7.	Income Taxes

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

	2016		2015		2014
Domestic	$	98,966	$	93,390	$	70,737
Foreign		1,033		2,951		(9,215	)
Total	$	99,999	$	96,341	$	61,522

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

	2016			2015			2014
Current:
Federal	$	31,409		$	41,002		$	20,374
State		3,819			5,227			2,443
Foreign		4,639			3,651			2,953
		39,867			49,880			25,770
Deferred:
Federal		(2,229	)		(14,611	)		1,139
State		276			(1,147	)		837
Foreign		(797	)		(348	)		(1,935	)
		(2,750	)		(16,106	)		41
Total income tax provision	$	37,117		$	33,774		$	25,811

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):

	2016			2015			2014
Provision at Federal rate of 35%	$	35,000		$	33,719		$	21,533
State income taxes, net of Federal impact		2,662			2,652			2,132
Research and experimentation credits		(71	)		(2,135	)		(450	)
Tax uncertainties		(1,597	)		(166	)		187
Section 199 manufacturing deduction		(4,060	)		(2,884	)		(1,936	)
Foreign rate differential		857			688			2,847
Valuation allowance for deferred tax assets		1,287			919			3,602
Other impact of foreign operations		2,157			283			(3,555	)
Other		882			698			1,451
Total income tax provision	$	37,117		$	33,774		$	25,811

We have undistributed earnings of approximately $43 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.

Deferred Income Taxes. Net deferred income tax assets as of December 31, 2016 and 2015 are as follows (in thousands):

	2016			2015
Deferred income tax assets	$	65,690		$	77,270
Deferred income tax liabilities		(33,748	)		(42,576	)
Valuation allowance		(17,823	)		(17,414	)
Net deferred income tax assets	$	14,119		$	17,280

The components of our net deferred income tax assets (liabilities) as of December 31, 2016 and 2015 are as follows (in thousands):

	2016			2015
Net deferred income tax assets:
Accrued expenses and reserves	$	13,252		$	14,001
Stock-based compensation		5,066			5,528
Software		912			602
Client contracts and related intangibles		(590	)		(2,079	)
Goodwill		(8,336	)		(7,590	)
Net operating loss carryforwards		36,123			38,726
Property and equipment		(8,672	)		(7,244	)
Convertible debt securities		(16,094	)		(16,853	)
Deferred revenue		3,556			4,268
Facility abandonments		2,273			2,374
Contingent payments		848			849
Other		3,630			2,294
Total deferred income tax assets		31,968			34,876
Less: valuation allowance		(17,750	)		(17,414	)
Net deferred income tax assets	$	14,218		$	17,462
Net deferred income tax liabilities:
Other	$	(26	)	$	(182	)
Total deferred income tax liabilities		(26	)		(182	)
Less: valuation allowance		(73	)		-
Net deferred income tax liabilities	$	(99	)	$	(182	)

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, 2016, 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, 2016, we have deferred income tax assets related to state and foreign income tax jurisdictions of $2.6 million and $27.6 million, respectively, and have established valuation allowances against those deferred income tax assets of $2.5 million and $15.4 million, respectively.

As of December 31, 2016 and 2015, we have an acquired U.S. Federal net operating loss (“NOL”) carryforward of approximately $45 million and $50 million, respectively, which will begin to expire in 2023 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, 2016 and 2015, we have: (i) state NOL carryforwards of approximately $63 million for both years, which will expire beginning in 2017 and end in 2037; and (ii) foreign subsidiary NOL carryforwards of approximately $87 million and $91 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 2011, we paid cash of approximately $6 million related to the deferred income tax liabilities associated with the 2004 Convertible Debt Securities repurchased in 2011. In 2016 and 2015, we paid cash of $5.6 million in each of the years 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 $11 million will be paid ratably over the next two 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):

	2016			2015			2014
Balance, beginning of year	$	4,079		$	3,417		$	3,713
Additions based on tax positions related to current year		—			150			351
Settlements		(1,893	)		—			—
Lapse of statute of limitations		(122	)		—			—
Additions for tax positions of prior years		370			925			30
Reductions for tax positions of prior years		(543	)		(413	)		(677	)
Balance, end of year	$	1,891		$	4,079		$	3,417

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 $1.9 million, $4.1 million, and $3.4 million of liability for unrecognized tax benefits as of December 31, 2016, 2015, and 2014, we had $0.4 million, $0.3 million, and $0.2 million, respectively, of income tax-related accrued interest, net of any federal benefit of deduction. If recognized, the $1.9 million of unrecognized tax benefits as of December 31, 2016, 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. During 2016, the U.S. Internal Revenue Service (“IRS”) completed its audits of our 2010 through 2012 tax years and in December 2016 we made an additional payment of approximately $8 million and entered into an agreement with the IRS closing the audits for those tax years. We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $0.3 million over the next twelve months due to completion of audits and the expiration of statute of limitations.