Note 10: Income Taxes

During the year ended December 31, 2011, the Company recorded an income tax provision of $38.3 million, reflecting an effective rate of 38.6% of pretax income. The effective tax rate for the year ended December 31, 2011, primarily consisted of a provision for federal income taxes of 32.7% (which is net of a benefit for state taxes of 2.3%), a provision for state taxes of 6.5% and a benefit of 0.6%, due to permanent book versus tax differences. During the year ended December 31, 2010, the Company recorded an income tax provision of $28.9 million, reflecting an effective rate of 37.1% of pretax income. The effective tax rate for the year ended December 31, 2010, primarily consisted of a provision for federal income taxes of 32.7% (which is net of a benefit for state taxes of 2.3%), a provision for state taxes of 6.7%, a 0.6% beneficial adjustment to the state and federal tax payable as a result of state and federal tax true-ups and a benefit of 1.7%, due to permanent book versus tax differences.

The pretax income consists of the following (in thousands):


	Year Ended December 31,
	2011		2010		2009
Domestic	$	93,354	$	73,863	$	52,839
Foreign		5,910		4,135		904

	$	99,264	$	77,998	$	53,743

The provision for income taxes consists of the following (in thousands):


	Year Ended December 31,
	2011			2010		2009
Current expense:
Federal	$	31,011		$	23,922	$	15,734
State		6,688			4,585		3,551
Foreign		2,407			—		—

		40,106			28,507		19,285
Deferred expense:
Federal		(814	)		369		1,212
State		90			70		199
Foreign		(1,076	)		—		—

		(1,800	)		439		1,411

	$	38,306		$	28,946	$	20,696

The components of deferred tax assets and liabilities consist of the following for the years presented (in thousands):


	December 31, 2011			December 31, 2010
Deferred tax assets:
State taxes	$	1,599		$	1,825
Stock option expense		7,266			5,995
Accrued expenses		2,069			876
Non-qualified plan		(151	)		(97	)
Deferred revenue		1,112			1,490
Interest rate swap		1,262			(104	)
State net operating losses		143			189
Other		(26	)		1,124
Valuation allowance		(12	)		(12	)

		13,262			11,286

Deferred tax liabilities:
Deferred court costs		(15,900	)		(11,674	)
Difference in basis of amortizable assets		(5,621	)		(5,285	)
Difference in basis of depreciable assets		(4,387	)		(2,418	)
Differences in income recognition related to receivable portfolios		(1,854	)		(8,477	)
Deferred debt cancellation income		(1,222	)		(1,222	)
Other		13			164

		(28,971	)		(28,912	)

Net deferred tax liability	$	(15,709	)	$	(17,626	)

The differences between the total income tax expense and the income tax expense computed using the applicable federal income tax rate of 35% per annum were as follows (in thousands):


	Year Ended December 31,
	2011			2010			2009
Computed "expected" Federal income tax expense	$	34,742		$	27,299		$	18,810
Increase (decrease) in income taxes resulting from:
State income taxes, net		4,222			3,306			2,437
Foreign non-taxed income		(772	)		(1,447	)		(316	)
Other adjustments, net		114			(212	)		(235	)

	$	38,306		$	28,946		$	20,696

The Company has not provided for the United States income taxes or foreign withholding taxes on the undistributed earnings from continuing operations of its subsidiary operating outside of the United States. Undistributed earnings of the subsidiary for the year ended December 31, 2011, were approximately $6.0 million. Such undistributed earnings are considered permanently reinvested. If the net earnings were to be distributed, it is estimated that taxes in the amount of approximately $2.3 million would need to be reflected in the financial statements.

The Company's subsidiary in India was operating under a tax holiday through March 31, 2011, at which time the tax holiday expired. If there had been no tax holiday for the quarter ended March 31, 2011, the Company would have expensed an additional $0.6 million in income taxes.

A reconciliation of the beginning and ending amount of the Company's unrecognized tax benefit is as follows (in thousands):


	Amount
Balance at December 31, 2010	$	754
Additions based on tax positions related to current year		476

Balance at December 31, 2011	$	1,230

As of December 31, 2011, the Company has a net tax expense recorded for penalties and interest of approximately $0.1 million. The penalties and interest are recorded as part of the provision for income taxes.

The Company has gross unrecognized tax benefits of $1.9 million at December 31, 2011, related to the refund of state taxes previously paid that, if recognized, would result in a net tax benefit of $1.2 million and would have a positive effect on the Company's effective tax rate. The Company believes that it is reasonably possible that its $1.9 million gross unrecognized tax benefits will significantly decrease within the next 12 months or be eliminated entirely, as the Company is currently undergoing a state tax audit. The completion of the audit could significantly reduce or eliminate the unrecognized tax benefits. Accordingly, the Company has recorded a reserve on the net unrecognized tax benefits.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2008 through 2011 tax years remain subject to examination by federal taxing authorities, the 2000 through 2011 tax years generally remain subject to examination by state tax authorities, and the 2010 and 2011 tax years remain subject to examination by foreign tax authorities.