9. INCOME TAXES

The Company's pre-tax loss for financial statement purposes was $43.2 million, $32.5 million and $46.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. The income tax (benefit) expense consisted of the following:


	Years Ended December 31,
	2011			2010			2009
Current:
Federal	$	(4,309	)	$	5,012		$	441
State		(22	)		(3,440	)		7,831

Total current		(4,331	)		1,572			8,272
Deferred:
Federal		—			—			—
State		—			—			—

Total deferred		—			—			—

Total income tax (benefit) expense	$	(4,331	)	$	1,572		$	8,272

A reconciliation of the statutory Federal income tax rate of 35% to the Company's effective income tax rates is as follows:


	Years Ended December 31,
	2011			2010			2009
Federal tax provision at statutory rate		35.00	%		35.00	%		35.00	%
State taxes (net of Federal benefit)		2.27	%		(4.17	%)		6.91	%
Change in reserve		(0.94	%)		(1.84	%)		—
Orphan drug credit		(0.70	%)		(1.06	%)		—
Stock-based compensation		0.06	%		(2.03	%)		(1.26	%)
Change in valuation allowance		(29.94	%)		(39.65	%)		(66.60	%)
Research and development credits		7.05	%		9.72	%		6.54	%
Net proceeds from stockholder securities law settlement		(2.43	%)		—			—
Other		(0.33	%)		(0.81	%)		1.52	%

Benefit (provision) for taxes		10.04	%		(4.84	%)		(17.89	%)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax basis of assets and liabilities. Significant components of the Company's deferred tax assets for Federal and state income taxes are follows:


	December 31,
	2011			2010
Deferred tax assets:
Deferred revenue	$	54,116		$	76,638
Net operating loss carry forward		30,767			4,786
Stock-based compensation		9,872			8,243
Research and development credits		11,280			3,280
Depreciation, amortization and other		133			120
Accruals and reserves		552			729

Total deferred tax assets		106,720			93,796
Less: valuation allowance		(106,720	)		(93,796	)

Net deferred tax assets	$	—		$	—

The income tax benefit for 2011 was approximately $4.3 million, which represents an effective tax rate of 10.04%. The income tax benefit mainly consists of a benefit due to the ability to carry back the current year Federal net operating loss to the prior two tax years. The difference in the effective tax rate for 2011 as compared to 2010 is primarily attributable to the benefit in 2011 due to the ability to carry back the current year Federal net operating loss to the prior two tax years.

The income tax provision for 2010 was approximately $1.6 million, which mainly consists of the Federal and state income tax and represents an effective tax rate of (4.84)%. The decrease in the effective tax rate in 2010 as compared to 2009 was primarily attributable to the state tax benefit recognized in 2010 from the 2009 California income tax refund.

During the year ended December 31, 2010, the Company accelerated the recognition of revenue related to the Astellas non-refundable, up-front payment received in 2009 for income tax purposes, while such revenue was deferred for financial statement purposes. The Company also accelerated the recognition of the milestone payment of $10.0 million received in October 2010 from Astellas for income tax purposes, while such revenue was deferred for financial statement purposes. Due to the suspension of California Net Operating Loss utilization in 2010, the Company was not able to utilize the net operating loss carryforwards to offset the taxable income in 2010.

Due to the Company's lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $12.9 million, $12.9 million and $30.8 million during the years ended December 31, 2011, 2010 and 2009, respectively.

The following table summarizes activity related to the Company's gross unrecognized tax positions:


	December 31,
	2011			2010		2009
Balance as of beginning of year	$	4,128		$	889	$	358
Additions based on tax positions related to the current year		500			393		429
Additions based on tax position related to prior year		109			2,846		102
Decreases based on tax positions related to prior year		(801	)		—		—

Balance as of end of year	$	3,936		$	4,128	$	889

Approximately $0.6 million and $1.2 million of the total gross unrecognized tax benefits at December 31, 2011 and 2010, respectively, if recognized, would affect the effective tax rate. The Company does not anticipate a material change in unrecognized tax benefits during the next 12 months.

As a result of the Company's net operating loss carryforwards, all of its tax years are subject to Federal and state examination. At December 31, 2011, there are no Federal or state tax audits in process. The Company was under audit by the Internal Revenue Service, or IRS, for the tax year of 2008. The audit was closed in 2011 with no adjustment.

Federal and state tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an "ownership change" for tax purposes, as defined in Internal Revenue Code Section 382. The Company completed Section 382 studies through December 31, 2010, and concluded that ownership changes occurred in 2004, 2007 and 2010. The ownership changes did not result in a reduction of its net operating loss or in its research and development credits expiring unused. If additional ownership change occurs, the utilization of net operating loss and credit carryforwards could be significantly reduced.

As of December 31, 2011, the Company has Federal net operating loss carryforwards of approximately $77.3 million, which will expire in 2031, if not utilized. Also, as of December 31, 2011, the Company has state net operating loss carryforwards of approximately $154.1 million, which will expire at various dates between the years 2015 and 2031, if not utilized.

The Company has Federal research and development credit and Orphan Drug credit carryforwards of approximately $13.3 million as of December 31, 2011. The Federal tax credit carryforwards expire in the year 2024 through 2031, if not used. In addition, the Company has California research and development credit carryforwards of approximately $1.4 million as of December 31, 2011. The California research credits do not expire.