Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

Note 15—Income Taxes

The Company recorded a non-cash income tax benefit of $19.1 million for the nine months ended September 30, 2011. This benefit was partially the result of a reduction in a liability for an unrecognized tax benefit of $3.6 million which was considered effectively settled due to the recent completion of a state tax audit in the first quarter of 2011. The remaining $15.5 million of income tax benefit resulted from the allocation of a tax benefit to continuing operations pursuant to ASC 740-30-45, Income Taxes. This guidance requires that amounts credited to capital in excess of par value, other comprehensive income or discontinued operations during the year are considered sources of income that enable a company to recognize a tax benefit on its loss from continuing operations. As discussed in Note 14 – Convertible Notes, the 2018 Convertible Notes were bifurcated into debt and equity components for accounting purposes. As a result, the Company recorded a credit to the capital in excess of par value account of $34.4 million, which caused the allocation of the $15.5 million tax benefit to continuing operations. The Company expects the full year tax benefit allocated to continuing operations for this item to be approximately $23.9 million. A deferred tax liability was also recorded as a result of the 2018 Convertible Notes creating a book carrying value that differs from the tax basis, since tax regulations do not recognize the beneficial conversion feature as an equity element.

	(In thousands)
Deferred tax liability set-up related to the convertible notes (net of finance costs)	$	23,924
Decrease in valuation allowance allowing an income tax benefit on current year net operating losses		(15,455	)
Net deferred tax asset reserved for by a liability for unrecognized tax benefits		(2,700	)
Net deferred tax liability on consolidated balance sheet	$	5,769

The total amount of federal, state and local unrecognized tax benefits was $3.4 million at September 30, 2011 and $10.3 million at December 31, 2010, including accrued penalties and interest. The decrease of $6.9 million in the Company's liability for unrecognized tax benefits from December 31, 2010 to September 30, 2011 is primarily the result of a recently completed state tax audit during the first quarter of 2011. The Company also decreased a portion of its liability for unrecognized tax benefits due to a change in estimate resulting from a recently settled federal tax audit during the first quarter of 2011.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of other (expense) income, net, in its consolidated statements of operations, which is consistent with the recognition of these items in prior reporting periods. The accrued liability for interest and penalties for unrecognized tax benefits decreased by $1.2 million and $0.5 million during the nine months ended September 30, 2011, respectively, with a corresponding $1.7 million increase to income recorded to other (expense) income, net, within the Company's statement of operations for the nine months ended September 30, 2011. The decrease in interest and penalty is primarily the result of a recently completed state tax audit during the first quarter of 2011.

The Company has filed income tax returns in the United States and various state jurisdictions for all tax years through 2010. In January 2011, the Company settled the 2006 through 2008 examination by the Internal Revenue Service for no additional liability, although certain tax attributes were adjusted (i.e. NOL carryforwards, orphan drug credit carryforward and capital loss carryforwards). However, the net results of these adjustments were not material to the Company's financial statements.

State income tax returns are generally subject to examination for a period of three to five years subsequent to the filing of the respective tax return. In March 2011, the Company settled the examination with the State of New Jersey for an immaterial amount of sales and use tax liability which included interest and penalty expense. The examination encompassed the review of the Company's 2005 through 2008 corporate income tax returns, the 2007 through 2009 gross employer tax returns and the April 2006 through March 2010 sales and use tax returns.

The initial Irish tax return for the Company's newly established Irish subsidiary, Savient Pharma Ireland Limited will be filed in 2012.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their basis for income tax purposes and the tax effects of capital loss, net operating loss and tax credit carryforwards. Valuation allowances reduce deferred tax assets to the amounts that are more likely than not to be realized.

At present, the likelihood of the Company being able to fully realize its deferred income tax benefits against future income is uncertain. Accordingly, at September 30, 2011, the Company had a valuation allowance against its deferred income tax assets except for the portion of the deferred tax asset that the Company expects to benefit from in the current year of $15.5 million and for the deferred income tax assets of $2.7 million that were offset by an unrecognized tax benefit reserve. As of December 31, 2010, the Company had a valuation allowance against its deferred income tax assets except for the deferred tax assets of $4.2 million that were offset by an unrecognized tax benefit reserve.

As of September 30, 2011 and December 31, 2010, $2.7 million and $4.2 million, respectively, of the net deferred tax assets remaining were offset by an unrecognized tax benefit reserve recorded as components of long-term liabilities on the Company's consolidated balance sheets.