8. Income Taxes

Concurrent and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for fiscal years before 1997.

The domestic and foreign components of loss before provision for income taxes are as follows:


		Year ended June 30,
		2012			2011			2010
		(Dollars in thousands)
United States	$	(2,406	)	$	(1,541	)	$	575
Foreign		170			(1,168	)		(1,193	)
	$	(2,236	)	$	(2,709	)	$	(618	)

The components of the provision for income taxes are as follows:


		Year ended June 30,
		2012			2011			2010
		(Dollars in thousands)
Current:
Federal	$	20		$	42		$	68
State		(11	)		(2	)		(10	)
Foreign		707			678			349
Total		716			718			407

Deferred:
Federal		-			-			-
State		-			-			-
Foreign		(65	)		(172	)		(11	)
Total		(65	)		(172	)		(11	)

Total	$	651		$	546		$	396

A reconciliation of the income tax expense (benefit) computed using the federal statutory income tax rate to our provision for income taxes is as follows:


		Year ended June 30,
		2012			2011			2010
		(Dollars in thousands)
Loss before provision for income taxes	$	(2,236	)	$	(2,709	)	$	(618	)
Provision (benefit) at Federal statutory rate		(760	)		(921	)		(210	)
Change in valuation allowance		452			(5,386	)		391
Permanent differences		82			6			302
Net operating loss expiration		700			5,782			1,760
Change in state tax rates		-			-			(2,211	)
Change in foreign tax rates		49			310			-
Change in uncertain tax positions		(313	)		358			15
UK refundable research and development tax credits		281			(429	)		-
Foreign rate differential		175			618			183
Other		(15	)		208			166
Provision for income taxes	$	651		$	546		$	396

As of June 30, 2012 and 2011, our deferred tax assets and liabilities were comprised of the following:


		June 30,
		2012			2011
		(Dollars in thousands)
Deferred tax assets related to:
U.S. and foreign net operating loss carryforwards	$	50,808		$	51,036
Book and tax basis differences for property and equipment		27			-
Bad debt, warranty and inventory reserves		861			963
Accrued compensation		1,049			1,168
Deferred revenue		1,211			1,450
U.S. Federal tax credits		347			343
Stock compensation		459			513
Other		1,086			1,083
Deferred tax assets		55,848			56,556
Valuation allowance		(54,340	)		(54,792	)
Total deferred tax assets		1,508			1,764

Deferred tax liabilities related to:
Acquired intangibles		575			903
Book and tax basis differences for property and equipment		-			15
Total deferred tax liability		575			918

Deferred income taxes, net	$	933		$	846

The net deferred income tax asset of $933,000 is comprised of $765,000 of current deferred tax assets, net, and $168,000 of non-current deferred tax assets, net. As of June 30, 2012, we have U.S. Federal net operating loss carryforwards of approximately $116,808,000 for income tax purposes, of which $18,623,000 expire in fiscal year 2013, and the remainder expires at various dates through 2032. We completed an evaluation of the potential effect of Section 382 of the Internal Revenue Code on our ability to utilize these net operating losses. The study concluded that we have not had an ownership change for the period from July 22, 1993 to June 30, 2012. Therefore, the U.S. Federal net operating losses will not be subject to limitation under Section 382.

As of June 30, 2012, we have state net operating loss carryforwards of approximately $64,125,000 and foreign net operating loss carryforwards of approximately $30,964,000. The state net operating losses expire between fiscal year 2012 and fiscal year 2032. The foreign net operating loss carryforwards expire according to the rules of each country, and with the exception of Spain, all have an indefinite carryforward period. Spanish net operating loss carryforwards will expire between fiscal year 2013 through fiscal year 2030. We have fully offset deferred tax assets related to both state and foreign net operating losses with a valuation allowance. We also have an alternative minimum tax credit for federal purposes of $207,000, which has an indefinite life, and a research and development credit carryforward for federal purposes of $140,000, which has a carryforward period of 20 years and will expire in fiscal years 2025 and 2026.

Of the $116,808,000 of aforementioned U.S. Federal Tax net operating loss carryforwards, $11,000,000 represents acquired net operating losses from the Everstream acquisition. We also acquired $254,000 in research and development credits in this transaction. The benefits associated with these Everstream losses and tax credits will likely be limited under Sections 382 and 383 of the Internal Revenue Code as of the date of acquisition. We have fully offset the deferred tax assets related to these losses and credits with a valuation allowance.

Deferred income taxes have not been provided for undistributed earnings of foreign subsidiaries because of our intent to reinvest them indefinitely in active foreign operations. Because of the availability of significant U.S. net operating losses, it is not practicable to determine the U.S. income tax liability that would be payable if such earnings were repatriated. Deferred taxes are provided for the earnings of foreign subsidiaries when it becomes evident that we do not plan to permanently reinvest the earnings into active foreign operations. As of June 30, 2012, $2,148,000 of the $29,613,000 (on the consolidated balance sheet) of cash and cash equivalents was held by foreign subsidiaries. As of June 30, 2012, we have both the intent and the ability to permanently reinvest our foreign earnings in our foreign subsidiaries

The valuation allowances for deferred tax assets as of June 30, 2012 and 2011 were approximately $54,340,000 and $54,792,000, respectively. The change in the valuation allowance for the year ended June 30, 2012 was a decrease of approximately $452,000. This change consisted of a $1,118,000 increase due to the creation of deferred tax assets during fiscal year 2012, a $696,000 decrease due to expiration and true-ups of domestic net operating loss carryforwards, and an $18,000 increase due to miscellaneous true-ups of prior year deferred tax amounts. Additionally, there was an $892,000 decrease due to exchange rate changes and the effect of unrealized gains/losses, the effect of which was a component of equity.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining whether or not a valuation allowance for deferred tax assets is needed, we evaluate all available evidence, both positive and negative, including: trends in operating income or losses; currently available information about future years; future reversals of existing taxable temporary differences; future taxable income exclusive of reversing temporary differences and carryforwards; taxable income in prior carryback years if carryback is permitted under the tax law; and tax planning strategies that would accelerate taxable amounts in order to utilize expiring carryforwards, change the character of taxable and deductible amounts from ordinary income or loss to capital gain or loss, or switch from tax-exempt to taxable investments. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. With the exception of our deferred tax assets in Japan, we maintain valuation allowances on our deferred tax assets in all jurisdictions, since we consider it more likely than not that the deferred tax assets will not be realized.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (dollars in thousands):


Balance at July 1, 2010	$	154
Additions based on tax positions related to the current year		339
Additions for tax positions of prior years		-
Reductions for tax positions for prior year		-
Reductions for lapse in statute of limitations		-
Settlements		-
Balance at June 30, 2011		493
Additions based on tax positions related to the current year		-
Additions for taxpositions of prior years		-
Reductions for tax positions for prior year		(339	)
Reductions for lapse in statute of limitations		-
Settlements		-
Balance at June 30, 2012	$	154

The amount of gross tax effected unrecognized tax benefits as of June 30, 2012 was approximately $154,000 of which all, if recognized, would affect the effective tax rate. During the fiscal year ended June 30, 2012, we recognized approximately $15,000 of interest and less than $1,000 of penalties. We had approximately $199,000 and $184,000 of accrued interest at June 30, 2012 and 2011, respectively. We had approximately $88,000 of accrued penalties as of both June 30, 2012 and 2011. We recognize potential interest and penalties related to unrecognized tax benefits as a component of income tax expense. We believe that the amount of uncertain tax positions will not change by a significant amount within the next twelve months.