
.	TAXES

Our income tax provision consists of the following components for 2016, 2015 and 2014 (in thousands):



	2016			2015			2014
Current
Federal	$	14,637		$	42,181		$	49,049
State	(60		)	415			2,499
Foreign source withholding tax	79,932			55,276			70,703
	94,509			97,872			122,251
Deferred
Federal	(48,086		)	(89,026		)	(121,937		)
State	(557		)	554			(437		)
Foreign source withholding tax	70,925			55,221			52,231
	22,282			(33,251		)	(70,143		)
Total	$	116,791		$	64,621		$	52,108

The deferred tax assets and liabilities were comprised of the following components at December 31, 2016 and 2015 (in thousands):



	2016
	Federal			State			Foreign			Total
Net operating losses	$	—		$	89,162		$	463		$	89,625
Deferred revenue, net	60,320			288			31,686			92,294
Stock compensation	12,648			2,038			—			14,686
Patent amortization	24,145			—			—			24,145
Depreciation	(502		)	(70		)	—			(572		)
Other-than-temporary impairment	558			61			—			619
Other accrued liabilities	4,483			321			—			4,804
Other employee benefits	2,524			275			—			2,799
	104,176			92,075			32,149			228,400
Less: valuation allowance	—			(89,352		)	(463		)	(89,815		)
Net deferred tax asset	$	104,176		$	2,723		$	31,686		$	138,585



	2015
	Federal		State			Foreign		Total
Net operating losses	$	—	$	81,965		$	140	$	82,105
Deferred revenue, net	94,203		8			22,473		116,684
Stock compensation	8,147		1,452			—		9,599
Patent amortization	21,217		—			—		21,217
Depreciation	929		(64		)	—		865
Other accrued liabilities	7,416		509			—		7,925
Other-than-temporary impairment	494		46			—		540
Other employee benefits	1,888		141			—		2,029
	134,294		84,057			22,613		240,964
Less: valuation allowance	—		(81,893		)	—		(81,893		)
Net deferred tax asset	$	134,294	$	2,164		$	22,613	$	159,071

Note: Included within the balance sheet, but not reflected in the tables are deferred tax assets primarily related to foreign withholding taxes that are expected to be paid within the next twelve months of $10.9 million and $1.5 million as of December 31, 2016 and December 31, 2015, respectively.

The following is a reconciliation of income taxes at the federal statutory rate with income taxes recorded by the Company for the years ended December 31, 2016, 2015 and 2014 (in thousands):



	2016		2015		2014
Tax at U.S. statutory rate	35.0	%	35.0	%	35.0	%
State tax provision	(0.1	)%	0.5	%	0.1	%
Change in federal and state valuation allowance	0.1	%	—	%	—	%
Research and development tax credits	(0.5	)%	(1.2	)%	(4.7	)%
Uncertain tax positions	2.1	%	—	%	0.9	%
Permanent differences	0.6	%	1.2	%	1.5	%
Domestic production activities deduction	(9.8	)%	—	%	—	%
Other	0.3	%	0.2	%	1.2	%
Total tax provision (a)	27.7	%	35.7	%	34.0	%

(a) In 2016, the inclusion of benefits associated with domestic production activities, net of uncertain tax provisions, related to prior years reduced the tax provision by 5.6%.

Valuation Allowances and Net Operating Losses

We establish a valuation allowance for any portion of our deferred tax assets for which management believes it is more likely than not that we will be unable to utilize the assets to offset future taxes. We believe it is more likely than not that the majority of our state deferred tax assets will not be utilized; therefore we have maintained a near full valuation allowance against our state deferred tax assets as of December 31, 2016. All other deferred tax assets are fully benefited.

We recognize excess tax benefits associated with share-based compensation to shareholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, we follow the with and without approach excluding any indirect effects of the excess tax deductions. Under the approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company. During 2016 and 2015, we realized $0.6 million and $2.5 million, respectively, of tax windfalls and accordingly recorded a corresponding credit to additional paid-in capital in each period. During 2014, we recorded a shortfall of $1.2 million and recorded a corresponding debit to additional paid-in capital. We had sufficient windfall benefits previously recorded in additional paid-in capital to offset the shortfall in 2014. As of December 31, 2016 and 2015, we had $11.9 million and $12.3 million, respectively, of state unrealized tax benefits associated with share-based compensation. These state tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized, rather than a reduction of the provision for income taxes.

