8.	Income Taxes

Concurrent and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With a 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 1999.

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

	Year ended June 30,
	2014		2013			2012
	(Dollars in thousands)
United States	$	3,930	$	4,979		$	(2,406	)
Foreign		1,167		(362	)		170
	$	5,097	$	4,617		$	(2,236	)

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

	Year ended June 30,
	2014			2013		2012
	(Dollars in thousands)
Current:
Federal	$	78		$	128	$	20
State		28			151		(11	)
Foreign		438			90		707
Total		544			369		716

Deferred:
Federal		(12,338	)		-		-
State		(1,361	)		-		-
Foreign		(253	)		-		(65	)
Total		(13,952	)		-		(65	)

Total	$	(13,408	)	$	369	$	651

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,
	2014			2013			2012
	(Dollars in thousands)

Income (loss) before provision for income taxes	$	5,097		$	4,617		$	(2,236	)
Provision (benefit) at Federal statutory rate		1,733			1,570			(760	)
Change in valuation allowance		(15,859	)		(5,444	)		452
Permanent differences		350			22			82
Net operating loss expiration and true-up		13			4,801			700
Change in state tax rates		(21	)		-			-
Change in foreign tax rates		43			-			49
Change in uncertain tax positions		21			16			(313	)
UK refundable research and development tax credits		-			-			281
Foreign rate differential		(40	)		23			175
State and foreign tax expense		145			194			(5	)
Stock option classification change due to repricing		-			(653	)		-
Other		207			(160	)		(10	)
Provision for income taxes	$	(13,408	)	$	369		$	651

As of June 30, 2014 and 2013, our deferred tax assets and liabilities were comprised of the following:

	June 30,
	2014			2013
	(Dollars in thousands)

Deferred tax assets related to:
U.S. and foreign net operating loss carryforwards	$	43,230		$	44,123
Book and tax basis differences for property and equipment		563			448
Bad debt, warranty and inventory reserves		707			804
Accrued compensation		944			898
Deferred revenue		596			1,112
U.S. credit carryforwards		549			459
Stock compensation		992			1,245
Other		1,076			1,030
Deferred tax assets		48,657			50,119
Valuation allowance		(33,851	)		(49,119	)
Total deferred tax assets		14,806			1,000

Deferred tax liabilities related to:
Acquired intangibles		117			245
Total deferred tax liability		117			245

Deferred income taxes, net	$	14,689		$	755

The net deferred income tax asset of $14,689,000 is comprised of $1,458,000 of current deferred tax assets, net, and $13,231,000 of non-current deferred tax assets, net. As of June 30, 2014, we have U.S. federal net operating loss carryforwards (NOLs) of approximately $94,323,000 for income tax purposes, of which none expire in fiscal year 2014, and the remainder expires at various dates through fiscal year 2032. We completed an evaluation of the potential effect of Section 382 of the Internal Revenue Code on our ability to utilize these NOLs. The study concluded that we have not had an ownership change in the past three years, and previous studies confirmed that there have been no ownership changes since July 22, 1993. Therefore, the U.S. federal NOLs will not be subject to limitation under Section 382.

As of June 30, 2014, we have state NOLs of approximately $54,339,000 and foreign NOLs of approximately $32,661,000. The state NOLs expire between fiscal year 2014 and fiscal year 2032. The foreign NOLs expire according to the rules of each country, and with the exception of Spain, all have an indefinite carryforward period. Spanish NOLs will expire between fiscal year 2015 through fiscal year 2023.

We have evaluated our ability to generate future taxable income in all jurisdictions that would allow it to realize the benefit associated with these NOLs. Based on our best estimate of future taxable income, we do not expect to fully realize the benefit of these NOLs. We expect a significant amount of the U.S. losses to expire without utilization, resulting in a valuation allowance in the U.S. on this portion of the deferred tax assets. We expect the U.K. losses to be fully realized based on a fiscal year 2014 tax law change regarding the treatment of research and development benefits, so we have fully released the valuation allowance placed on these losses in prior periods. We do not expect to realize the benefit of our NOLs in other international jurisdictions due to cumulative accounting losses, our long history of taxable losses and our uncertainty with respect to generating future taxable income in the near term given our recently completed projections and other inherent uncertainties in our business. We continue to maintain a full valuation allowance on losses in these other international jurisdictions.

We also have an alternative minimum tax credit for federal purposes of $377,000, 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. We do not expect to be able to realize the benefit of the research and development credit carryforward before its expiration, and we maintain a full valuation allowance on this item.

