Income Taxes

The components of loss before income taxes were as follows (in thousands):



	Fiscal Years Ended
	December 29, 2012			December 31, 2011			December 25, 2010
United States	$	(64,252	)	$	(71,172	)	$	(178,849	)
Foreign	2,286			3,290			(11,357		)
	$	(61,966	)	$	(67,882	)	$	(190,206	)

The components of the provision for income taxes are as follows (in thousands):



	Fiscal Years Ended
	December 29, 2012			December 31, 2011			December 25, 2010
Current provision (benefit):
Federal	$	(1,929	)	$	(157	)	$	(2,436	)
State	60			1			(107		)
Foreign	(81		)	(546		)	2,728
	(1,950		)	(702		)	185
Deferred provision (benefit):
Federal	(25,520		)	(37		)	(85		)
State	—			—			—
Foreign	1,050			(1,162		)	(2,020		)
	(24,470		)	(1,199		)	(2,105		)
Total benefit from income taxes	$	(26,420	)	$	(1,901	)	$	(1,920	)

The following is a reconciliation of the difference between income taxes computed by applying the federal statutory rate of 35% and the benefit from income taxes for fiscal 2012, 2011 and 2010 (in thousands):



	Fiscal Years Ended
	December 29, 2012			December 31, 2011			December 25, 2010
U.S. statutory Federal tax rate	$	(21,687	)	$	(23,759	)	$	(66,571	)
State taxes and credits, net of Federal benefit	(1,991		)	(1,890		)	(5,776		)
Amortization of stock-based compensation, net of tax benefit	376			287			606
Research and development credits	(674		)	(2,499		)	(2,622		)
Foreign taxes at rates different than the U.S.	598			(294		)	2,765
Other permanent differences	(1,164		)	126			1,829
Change in valuation allowance	(1,818		)	25,622			68,634
Other	(60		)	506			(785		)
Total	$	(26,420	)	$	(1,901	)	$	(1,920	)

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following (in thousands):



	Fiscal Years Ended
	December 29, 2012			December 31, 2011
Tax credits	$	25,223		$	25,168
Inventory reserve	18,871			20,028
Other reserves and accruals	6,403			4,241
Non-statutory stock options	20,418			19,708
Depreciation and amortization	7,570			10,682
Net operating loss carryforwards	117,049			96,219
Gross deferred tax assets	195,534			176,046
Valuation allowance	(163,265		)	(168,875		)
Total deferred tax assets	32,269			7,171
Acquired intangibles & fixed assets	(27,879		)	—
Unrealized investment gains	(42		)	(102		)
Total deferred tax liabilities	(27,921		)	(102		)
Net deferred tax assets	$	4,348		$	7,069

We are required to evaluate the realizability of our deferred tax assets in both our U.S. and non-U.S. jurisdictions on an ongoing basis in accordance with GAAP to determine whether there is a need for a valuation allowance with respect to such deferred tax assets. During fiscal 2012 and 2011, we maintained a valuation allowance against our U.S. deferred tax assets. We intend to maintain a valuation allowance until sufficient positive evidence exists to support the realization of such deferred tax assets.

Included in the $26.4 million income tax benefit for the year ended December 29, 2012 is a $25.5 million tax benefit from the release of valuation allowance of our deferred tax assets ("DTAs"). In connection with our acquisition of MicroProbe during the year ended December 29, 2012, deferred tax liabilities ("DTLs") were established on the acquired identifiable intangible assets. These DTLs exceeded the acquired DTAs by $25.5 million. These DTLs exceeded the acquired DTAs by $25.5 million and created additional sources of income to realize a tax benefit for our DTAs. As such, authoritative guidance requires the impact on the acquiring company's deferred tax assets and liabilities caused by an acquisition be recorded in the acquiring company's financial statements outside of acquisition accounting. Accordingly, the valuation allowance on a portion of our DTAs was released and resulted in an income tax benefit of $25.5 million.

