12.

INCOME TAXES

Income tax provision (benefit) for the years ended December 31, 2011, 2010 and 2009 consists of the following (in thousands):


	Year Ended December 31,
	2011			2010			2009
Current income tax provision (benefit):
Federal	$	(2,738	)	$	(16	)	$	(5,172	)
State		(32	)		(355	)		(1,636	)

		(2,770	)		(371	)		(6,808	)

Deferred income tax provision (benefit):
Federal		164			136			913
State		1			64			84

		165			200			997

Total income tax provision (benefit)	$	(2,605	)	$	(171	)	$	(5,811	)

The income tax provision (benefit) differs from the amount of income tax determined by applying the U.S. federal statutory rate to income before taxes as a result of the following (in thousands):


	Year Ended December 31,
	2011			2010			2009
U.S. federal statutory taxes	$	(4,826	)	$	(3,502	)	$	(7,725	)
State and local taxes, net of U.S. federal benefit		(650	)		(1,971	)		(928	)
Permanent items		96			(1	)		(30	)
Federal credits		(59	)		(66	)		(61	)
Other		(275	)		(503	)		(1,255	)
Increase in valuation allowance		3,109			5,872			4,188

Total income tax provision (benefit)	$	(2,605	)	$	(171	)	$	(5,811	)

Deferred tax assets and liabilities as of December 31, 2011 and 2010 consist of the following (in thousands):


	As of December 31,
	2011			2010
Deferred tax assets:
Net operating losses	$	23,043		$	20,457
Warranty reserve		6,306			5,642
Stock-based compensation		3,254			3,116
Accruals not currently deductible and other		3,959			5,932
Inventories		4,137			4,458
State tax credit carryforwards		4,252			3,850

Gross deferred tax assets, before valuation allowance		44,951			43,455
Valuation allowance		(24,199	)		(21,090	)

Gross deferred tax assets, after valuation allowance		20,752			22,365

Deferred tax liabilities:
Debt discount		(2,103	)		(5,949	)
Depreciation and other		(21,592	)		(19,026	)

Gross deferred tax liabilities		(23,695	)		(24,974	)

Net deferred tax asset (liability)	$	(2,943	)	$	(2,610	)

The valuation allowance as of December 31, 2011 of $24.2 million is primarily attributable to the uncertainty related to the realizability of the Company's excess deferred tax assets. The increase in the valuation allowance during 2011 resulted from an increase in the Company's excess deferred tax assets. The excess deferred tax assets increased due to the fact that deductions included in the Company's financial statements exceeded allowable current tax deductions. The Company has considered all available evidence, both positive and negative, in determining the need for a valuation allowance. Based upon this analysis, including a consideration of the Company's cumulative loss history in the three-year period ended December 31, 2011, management determined that it is not more likely than not that its excess deferred tax assets will be realized. The Company's future realization of its excess deferred tax assets ultimately depends on the existence of sufficient taxable income in the carry-forward periods under the tax laws. The Company will analyze its position in subsequent reporting periods, considering all available positive and negative evidence, in determining the expected realization of its excess deferred tax assets.

The Company has federal net operating losses of $65.3 million at December 31, 2011 which expire starting 2027.

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (codified in ASC 740) on January 1, 2007. As a result of the adoption, the Company recorded a charge of $2.7 million to the January 1, 2007 "Retained earnings" balance in the accompanying consolidated balance sheets. The Company had $0.1 million, $3.1 million and $3.8 million of unrecognized tax benefits as of December 31, 2011, 2010 and 2009, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


	Year Ended December 31,
	2011			2010			2009
Unrecognized tax benefits balance at January 1	$	3,126		$	3,752		$	3,070
Gross increases related to prior year tax positions		1			—			2,528
Gross decreases related to prior year tax positions		(2,760	)		—			(167	)
Gross increases related to current year tax positions		—			—			—
Settlements		(245	)		(609	)		(1,368	)
Lapse of statute of limitations		(62	)		(17	)		(311	)

Unrecognized tax benefits balance at December 31	$	60		$	3,126		$	3,752

The total liabilities associated with unrecognized tax benefits that, if recognized, would affect the effective tax rates were $0.1 million and $0.4 million at December 31, 2011 and December 31, 2010, respectively.

The Company recognizes interest and penalties related to tax matters as a component of "Selling, general and administrative expenses" in the accompanying consolidated statements of operations. As of December 31, 2011 and December 31, 2010, the Company had accrued interest related to uncertain tax positions of $0.1 million and $0.6 million, respectively, and accrued penalties related to uncertain tax positions of $15 thousand and $81 thousand respectively, in the accompanying consolidated balance sheets.

The Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities and the Company has accrued a liability when it believes that it is not more likely than not that it will realize the benefits of tax positions that it has taken or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with ASC 740. The Company believes that adequate provisions have been made for all tax returns subject to examination.

The Company has taken tax positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits may decrease within the year ending December 31, 2012. The possible decrease could result from the closing of the statutes for federal and state tax purposes in some taxing jurisdictions and would be approximately $2 thousand.