11,244		$	21,507

The difference between our income tax provision computed at the statutory Federal income tax rate and our financial statement income tax related to continuing operations is summarized as follows (in thousands):


	2011			2010			2009
Provision at Federal rate of 35%	$	26,590		$	11,785		$	22,179
State income taxes, net of Federal impact		322			2,423			2,281
Research and experimentation credits		(3,036	)		(2,830	)		(2,152	)
Resolution of certain tax uncertainties		—			(4,198	)		(465	)
Section 199 manufacturing deduction		(972	)		(1,248	)		(344	)
Impact of foreign operations		10,429			784			—
Loss on foreign currency transactions		—			1,779			—
Acquisition costs		—			2,450			—
Other		357			299			8

Total income tax provision	$	33,690		$	11,244		$	21,507

We have undistributed earnings of approximately $22 million from certain foreign subsidiaries. We intend to indefinitely reinvest these foreign earnings, therefore, a provision has not been made for income taxes that might be payable upon remittance of such earnings. Determination of the amount of unrecognized deferred tax liability on unremitted foreign earnings is not practicable.

Deferred Income Taxes. Net deferred income tax liabilities as of December 31, 2011 and 2010 are as follows:


	2011			2010
Deferred income tax assets	$	73,134		$	75,506
Deferred income tax liabilities		(61,603	)		(62,119	)
Valuation allowance		(18,729	)		(23,105	)

Net deferred income tax liabilities	$	(7,198	)	$	(9,718	)

The components of our net deferred income tax assets (liabilities) as of December 31, 2011 and 2010 are as follows (in thousands):


	2011			2010
Net current deferred income tax assets:
Accrued expenses and reserves Convertible debt securities	$	18,042 —		$	17,180 (5,777	)
Stock-based compensation		3,723			3,978

Total current deferred income tax assets		21,765			15,381
Less: valuation allowance		(1,783	)		(1,529	)

Net current deferred income tax assets	$	19,982		$	13,852

Net non-current deferred income tax assets:
Client contracts and related intangibles	$	(936	)	$	(1,189	)
NOL carryforwards		4,778			6,352
Property and equipment		5,164			4,126
Deferred revenue		559			571
Facility abandonment		926			906
Other		133			286

Total non-current deferred income tax assets		10,624			11,052
Less: valuation allowance		(9,616	)		(1,375	)

Net non-current deferred income tax assets	$	1,008		$	9,677

Net non-current deferred income tax liabilities:
Purchased research and development	$	1,811		$	4,532
Software		(135	)		(654	)
Client contracts and related intangibles		(7,041	)		(2,028	)
Goodwill		(3,506	)		(2,481	)
NOL carryforwards		31,981			28,814
Property and equipment		(8,122	)		(6,797	)
Convertible debt securities		(41,863	)		(43,193	)
Deferred revenue		1,902			5,933
Contingent payments		897			891
Facility abandonment		1,160			1,337
Other		2,058			600

Total non-current deferred income tax liabilities		(20,858	)		(13,046	)
Less: valuation allowance		(7,330	)		(20,201	)

Net non-current deferred income tax liabilities	$	(28,188	)	$	(33,247	)

We regularly assess the likelihood of the future realization of our deferred income tax assets. To the extent we believe that it is more likely than not that a deferred income tax asset will not be realized, a valuation allowance is established. As of December 31, 2011, we believe that between: (i) carryback opportunities to past periods with taxable income; and (ii) sufficient taxable income to be generated in the future, we will realize 100% of the benefit of our U.S. Federal deferred income tax assets, thus no valuation allowance has been established. As of December 31, 2011, we have deferred income tax assets related to state and foreign income tax jurisdictions of approximately $3 million and $33 million, respectively, and have established valuation allowances against those deferred income tax assets of approximately $2 million and $17 million, respectively.