Uncertain Income Tax Positions

As of December 31, 2016, 2015 and 2014, we had $10.4 million, $1.5 million and $1.4 million, respectively, of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate. The total amount of unrecognized tax benefits could change within the next twelve months for a number of reasons including audit settlements, tax examination activities and the recognition and measurement considerations under this guidance.

During 2016, we established a reserve of $3.2 million related to the recognition of the 2016 research and development credit and manufacturing deduction credit. We also established a reserve of $6.3 million related to the recognition of a gross benefit for manufacturing deduction credits related to prior years and released a reserve of $0.6 million for research and development credits. The 2016 reserve was also increased for interest and penalty on previously recognized reserves. During 2015, the reserve was increased for interest and penalty on previously recognized reserves, and we also established a reserve of $0.1 million related to the recognition of the 2015 research and development credit.

The following is a roll forward of our total gross unrecognized tax benefits, which if reversed would impact the effective tax rate, for the fiscal years 2014 through 2016 (in thousands):



	2016			2015			2014
Balance as of January 1	$	1,469		$	1,361		$	—
Tax positions related to current year:
Additions	3,209			141			95
Reductions	—			—			—
Tax positions related to prior years:
Additions	6,281			—			1,266
Reductions	—			(33		)	—
Settlements	(562		)	—			—
Lapses in statues of limitations	—			—			—
Balance as of December 31	$	10,397		$	1,469		$	1,361

Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For certain positions that related to years prior to 2016, we have recorded approximately $0.1 million of accrued interest during 2016 and 2015.

The Company and its subsidiaries are subject to United States federal income tax, foreign income and withholding taxes and income taxes from multiple state jurisdictions. Our federal income tax returns for 2011 to the present are currently open and will not close until the respective statutes of limitations have expired. The statutes of limitations generally expire three years following the filing of the return or in some cases three years following the utilization or expiration of net operating loss carry forwards. The statute of limitations applicable to our open federal returns will expire at the end of 2019. The 2016 return is expected to be filed by October 16, 2017 and the statute of limitations will expire three years from the date it is filed. Specific tax treaty procedures remain open for certain jurisdictions for 2006, 2007 and 2008. Many of our subsidiaries have filed state income tax returns on a separate company basis. To the extent these subsidiaries have unexpired net operating losses, their related state income tax returns remain open. These returns have been open for varying periods, some exceeding ten years. The total amount of state net operating losses is $1.5 billion.

The U.S. Internal Revenue Service ("IRS") concluded their audit of tax years 2010 through 2012 in 2015 and the refund, related to research and development tax credits, was reviewed by the Joint Committee on Taxation, as all refund claims in excess of $5.0 million are reviewed. In February 2016, we received correspondence from the Joint Committee on Taxation confirming the results of the IRS exam with no exception. We reversed our related reserve for unrecognized tax benefits of $0.6 million in first quarter 2016. In second quarter 2016, we filed amended returns for 2011 through 2014 related to the manufacturing deduction and received notice from the IRS in third quarter 2016 that the amended years, along with the originally filed return for 2015, were open to examination. We are under audit by one state for tax years 2012 through 2013. Currently we do not expect any material adjustments to our previous tax filings as a result of this audit. No other federal, state or foreign audits are in process.

Foreign Taxes

We pay foreign source withholding taxes on patent license royalties and state taxes when applicable. We apply foreign source withholding tax payments against our United States federal income tax obligations to the extent we have foreign source income to support these credits. In 2016, 2015 and 2014, we paid $79.9 million, $55.3 million and $70.7 million in foreign source withholding taxes, respectively, and applied these payments as credits against our United States federal tax obligation.

Between 2006 and 2016, we paid approximately $375.0 million in foreign taxes for which we have claimed foreign tax credits against our U.S. tax obligations. Of this amount, $236.1 million relates to taxes paid to foreign governments that have tax treaties with the U.S. It is possible that as a result of tax treaty procedures, the U.S. government may reach an agreement with the related foreign governments that will result in a partial refund of foreign taxes paid with a related reduction in our foreign tax credits. Due to both foreign currency fluctuations and differences in the interest rate charged by the U.S. government compared to the interest rates, if any, used by the foreign governments, any such agreement could result in interest expense and/or foreign currency gain or loss.