NOTE 16 – INCOME TAXES

Income before income tax expense consisted of the following (in thousands):


	Year Ended March 31,
	2013			2012		2011
Domestic	$	66,735		$	49,525	$	53,008
Foreign		(2,999	)		1,393		3,285

	$	63,736		$	50,918	$	56,293

The components of the income tax expense are as follows (in thousands):


	Year Ended March 31,
	2013			2012			2011
Current income tax expense:
Federal	$	15,826		$	10,585		$	13,197
State		2,266			1,421			1,268
Foreign		1,035			1,032			1,104

		19,127			13,038			15,569

Deferred income tax expense (benefit):
Federal		5,161			5,603			2,967
State		320			44			492
Foreign		(1,481	)		(195	)		0

		4,000			5,452			3,459

	$	23,127		$	18,490		$	19,028

The income tax expense computed using the federal statutory income tax rate differs from NetScout’s effective tax rate primarily due to the following:


	Year Ended March 31,
	2013			2012			2011
Statutory U.S. federal tax rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal tax effect		3.6			3.2			3.0
Research and development tax credits		(2.1	)		(2.1	)		(2.1	)
Tax rate differential of foreign operations		0.7			0.1			(0.2	)
Domestic production activities deduction		(2.9	)		(2.4	)		(3.0	)
Transaction costs		0.7			1.5			0
Other		1.3			1.0			1.1

		36.3	%		36.3	%		33.8	%

The components of net deferred tax assets are as follows (in thousands):


	Year Ended March 31,
	2013			2012
Assets:
Accrued expenses	$	5,290		$	3,841
Depreciation		0			1,333
Deferred revenue		6,752			5,743
Reserves		1,325			892
Net operating loss carryforwards		26,096			22,622
Tax credit carryforwards		2,284			1,994
Share-based compensation		1,550			760
Auction rate securities temporary impairment		0			73
Other		352			264

		43,649			37,522
Liabilities:
Intangible assets		(21,934	)		(13,274	)
Valuation allowance		(3,795	)		(3,529	)
Depreciation		(113	)		0

	$	17,807		$	20,719

Deferred tax assets and liabilities are recognized based on the anticipated future tax consequences, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. We evaluate the recoverability of deferred tax assets by considering all positive and negative evidence relating to future profitability. We weigh objective and verifiable evidence more heavily in this analysis. In situations where we conclude that we do not have sufficient objective and verifiable evidence to support the realizability of the asset we create a valuation allowance against it. A valuation allowance has been established for the deferred tax assets related to Psytechnics Ltd. as well as for the federal foreign tax credits acquired as part of the Network General acquisition, as the Company has determined there is not sufficient objective evidence to support the realizability of these tax assets. If it is later determined the Company is able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, then the Company may be required to recognize these deferred tax assets through a tax benefit recorded in the period such determination is made.

Deferred income taxes were not provided on approximately $16.5 million of undistributed earnings of certain foreign subsidiaries as of March 31, 2013 because such undistributed foreign earnings are to be indefinitely reinvested outside of the United States. No provision for U.S. income and foreign withholding taxes has been made for unrepatriated foreign earnings because it is expected that such earnings will be reinvested indefinitely. If these earnings were distributed to the United States in the form of dividends or otherwise, it would be included in the Company’s U.S. taxable income. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

At March 31, 2013, the Company had United States federal net operating loss carryforwards of $50.7 million. At March 31, 2013, the Company had state net operating loss carryforwards of $71.0 million. At March 31, 2013, the Company had gross federal and state research and development tax carryforwards of $2.6 million. The net operating loss and credit carryforwards will expire at various dates beginning in 2023 and extending through 2033, if not utilized. Utilization of the net operating losses and credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state tax provisions.

The Company files U.S. federal tax returns and files returns in various state, local and foreign jurisdictions. With respect to the U.S. federal and primary state jurisdictions, the Company is no longer subject to examinations by tax authorities for tax years before 2007, although carryforward attributes that were generated prior to 2007 may still be adjusted upon examination if they either have been or will be used in a future period. The Company also receives inquiries from various tax jurisdictions during the year, and some of those inquiries may include an audit of the tax return previously filed. In the normal course of business, NetScout and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. As of March 31, 2013, the Company remained subject to examination in the United States for the 2011 tax years.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the fiscal years ended March 31, 2013, 2012 and 2011 is as follows (in thousands):


	Year Ended March 31,
	2013		2012			2011
Balance at April 1,	$	335	$	383		$	349
Additions based on tax positions related to the current year		35		34			34
Release of tax positions of prior years		0		0			0
Decrease relating to settlements with taxing authorities		0		(82	)		0
Reductions as a result of lapses of statute of limitations		0		0			0

Balance at March 31,	$	370	$	335		$	383

The Company notes that a majority of the unrecognized tax benefits are in the appeals process in foreign jurisdictions. We are unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. All of the unrecognized tax benefits would affect the effective tax rate if recognized.

The Company includes interest and penalties accrued in the consolidated financial statements as a component of the tax provision.