16. INCOME TAXES

The components of income (loss) before provision (benefit) for income taxes are as follows for the years ended December 31:


(in thousands)	2011		2010			2009
Domestic	$	1,862	$	(13,695	)	$	42,513
Foreign		8,951		7,498			4,902

Total	$	10,813	$	(6,197	)	$	47,415

The components of the provision (benefit) for income taxes are as follows for the years ended December 31:


(in thousands)	2011			2010			2009
Current:
Federal	$	11,698		$	(376	)	$	10,784
State		1,775			292			1,442
Foreign		2,501			1,352			1,564

Total current provision		15,974			1,268			13,790

Deferred:
Federal		(13,978	)		(4,622	)		899
State		(2,204	)		2,486			671
Foreign		913			562			(157	)

Total deferred (benefit) provision		(15,269	)		(1,574	)		1,413

Total provision (benefit)	$	705		$	(306	)	$	15,203

The effective income tax rate differed from the statutory federal income tax rate due to the following:


	2011			2010			2009
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance		3.0			(37.2	)		0.5
Transaction costs		—			(10.7	)		—
State income taxes, net of federal benefit and tax credits		(4.6	)		7.8			1.8
Permanent differences		5.4			(7.8	)		0.8
Domestic production activities		(13.6	)		—			(1.8	)
Federal research and experimentation credits		(5.3	)		5.5			(0.4	)
Tax effects of foreign activities		1.7			14.1			(1.1	)
Tax-exempt income		(0.3	)		1.8			(1.8	)
Provision to return adjustments		2.5			1.7			0.1
Non-deductible compensation		3.0			(2.2	)		—
Tax exposure reserve		(19.7	)		0.2			(1.7	)
Other		(0.6	)		(3.3	)		0.7

Effective income tax rate		6.5	%		4.9	%		32.1	%

Deferred income taxes reflect the tax attributes and tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of net deferred tax assets and liabilities are as follows:


(in thousands)	2011			Recasted 2010 (1)
Deferred tax assets:
Net operating loss carryforwards	$	62,918		$	63,805
Accruals and reserves		14,951			9,103
Software revenue		7,024			1,332
Depreciation		3,635			2,652
Tax credit carryforwards		3,964			4,991
Other		5			67

Total deferred tax assets		92,497			81,950
Less valuation allowances		(13,057	)		(12,739	)

Net deferred tax assets	$	79,440		$	69,211

Deferred tax liabilities:
Software revenue	$	—		$	(429	)
Intangibles		(26,328	)		(30,243	)

Total deferred tax liabilities		(26,328	)		(30,672	)

Net deferred income taxes	$	53,112		$	38,539

Reported as:
Current deferred tax asset	$	9,826		$	4,770
Long-term deferred income tax assets		43,286			33,769

Total deferred income taxes	$	53,112		$	38,539

(1)	The purchase price adjustments related to the Chordiant acquisition identified during the first quarter of 2011 were retrospectively applied as of December 31, 2010. See Note 9 "Acquisition, Goodwill, and Other Intangible Assets" for further discussion of these adjustments.

In 2010, the Company recognized approximately $174 million of federal net operating losses ("NOLs") and approximately $6 million of foreign NOLs from the Chordiant acquisition. The Company determined that it may utilize approximately $150.8 million of acquired Chordiant federal and foreign NOLs after application of applicable tax limitations impacting the annual use of the NOLs. A valuation allowance is recorded on the deferred tax assets in excess of the NOL that is recoverable as a result of these limitations. The Company also recorded approximately $2.5 million of deferred tax assets related to acquired Chordiant state NOLs.

As of December 31, 2011, the Company had approximately $154 million of federal NOLs, of which $125 million are available for use subject to annual limitations through 2029, and $2.2 million of foreign NOLs that have an unlimited carryover period. In 2011, the Company adjusted in purchase accounting the amount of deferred tax asset it had for state NOLs by approximately $0.8 million. As of December 31, 2011 the Company has $1.5 million of deferred tax asset related to state NOLs.

The Company records a valuation allowance for deferred tax assets when it is more-likely-than-not that the Company will not realize the entire benefit of the assets. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information. The $0.3 million increase in the valuation allowance in 2011 relates to a valuation allowance recorded against certain state tax credits generated during the year and certain capital losses that the Company will not be able to utilize. The $14.4 million increase in the valuation allowance during 2010 primarily related to a $12 million valuation allowance recorded against acquired Chordiant federal and state NOLs, which the Company determined it will not be able to utilize due to various statutory limitations. In addition, the consolidation of Chordiant's operations had a significant impact on the Company's consolidated state apportionment factors, which reduced the Company's ability to realize state research credits. As a result of this change, the Company recorded a $2.3 million valuation allowance against state research credits in 2010.

As of December 31, 2011, the Company had available $6.6 million of state tax research and experimentation ("R&E") credits and $0.3 million of investment tax credits expiring in the years 2013 through 2026.

Our India subsidiary is a development center in an area designated as a Special Economic Zone ("SEZ"), and is entitled to a tax holiday in India. The tax holiday reduces or eliminates income tax in that country and expires in 2022. For the years ended December 31, 2011, 2010, and 2009, the effect of the income tax holiday was to reduce the overall income tax provision by approximately $0.3 million, $0.4 million, and $0.2 million, respectively.

Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $31.3 million as of December 31, 2011. The Company has not provided any additional federal or state income taxes or foreign withholding taxes on the undistributed earnings as such earnings have been indefinitely reinvested in the business.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:


(in thousands)	2011			2010			2009
Balance as of January 1,	$	20,266		$	4,442		$	6,201
Additions based on tax positions related to the current year		7,231			54			128
Additions for tax positions of prior years		3			16			50
Additions for acquired uncertain tax benefits		—			16,670			—
Reductions for tax positions of prior years		(2,188	)		(916	)		(1,937	)

Balance as of December 31,	$	25,312		$	20,266		$	4,442

As of December 31, 2011, the Company had approximately $25.3 million of total unrecognized tax benefits, of which $18.2 million would decrease the Company's effective tax rate if recognized. However, approximately $11.1 million of these unrecognized tax benefits relate to acquired NOLs and research tax credits, which are subject to limitations on use. The Company expects that the changes in the unrecognized benefits within the next twelve months will be approximately $0.2 million, which would reduce the Company's effective tax rate if realized.

For the years ended December 31, 2011 and 2009, the Company recognized a reduction of interest expense of approximately $0.4 million and $0.5 million, respectively. For the year ended December 31, 2010, the Company recognized interest expense of approximately $44,000. For the years ended December 31, 2011, 2010, and 2009, the Company did not recognize any significant penalties. As of December 31, 2011 and 2010, the Company had accrued approximately $0.6 million and $1.4 million, respectively, for interest and penalties.

The Company files income tax returns in the U.S. and in foreign jurisdictions. Generally, the Company is no longer subject to U.S. federal, state, or local, or foreign income tax examinations by tax authorities for the years before 2008. With few exceptions, the statute of limitations remains open in all other jurisdictions for the tax years 2008 to the present.