As of December 31, 2011 we have an acquired U.S. Federal NOL carryforward of approximately $51 million, which will begin to expire in 2019 and can be utilized through 2030. The acquired U.S. Federal NOL carryforward is attributable to the pre-acquisition periods of acquired subsidiaries. The annual utilization of this U.S. Federal NOL carryforward is limited pursuant to Section 382 of the Internal Revenue Code of 1986, as amended. In addition, as of December 31, 2011, we have: (i) state NOL carryforwards of approximately $67 million, which will expire beginning in 2012 and ending in 2030; and (ii) foreign subsidiary NOL carryforwards of approximately $57 million, which will expire beginning in 2015, with a portion of the losses available over an indefinite period of time.

Our 2004 Convertible Debt Securities, which we fully extinguished in 2011, were subject to special U.S. Treasury regulations governing contingent payment debt instruments. These regulations allowed us to take a tax deduction for interest expense on our U.S. Federal income tax return at a constant rate of 9.09% (subject to certain adjustments), compounded semi-annually, which represented the estimated yield on comparable non-contingent, non-convertible, fixed-rate debt instruments with terms and conditions otherwise similar to the 2004 Convertible Debt Securities. This interest expense tax deduction was greater than the interest expense reflected in the accompanying Income Statements, thus creating a deferred income tax liability. The extinguishment of the 2004 Convertible Debt Securities resulted in: (i) the holders of the 2004 Convertible Debt Securities not having the ability to achieve the 9.09% target yield, and (ii) a requirement for us to pay an amount equal to the cumulative deferred income tax liability to the U.S. tax authorities (without interest or penalties). During the third and fourth quarters of 2011, we paid cash of approximately $6 million related to the deferred income tax liabilities associated with the 2004 Convertible Debt Securities repurchased in June and July of 2011. Beginning in 2014, we will pay cash of approximately $31 million ratably over five years related to the deferred income tax liabilities associated with the 2004 Convertible Debt Securities repurchased in 2009 and 2010.

Accounting for Uncertainty in Income Taxes. We are required to estimate our income tax liability in each jurisdiction in which we operate, including U.S. Federal, state and foreign income tax jurisdictions. Various judgments and estimates are required in evaluating our tax positions and determining our provisions for income taxes. During the ordinary course of business, there are certain transactions and calculations for which the ultimate income tax determination may be uncertain. In addition, we may be subject to examination of our income tax returns by various tax authorities, which could result in adverse outcomes. For these reasons, we establish a liability associated with unrecognized tax benefits based on estimates of whether additional taxes and interest may be due. This liability is adjusted based upon changing facts and circumstances, such as the closing of a tax audit, the expiration of a statute of limitations or the refinement of an estimate.

A reconciliation of the beginning and ending balances of our liability for unrecognized tax benefits is as follows (in thousands):


	2011			2010			2009
Balance, beginning of year	$	954		$	4,131		$	4,672
Additions based on tax positions related to current year		—			—			1,289
Additions for tax positions of prior years		3,249			954			365
Reductions for tax positions of prior years		(89	)		(4,131	)		—
Lapse of statute of limitations		—			—			(2,195	)

Balance, end of year	$	4,114		$	954		$	4,131

We recognize interest and penalty expense associated with our liability for unrecognized tax benefits as a component of income tax expense in our Income Statements. In addition to the $4.1 million, $1.0 million and $4.1 million of liability for unrecognized tax benefits as of December 31, 2011, 2010 and 2009 respectively, we had $0.1 million, $0.1 million and $0.4 million respectively, of income tax-related accrued interest. If recognized, the $4.1 million of unrecognized tax benefits as of December 31, 2011, would favorably impact our effective tax rate in future periods.

We file income tax returns in the U.S. Federal jurisdiction, various U.S. state and local jurisdictions, and many foreign jurisdictions. The U.S., U.K., and Ireland are the main taxing jurisdictions in which we operate. The years open for audit vary depending on the taxing jurisdiction. As of December 31, 2011, the U.S. Internal Revenue Service had completed audits, closing years 2006 through 2008, and the statute of limitations has expired in our major state jurisdictions of Nebraska, Colorado and Florida for years prior to 2002, 2007, and 2008, respectively. We are currently under audit in the U.K. for the accounting periods beginning October 1, 2005 and ending September 30, 2010. We have not been audited in Ireland and are subject to record retention requirements back to 2006.