9.	Income Taxes

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

	2013			2012			2011
Domestic	$	63,278		$	103,917		$	89,791
Foreign		(1,759	)		(26,693	)		(13,819	)
Total	$	61,519		$	77,224		$	75,972

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

	2013			2012			2011
Current:
Federal	$	7,260		$	32,121		$	25,096
State		453			4,133			111
Foreign		4,273			2,658			3,554
		11,986			38,912			28,761
Deferred:
Federal		1,130			(832	)		3,190
State		2,329			(3,977	)		384
Foreign		(5,277	)		(5,758	)		1,355
		(1,818	)		(10,567	)		4,929
Total income tax provision	$	10,168		$	28,345		$	33,690

Included in the deferred state income tax provision amount for 2012 in the table above is $(3.1) million related to the impact of an enacted state income tax law change.

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):

	2013			2012			2011
Provision at Federal rate of 35%	$	21,532		$	27,028		$	26,590
State income taxes, net of Federal impact		1,808			101			322
Research and experimentation credits		(16,683	)		(3,651	)		(3,036	)
Tax uncertainties		4,878			1,333			—
Section 199 manufacturing deduction		(2,263	)		(4,246	)		(972	)
Foreign rate differential		1,133			3,108			3,564
Valuation allowance for deferred tax assets		(3,312	)		3,550			3,395
Other impact of foreign operations		2,088			672			3,470
Other		987			450			357
Total income tax provision	$	10,168		$	28,345		$	33,690

We have undistributed earnings of approximately $32 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 because of the complexities of the hypothetical calculation.

Our research and experimentation (R&D) credits increased from 2012 to 2013 primarily due to the recording of approximately $6 million of R&D credits generated in 2012 but recorded in 2013, due to the timing of the execution of the American Taxpayer Relief Act of 2012, and the recognition of approximately $5 million of incremental R&D credits due to revised calculations for development activities in 2009 and 2010. The 2012 R&D credit amount above is the result of a revised calculation for 2011. The 2013 provision for valuation allowance for deferred tax assets includes an approximately $6 million reduction of certain tax allowances related to our ability to realize certain foreign net operating losses.

Deferred Income Taxes. Net deferred income tax liabilities as of December 31, 2013 and 2012 are as follows (in thousands):

	2013			2012
Deferred income tax assets	$	68,829		$	90,374
Deferred income tax liabilities		(48,830	)		(64,320	)
Valuation allowance		(17,741	)		(22,888	)
Net deferred income tax liabilities	$	2,258		$	3,166

The components of our net deferred income tax assets (liabilities) as of December 31, 2013 and 2012 are as follows (in thousands):

	2013			2012
Net current deferred income tax assets:
Accrued expenses and reserves	$	12,429		$	19,322
Stock-based compensation		3,929			4,354
Total current deferred income tax assets		16,358			23,676
Less: valuation allowance		(1,273	)		(1,432	)
Net current deferred income tax assets	$	15,085		$	22,244
Net non-current deferred income tax assets:
Client contracts and related intangibles	$	(952	)	$	(8,229	)
NOL carryforwards		11,505			15,482
Property and equipment		4,097			12,999
Deferred revenue		1,209			1,700
Facility abandonment		189			606
Other		678			44
Total non-current deferred income tax assets		16,726			22,602
Less: valuation allowance		(9,279	)		(20,006	)
Net non-current deferred income tax assets	$	7,447		$	2,596
Net non-current deferred income tax liabilities:
Purchased R&D	$	-		$	222
Software		88			269
Client contracts and related intangibles		(4,104	)		393
Goodwill		(3,846	)		(4,207	)
NOL carryforwards		27,500			25,276
Property and equipment		(4,812	)		(13,609	)
Convertible debt securities		(35,116	)		(37,415	)
Deferred revenue		4,470			4,858
Contingent payments		836			836
Facility abandonment		1,892			1,413
Other		7			1,740
Total non-current deferred income tax liabilities		(13,085	)		(20,224	)
Less: valuation allowance		(7,189	)		(1,450	)
Net non-current deferred income tax liabilities	$	(20,274	)	$	(21,674	)

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, 2013, 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, 2013, we have deferred income tax assets related to state and foreign income tax jurisdictions of approximately $2.1 million and $33.2 million, respectively, and have established valuation allowances against those deferred income tax assets of approximately $1.8 million and $15.9 million, respectively.

As of December 31, 2013 and 2012, we have an acquired U.S. Federal NOL carryforward of approximately $50 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, 2013 and 2012, we have: (i) state NOL carryforwards of approximately $50 million and $54 million, respectively, which will expire beginning in 2014 and end in 2034; and (ii) foreign subsidiary NOL carryforwards of approximately $90 million and $89 million, respectively, which will expire beginning in 2016, 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 $29 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):

	2013			2012			2011
Balance, beginning of year	$	4,029		$	4,114		$	954
Additions based on tax positions related to current year		1,292			276			—
Additions for tax positions of prior years		4,597			933			3,249
Reductions for tax positions of prior years		(401	)		(764	)		(89	)
Lapse of statute of limitations		-			(530	)		—
Balance, end of year	$	9,517		$	4,029		$	4,114

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 $9.5 million, $4.0 million, and $4.1 million of liability for unrecognized tax benefits as of December 31, 2013, 2012, and 2011, we had $0.3 million, $0.2 million, and $0.1 million, respectively, of income tax-related accrued interest. If recognized, the $9.5 million of unrecognized tax benefits as of December 31, 2013, 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 Australia are the main taxing jurisdictions in which we operate. The years open for audit vary depending on the taxing jurisdiction. As of December 31, 2013, the U.S. Internal Revenue Service had commenced an audit of our 2010 tax year. In addition, the U.S. Federal statute of limitations has expired for periods prior to 2010, and the statute of limitations has expired in our major state jurisdictions of Nebraska, Colorado and Florida for years prior to 2002, 2009, and 2010, respectively. In 2012, we completed our audit in the U.K. for the accounting periods beginning October 1, 2005 and ending September 30, 2010. We have been audited in Australia for years prior to 2007. In addition, the statute of limitations has expired in Australia for years prior to 2009.