NOTE 13. INCOME TAXES

The Company’s income before income tax (expense) benefit was $381.3 million and $260.2 million for the years ended December 31, 2015 and 2014, respectively. The Company’s loss before income tax expense was $42.5 million for the year ended December 31, 2013. Since inception, the Company has only generated pre-tax income (losses) in the United States and has not generated any pre-tax income (losses) outside the United States. Income tax (expense) benefit for the periods presented consisted of the following:

	Years Ended December 31,
	2015			2014			2013
Current:
Federal	$	(140,987	)	$	(19,476	)	$	(7	)
State		(3,875	)		(1,496	)		(108	)
Total current		(144,862	)		(20,972	)		(115	)
Deferred:
Federal		8,179			36,917			—
State		90			313			—
Total deferred		8,269			37,230			—
Total income tax (expense) benefit	$	(136,593	)	$	16,258		$	(115	)

During 2015 and 2014, the Company reduced its current Federal and state taxes payable by $100.2 million and $17.0 million, respectively, related to excess tax benefits from stock-based compensation, offsetting additional paid-in capital. In addition, for the year ended December 31, 2015, the Company recorded a credit to additional paid-in capital of $11.8 million related to certain tax impacts of the extinguishment of Convertible Notes. The Company had unrecorded state excess stock-based compensation tax benefits of $3.4 million (tax-effected) as of December 31, 2015. These amounts will be credited to additional paid-in capital when such amounts reduce cash taxes payable.

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,
	2015			2014			2013
Federal tax provision at statutory rate		35.0	%		35.0	%		35.0	%
State taxes (net of Federal benefit)		0.6	%		0.4	%		1.4	%
Stock-based compensation		0.1	%		0.1	%		(0.2	%)
Non-deductible officer compensation		0.2	%		0.1	%		(1.8	%)
Change in valuation allowance		—			(40.5	%)		(52.1	%)
Research and development credits		(0.2	%)		(1.5	%)		17.1	%
Other		0.1	%		0.2	%		0.3	%
Effective income tax rate		35.8	%		(6.2	%)		(0.3	%)

The Company recorded income tax expense of $136.6 million for the year ended December 31, 2015. The Company recorded an income tax benefit of $16.3 million for the year ended December 31, 2014. For the year ended December 31, 2015, the provision for income taxes was higher than the tax computed at the U.S. Federal statutory rate primarily due to state income taxes and non-deductible stock-based compensation, net of Federal research and development credit. For the year ended December 31, 2014, the provision for income taxes was lower than the tax computed at the U.S. Federal statutory rate due primarily to utilization of net operating loss and tax credit carryforwards and the release of the valuation allowance on a portion of the Company’s net deferred tax assets. The income tax expense for the year ended December 31, 2013 was not significant. The increase in the effective tax rate for the year ended December 31, 2015 as compared to the year ended December 31, 2014 was primarily due to the release of the valuation allowance against federal and certain state deferred tax assets during the fourth quarter of 2014.

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,
	2015			2014
Deferred tax assets:
Deferred revenue	$	—		$	1,005
Net operating loss carryforward		8,257			9,100
Stock-based compensation		35,482			26,000
Tax credits		8,076			12,098
Intangible assets		9,833			5,259
Accruals and reserves		19,156			15,247
Total deferred tax assets		80,804			68,709
Less: valuation allowance		(16,827	)		(16,023	)
Total net deferred tax assets		63,977			52,686
Deferred tax liabilities
Depreciation		(3,168	)		(2,741	)
Convertible Notes		—			(12,792	)
Contingent consideration		(3,798	)		—
Total deferred tax liabilities		(6,966	)		(15,533	)
Net deferred tax assets	$	57,011		$	37,153
Recorded as:
Net current deferred tax assets	$	—		$	21,987
Net non-current deferred tax assets		57,011			15,176
Net non-current deferred tax liabilities (included in “Other non-current liabilities”)		—			(10	)
Net deferred tax assets	$	57,011		$	37,153

As of December 31, 2015, all deferred tax assets and liabilities are classified as non-current on the Company’s balance sheet in accordance with the early adoption of ASU 2015-17. See additional discussion in Note 2, “Summary of Significant Accounting Policies”.

