11. Income Taxes

The Company records an income tax provision or benefit based upon its estimated annual effective tax rate, which is estimated at 34.3% and 36.3% for the three months ended March 31, 2012 and 2011, respectively.

As of March 31, 2012 and December 31, 2011, the Company had $632,000 of unrecognized tax benefits and no penalties or interest was accrued. If the unrecognized tax benefits were recognized $410,000 would impact the effective tax rate.

A reconciliation of the change in the amount of gross unrecognized income tax benefits is as follows (in thousands):


	March 31, 2012		December 31, 2011
Balance at beginning of period	$	632	$	—
Increase of unrecognized tax benefits related to prior years		—		632

Balance at end of period	$	632	$	632

Although the timing and outcome of income tax audits is uncertain, it is possible that unrecognized tax benefits may be reduced as a result of the lapse of the applicable statues of limitations in federal and state jurisdictions within the next 12 months. Currently, the Company cannot reasonably estimate the amount of reductions, if any, during the next 12 months. Any such reduction could be impacted by other changes in unrecognized tax benefits and could result in changes to in the Company's tax obligations.

The State of California is currently conducting an examination of the Company's 2007 and 2008 state tax returns.

The State of Oregon conducted an examination of the Company's 2007 and 2008 state tax returns and in November 2011, the Company received a Proposed Auditor's Report from the State of Oregon seeking approximately $800,000 in unpaid taxes, interest and penalties in connection with the Company's treatment of the proceeds from its 2007 and 2008 sales of Safeco Corporation stock and dividends received. The Company intends to oppose the State of Oregon's position. The final disposition of the proposed audit adjustments could require the Company to make additional tax payments, which could materially affect its effective tax rate.

The determination of the Company's provision for income taxes and valuation allowance requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. In assessing whether and to what extent deferred tax assets can be realized, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.

The Company assesses the likelihood of the realizability of its deferred tax assets on a quarterly basis. As of March 31, 2012 and December 31, 2011, the Company had a valuation allowance of approximately $480,000 on certain of its deferred tax assets. The amount of net deferred tax assets considered realizable, however, could be reduced in the future if the Company's projections of future taxable income are reduced or if the Company does not perform at the levels that it is projecting. This could result in an increase in the Company's valuation allowance for deferred tax assets.