Income Taxes

The components of income before income tax expense for the years ended December 31, 2012, 2011 and 2010 were as follows (in thousands):



	2012		2011		2010
U.S.	$	16,682	$	7,252	$	23,108
Foreign	9,116		8,072		373
	$	25,798	$	15,324	$	23,481

Income tax expense (benefit) for years ended December 31, 2012, 2011 and 2010 consisted of current and deferred components categorized by federal, state and foreign jurisdictions, as shown below. The current provision is generally that portion of income tax expense that is currently payable to the taxing authorities. The Company makes estimated payments of these amounts during the year. The deferred tax provision results from changes in the Company’s deferred tax assets (future deductible amounts) and tax liabilities (future taxable amounts), which are presented in the table below:



	Current		Deferred			Total
	(In thousands)
2012:
Federal	$	7,692	$	(640	)	$	7,052
State	952		(204		)	748
Foreign	610		(810		)	(200		)
	$	9,254	$	(1,654	)	$	7,600
2011:
Federal	$	10,820	$	(357	)	$	10,463
State	591		1			592
Foreign	950		—			950
	$	12,361	$	(356	)	$	12,005
2010:
Federal	$	8,512	$	(1,102	)	$	7,410
State	2,458		(174		)	2,284
Foreign	630		—			630
	$	11,600	$	(1,276	)	$	10,324

During 2011, an income tax benefit of $268,000 was recorded in stockholders’ equity for the tax benefit of stock option exercises.

During 2012, an income tax benefit of $800,000 was recorded to recognize the foreign net operating loss carryforward deferred tax assets due to a partial release of valuation allowance.

Income tax expense for years ended December 31, 2012, 2011 and 2010 differed from the amounts computed by applying the U.S. federal statutory tax rate applicable to the Company’s level of pretax income as a result of the following (in thousands):



	2012			2011			2010
Federal tax at statutory rates	$	9,029		$	5,363		$	8,218
State taxes, net of federal income tax benefit	489			385			1,488
Foreign losses not benefited	—			—			500
Change of valuation allowance	(2,453		)	(1,235		)	—
Unexchanged promotional merger shares	1,050			7,000			—
Non-deductible expenses and other	(515		)	492			118
Total income tax expense	$	7,600		$	12,005		$	10,324

Operating losses incurred in the foreign subsidiaries for the year ended December 31, 2010 were treated as having no recognizable tax benefit.

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows (in thousands):



	2012			2011
Deferred tax assets:
Foreign net operating loss carryforwards	$	1,936		$	4,762
State income taxes	565			651
Accruals and allowances	697			500
Stock based compensation	1,094			618
Capital loss	1,754			1,754
Deferred revenue	790			631
Deferred rent	302			219
Property, equipment and intangible assets	7			—
Total deferred tax assets	7,145			9,135
Valuation allowance	(2,886		)	(6,516		)
Total deferred tax assets net of valuation allowance	4,259			2,619
Deferred tax liabilities:
US tax on undistributed earnings	(355		)	(251		)
Property, equipment and intangible assets	—			(270		)
Total deferred tax liabilities	(355		)	(521		)
Net deferred tax assets	$	3,904		$	2,098

The Company has a valuation allowance of approximately $1.1 million as of December 31, 2012 related to foreign net operating loss carryforwards of approximately $8.3 million for which it is more likely than not that the tax benefit will not be realized. These net operating loss carryforwards do not expire. The Company also has a valuation allowance of $1.8 million as of December 31, 2012 related to the capital loss carryforward of $4.5 million for which it is more likely than not that the tax benefit will not be realized. If not utilized, the capital loss carryforward will expire in 2014. The total amount of the valuation allowance at December 31, 2012 decreased from the amount recorded as of December 31, 2011, primarily due to the utilization of foreign net operating loss carryforwards and a partial release of valuation allowance recorded against the net operating loss carryforwards in 2012. At December 31, 2012, the Company determined that approximately $800,000 of the total foreign net operating loss carryforward deferred tax assets will more likely than not be realized in future periods. Therefore, the Company recognized $800,000 of deferred tax assets associated with the foreign net operating loss carryforwards, as a reduction in the valuation allowance at December 31, 2012.

United States income and foreign withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries. The undistributed earnings on a book basis for the non-U.S. subsidiaries are approximately $2.0 million. The Company intends to reinvest these earnings indefinitely in its operations outside the U.S. If the undistributed earnings are remitted to the U.S. these amounts would be taxable in the U.S at the current federal and state tax rates net of foreign tax credits. Also, depending on the jurisdiction any distribution may be subject to withholding taxes at rates applicable for that jurisdiction.

The Company maintains liabilities for uncertain tax positions. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in the overall income tax provision in the period that such determination is made. At December 31, 2012, the Company had approximately $9.4 million in total unrecognized tax benefits, approximately $584,000 in accrued interest, of which $365,000 accrued in 2012, and approximately $80,000 in accrued penalties, of which $10,000 accrued in 2012. Unrecognized tax benefits of approximately $8.0 million which, if recognized, would favorably affect the Company’s effective income tax rate, and unrecognized tax benefits of approximately $1.4 million which if recognized, would be recorded in discontinued operations. The increase in the unrecognized tax benefit for the twelve months ended December 31, 2012 is related to a deduction taken on the Company's 2011 U.S. federal and state income tax returns for the $20.0 million settlement with the State of Delaware. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):




Unrecognized tax benefits balance at January 1, 2010	$	2,003
Increase related to prior year tax positions	—
Decrease related to prior year tax positions	(224		)
Increase related to current year tax positions	—
Settlements	(413		)
Lapse of statute of limitations	—

Unrecognized tax benefits balance at December 31, 2010	1,366
Increase related to prior year tax positions	510
Decrease related to prior year tax positions	—
Increase related to current year tax positions	—
Settlements	(42		)
Lapse of statute of limitations	—

Unrecognized tax benefits balance at December 31, 2011	1,834
Increase related to prior year tax positions	47
Decrease related to prior year tax positions	(9		)
Increase related to current year tax positions	7,851
Settlements	(251		)
Lapse of statute of limitations	(107		)

Unrecognized tax benefits balance at December 31, 2012	$	9,365

The Company is in various stages of multiple year examinations by federal and state taxing authorities. Although the timing of resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of the gross unrecognized tax benefits related to the method of computing income taxes in certain jurisdiction and losses reported on certain income tax returns could significantly change in the next 12 months. These changes may occur through settlement with the taxing authorities or the expiration of the statute of limitations on the returns filed. The Company is unable to estimate the range of possible adjustments to the balance of the gross unrecognized tax benefits.

The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is subject to U.S. federal and certain state tax examinations for years after 2008 and is subject to California tax examinations for years after 2004.