As of December 31, 2015, the Company had no Federal net operating loss carryforwards for tax return purposes as the Company fully utilized all of its tax attributes during 2015. Also, as of December 31, 2015, the Company had state net operating loss carryforwards for tax return purposes of approximately $216.3 million, which will expire at various dates between the years 2017 and 2033, if not utilized.

The Company has fully utilized all of its Federal research and development credit and Orphan Drug credit carryforwards and alternative minimum tax credits as of December 31, 2015 for tax return purposes. In addition, the Company has California research and development credit carryforwards for tax purposes of approximately $16.6 million as of December 31, 2015. The California research credits do not expire. On December 18, 2015, the Consolidated Appropriations Act of 2016 was signed, permanently renewing the Federal research and development tax credit retroactive to January 1, 2015. ASC 740-10-45-15, “Income Taxes,” requires that the effects of a change in tax laws or rates be recognized in the period that includes the enactment date; consequently, the Company recognized the benefit of the Federal research and development credit during the fourth quarter of 2015.

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 IRC Section 382. The Company completed Section 382 studies through September 30, 2015, 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 changes occur, the utilization of net operating loss and credit carryforwards could be significantly reduced.

The valuation allowance increased by $0.8 million in 2015, decreased by $104.8 million in 2014 and increased by $22.1 million in 2013.

The Company records a valuation allowance to reduce deferred tax assets to reflect the net amount that is more likely than not to be realized. Based upon the weight of available evidence at December 31, 2014, the Company determined that it was more likely than not that a portion of its deferred tax assets would be realizable and consequently released the valuation allowance against Federal and certain state net deferred tax assets and recorded a discrete tax benefit of $33.4 million during the fourth quarter of 2014. The decision to reverse a portion of the valuation allowance was made after management considered all available evidence, both positive and negative, including but not limited to the historical operating results, income or loss in recent periods, cumulative income in recent years, forecasted earnings, forecasted future taxable income, and significant risk and uncertainty related to forecasts. The release of the valuation allowance resulted in the recognition of certain deferred net tax assets and a decrease to income tax expense.

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

	December 31,
	2015			2014			2013
Balance as of beginning of year	$	12,367		$	5,955		$	4,602
Additions based on tax positions related to the current year		2,898			6,439			702
Additions based on tax position related to prior year		135			—			660
Decreases based on tax positions related to prior year		(1,324	)		(27	)		(9	)
Balance as of end of year	$	14,076		$	12,367		$	5,955

Approximately $7.7 million of the total gross unrecognized tax benefits at December 31, 2015, if recognized, would affect the effective tax rate. The Company does not anticipate a material change in unrecognized tax benefits during the next twelve months.

Interest and/or penalties related to income tax matters are recognized as a component of income tax expense as incurred. The interest expense related to uncertain tax positions in the income tax expense line of the Company’s consolidated statements of operations was not significant during 2015, 2014, and 2013. Interest related to income tax matters accrued as of December 31, 2015 and 2014 was not significant.

As a result of the Company’s net operating loss and tax credit carryforwards, all of its tax years are subject to Federal and state examination. The Company’s Federal income tax returns were audited by the Internal Revenue Service for tax years 2008 and 2012 and resulted in no material adjustments. The Company’s 2009 and 2010 California income tax returns are currently under audit by the California tax authorities. The Company believes that it has adequately provided for any reasonable foreseeable outcomes related to its Federal and California income tax returns.

The future effective tax rate is subject to volatility and may be materially impacted by various internal and external factors. These factors may include, but are not limited to, the amount of income tax benefits and charges from: interpretations of existing tax laws; changes in tax laws and rates; future levels of research and development expenditures; changes in the mix of earnings in countries with differing statutory tax rates in which the Company may conduct business; changes in the valuation of deferred tax assets and liabilities; state income taxes; the tax impact of stock-based compensation; accounting for uncertain tax positions; closure of statute of limitations or settlement of tax audits; changes in estimates of prior years’ items; tax costs for acquisition-related items; changes in accounting standards; non-deductible officers’ compensation; limitations on the utilization of net operating losses and tax credits due to changes in ownership; and overall levels of income before taxes.