7.	Income Taxes

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

	2015		2014			2013
Domestic	$	93,390	$	70,737		$	63,278
Foreign		2,951		(9,215	)		(1,759	)
Total	$	96,341	$	61,522		$	61,519

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

	2015			2014			2013
Current:
Federal	$	41,002		$	20,374		$	12,880
State		5,227			2,443			916
Foreign		3,651			2,953			4,273
		49,880			25,770			18,069
Deferred:
Federal		(14,611	)		1,139			1,130
State		(1,147	)		837			2,329
Foreign		(348	)		(1,935	)		(5,277	)
		(16,106	)		41			(1,818	)
Total income tax provision	$	33,774		$	25,811		$	16,251

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):

	2015			2014			2013
Provision at Federal rate of 35%	$	33,719		$	21,533		$	21,532
State income taxes, net of Federal impact		2,652			2,132			2,109
Research and experimentation credits		(2,135	)		(450	)		(5,754	)
Tax uncertainties		(166	)		187			(269	)
Section 199 manufacturing deduction		(2,884	)		(1,936	)		(2,263	)
Foreign rate differential		688			2,847			1,133
Valuation allowance for deferred tax assets		919			3,602			(3,312	)
Other impact of foreign operations		283			(3,555	)		2,088
Other		698			1,451			987
Total income tax provision	$	33,774		$	25,811		$	16,251

We have undistributed earnings of approximately $40 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.

In the fourth quarter of 2015, we corrected our Financial Statements for an error in the calculation of our research and experimentation income tax credit (“R&D credit”) amount recorded within our 2014, 2013, and 2012 income tax provisions. The error, which relates to the 2009 – 2014 tax years, resulted in the understatement of income tax expense and the overstatement of the net income tax receivable of $1.2 million, $6.1 million, and $1.8 million for each of years ended December 31, 2014, 2013, and 2012 (2013 beginning accumulated earnings), respectively. Due to the timing of claims for certain of the R&D credit amounts, the fiscal year ended December 31, 2013 included the income tax benefits related to not only 2013, but the change in estimate of certain incremental R&D credits claimed for development activities generated in 2009, 2010, and 2012. In none of the individual 2009 – 2014 tax years did the amount of the R&D credit error exceed $1.9 million. We assessed the materiality of the error in accordance with Staff Accounting Bulletin No. 99, Materiality, and determined that the error was immaterial to previously reported amounts contained in our annual report.

Deferred Income Taxes. Net deferred income tax liabilities as of December 31, 2015 and 2014 are as follows (in thousands):

	2015			2014
Deferred income tax assets	$	77,270		$	77,201
Deferred income tax liabilities		(42,576	)		(55,045	)
Valuation allowance		(17,414	)		(20,507	)
Net deferred income tax assets	$	17,280		$	1,649

The components of our net deferred income tax assets (liabilities) as of December 31, 2015 and 2014 are as follows (in thousands):

	2015			2014
Net current deferred income tax assets:
Accrued expenses and reserves	$	14,001		$	10,221
Stock-based compensation		5,528			4,425
Total current deferred income tax assets		19,529			14,646
Less: valuation allowance		(1,394	)		(1,442	)
Net current deferred income tax assets	$	18,135		$	13,204
Net non-current deferred income tax assets:
Software	$	412		$	809
Client contracts and related intangibles		(2,914	)		(5,252	)
Net operating loss carryforwards		15,688			18,527
Property and equipment		7,975			11,470
Deferred revenue		914			550
Facility abandonment		143			262
Other		877			305
Total non-current deferred income tax assets		23,095			26,671
Less: valuation allowance		(14,713	)		(17,781	)
Net non-current deferred income tax assets	$	8,382		$	8,890
Net non-current deferred income tax liabilities:
Software	$	190		$	211
Client contracts and related intangibles		835			3,127
Goodwill		(7,590	)		(6,747	)
Net operating loss carryforwards		23,038			23,298
Property and equipment		(15,219	)		(15,048	)
Convertible debt securities		(16,853	)		(27,708	)
Deferred revenue		3,354			961
Contingent payments		849			840
Facility abandonment		2,231			2,194
Other		1,235			(290	)
Total non-current deferred income tax liabilities		(7,930	)		(19,162	)
Less: valuation allowance		(1,307	)		(1,284	)
Net non-current deferred income tax liabilities	$	(9,237	)	$	(20,446	)

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, 2015, 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, 2015, we have deferred income tax assets related to state and foreign income tax jurisdictions of $2.7 million and $29.7 million, respectively, and have established valuation allowances against those deferred income tax assets of $2.5 million and $14.9 million, respectively.

As of December 31, 2015 and 2014, we have an acquired U.S. Federal net operating loss (“NOL”) carryforward of approximately $50 million and $51 million, respectively, 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, 2015 and 2014, we have: (i) state NOL carryforwards of approximately $63 million and $63 million, respectively, which will expire beginning in 2016 and end in 2036; and (ii) foreign subsidiary NOL carryforwards of approximately $91 million and $96 million, respectively, which will expire beginning in 2017, 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. In 2015, we paid cash of $5.6 million related to the deferred income tax liabilities associated with the 2004 Convertible Debt Securities repurchased in 2009 and 2010. The remaining balance owed of approximately $18 million will be paid ratably over the next three years.

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):

	2015			2014			2013
Balance, beginning of year	$	3,417		$	3,713		$	3,372
Additions based on tax positions related to current year		150			351			173
Additions for tax positions of prior years		925			30			569
Reductions for tax positions of prior years		(413	)		(677	)		(401	)
Balance, end of year	$	4,079		$	3,417		$	3,713

As discussed earlier, in connection with our immaterial correction of our 2014 and 2013 Financial Statements, our liability for unrecognized tax benefits was reduced by $0.4 million and $5.8 million, respectively.

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, $3.4 million, and $3.7 million of liability for unrecognized tax benefits as of December 31, 2015, 2014, and 2013, we had $0.3 million, $0.2 million, and $0.2 million, respectively, of income tax-related accrued interest, net of any federal benefit of deduction. If recognized, the $4.1 million of unrecognized tax benefits as of December 31, 2015, 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, 2014, the U.S. Internal Revenue Service had commenced an audit of our 2010 through 2012 tax years. 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, 2011, and 2012, respectively. In 2012, we completed our audit in the U.K. for the accounting periods beginning October 1, 2005 and ended 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 2011. We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $2.4 million over the next twelve months due to completion of audits and the expiration of statute of limitations.