During fiscal 2011, we determined that it is more likely than not that the deferred tax assets of a non-U.S. jurisdiction will be realized after considering all positive and negative evidence. Positive evidence included finalization of our current restructuring activity for the related foreign jurisdiction. It also included conclusion that such location would continue to be in operation for the foreseeable future and future taxable income sufficient to realize such deferred tax assets prior to the expiration of existing net operating loss carryforwards due to a change in the entity's structure to a cost-plus arrangement. Our conclusion that it is more likely than not that such deferred tax assets will be realized is strongly influenced by the expectation that such location will continue to be in operation for the foreseeable future. We believe such conclusion is reasonable in light of our current operational structure and forecasted operations, both for the foreign jurisdiction and our consolidated operations; however, such conclusion is inherently uncertain. Therefore, if we have material unforeseen losses or are required to restructure our non-U.S. operations to further align our operating expense structure with our expected revenues, then its ability to generate sufficient income necessary to realize a portion of the deferred tax assets may be reduced and an additional charge to increase the valuation allowance may be recorded.

The valuation allowance against deferred tax assets consisted of the following activity for the fiscal years 2012, 2011 and 2010 (in thousands):



Description	Balance at Beginning of Year		Additions		Reduction			Balance at End of Year
Allowance against deferred tax assets
Year ended December 25, 2010	$	59,097	$	68,634	$	—		$	127,731
Year ended December 31, 2011	127,731		44,520		(3,376		)	168,875
Year ended December 29, 2012	168,875		19,910		(25,520		)	163,265

At December 29, 2012, we had Federal research and development tax credit, net operating loss, and foreign tax credit carryforwards of $18.5 million, $284.2 million and $1.6 million, which will expire at various dates from 2016 through 2032. We had alternative minimum tax credits of $2.2 million which do not expire. We had California research credit and net operating loss carryforwards of $22.7 million and $266.7 million, respectively. The California research credit can be carried forward indefinitely while California net operating loss carryforwards will expire at various dates from 2030 through 2032. We had Singapore net operating loss carryforwards of $12.2 million which can be carried forward indefinitely.

U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for $6.5 million of undistributed earnings of its foreign subsidiaries. We intend to reinvest these earnings indefinitely in our foreign subsidiaries. If these earnings were distributed to the U.S. in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes, of approximately $42,000. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

During fiscal 2012, 2011 and 2010, there were no tax benefits associated with the exercise of employee stock options and other employee stock programs.

The following table reflects changes in the unrecognized tax benefits (in thousands):



	Fiscal Years Ended
	December 29, 2012			December 31, 2011			December 25, 2010
Unrecognized tax benefit beginning balance	$	17,752		$	17,500		$	17,925
Additions based on tax positions related to the current year	2,237			751			1,610
Reductions for tax positions of prior years	9			(270		)	—
Reductions to unrecognized tax benefits due to lapse of the applicable statute of limitations	(2,817		)	(148		)	(35		)
Settlements	—			(81		)	(2,000		)
Unrecognized tax benefit ending balance	$	17,181		$	17,752		$	17,500

At December 29, 2012, we had gross tax-effected unrecognized tax benefits of $17.2 million of which $2.7 million if recognized, would impact the effective tax rate.

We recognize interest charges and penalties related to uncertain tax positions as part of the income tax provision. We recognized interest charges and penalties of $0.3 million and $12,000 in fiscal 2012 and fiscal 2011, respectively, and an interest benefit of $0.3 million for fiscal 2010. As of December 29, 2012 and December 31, 2011, we have accrued total interest charges and penalties of $0.4 million and $0.7 million, respectively, related to uncertain tax positions.

The amount of income taxes we pay is subject to ongoing audits by Federal, state and foreign tax authorities which might result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is judgmental in nature. However, we believe we have adequately provided for any reasonably foreseeable outcome related to those matters. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. As of December 29, 2012 changes to our uncertain tax positions in the next 12 months that are reasonably possible are not expected to have a significant impact on our financial position or results of operations.

We and our subsidiaries file income tax returns in the U.S. Federal jurisdiction, various states and non U.S jurisdictions. The material jurisdictions in which we are subject to potential examination by tax authorities for the tax years after 2003 include, among others, the U.S. (Federal and California), Singapore, and Japan.

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which includes retroactive extension of the research credit from January 1, 2012 through December 31, 2013. This enacted tax law will result in an increase in the Company’s gross deferred tax asset by approximately $0.4 million, offset by a valuation allowance, during the first quarter of 2013.