Of the $94,323,000 of aforementioned U.S. federal tax NOLs, $11,000,000 represents acquired NOLs from the Everstream acquisition. Additionally, we acquired the aforementioned $140,000 in research and development credits in the 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. However as the alternative minimum tax credit has an indefinite life, we have released the valuation allowance on this item.

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 not reinvested indefinitely. 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, 2014, $2,670,000 of the $28,074,000 (on the consolidated balance sheet) of cash and cash equivalents was held by foreign subsidiaries. As of June 30, 2014, 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, 2014 and 2013 were approximately $33,851,000 and $49,119,000, respectively. The change in the valuation allowance for the year ended June 30, 2014 was a decrease of approximately $15,268,000. This change was primarily due to a $13,913,000 decrease related to the release of our valuation allowances in both the U.S. and the U.K. In the U.S. we concluded during our fourth quarter of fiscal year 2014 that it is more likely than not that we will utilize a portion of our domestic deferred tax assets, and released $13,699,000 of our U.S. valuation allowance based on our best estimate of the realizability of those assets. In the U.K., we released $214,000 of valuation allowance based on a change in U.K. tax law related to research and development benefits that will allow us to fully utilize our deferred tax inventory in the U.K. This change also resulted from a $1,766,000 decrease due to the use of deferred tax assets during fiscal year 2014, and a $201,000 decrease due to miscellaneous true-ups of prior year deferred tax amounts. Additionally, there was a $590,000 increase due to exchange rate changes and the effect of unrealized gains/losses, the effect of which was a component of equity, and a $22,000 increase due to a change in foreign tax rates.

Deferred Tax Assets and Related Valuation Allowances

Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance we consider our historical and future projected operations along with other positive and negative evidence in assessing if sufficient future taxable income will be generated to use the existing deferred tax assets. The following summarizes our conclusions on the need for a valuation allowance in each jurisdiction as of June 30, 2014:

U.S.: As of June 30, 2014, we have realized a three-year cumulative accounting profit in the U.S. adjusted for permanent differences and other non-recurring events, including the 2013 gain on the sale of certain patents, and adjusting for the loss of a long time customer. This three-year period is the standard period by which we initially assess each jurisdiction and is strong objective evidence, whether positive or negative, to be considered in the release or recording of any valuation allowance. In determining whether or not to release valuation allowance for the U.S. jurisdiction we considered positive evidence including the three year cumulative accounting profit, current projections of future profitability, lack of any significant claims or loss contingencies, and positive cash from operations. Negative evidence considered includes significant volatility in our operations, history of NOLs expiring unused, concentration of our customer base including the risk that global consolidation in the cable industry, and the loss of a long-time customer in the current year. Based on our analysis of both positive and negative evidence, we have concluded during fourth quarter of our fiscal year 2014 that it is now more likely than not that we will realize a portion of our U.S. deferred tax asset as the positive objective evidence, including the three-year cumulative accounting gain, outweighed the negative subjective evidence of customer concentration and volatility in our business. As a result we realized a $13,699,000 tax benefit related to the release of a portion of our valuation allowance against federal and state net operating losses as well as on the aforementioned deferred tax asset related to AMT credit as it has an indefinite life. We did not release the valuation allowance against our research and development credit as it is expected to expire in future years in which we already expect an expiration of federal NOLs. The amount of valuation allowance released against our net deferred tax assets is based upon our best estimate of future earnings including consideration of a combination of a past historical operating income and future projected income scheduled against the future expected expiration of federal and state NOLs. We did not perform a full release of valuation allowance as there are still significant NOLs that will expire unused based upon our expectations of future earnings. Before consideration of future earnings, there are $25,570,000 and $18,954,000 of federal NOLs scheduled to expire in 2020 and 2021 respectively in addition to other years through 2032 mentioned above. Results materially different from our current expectations on an ongoing basis, or significant events such as the acquisition or loss of a major customer, or the change in buying habits of our customers, could result in future additional change in the valuation allowance. We will continue to evaluate our assumptions each quarter regarding the need for a valuation allowance and will make appropriate adjustments as necessary.

In the recent past, our U.S. tax provision expense has been limited to the alternative minimum tax amount for federal tax purposes, which approximates 2% of earnings before income taxes, and state taxes in various jurisdictions. However, as a result of our non-cash valuation allowance release during our fiscal year ended June 30, 2014, we expect our U.S. tax provision expense in future periods to be at a higher effective tax rate, which will reduce our net income (or loss) and earnings (or loss) per share, by a greater amount than it has in the past. The higher effective tax rates and tax provisions will result in non-cash income tax expense in the future, as we will be able to utilize net operating losses to offset future cash taxes into the foreseeable future.

U.K. - During our fiscal year 2014, a change in U.K. tax law relative to treatment of research and development expenses allowed us to release $214,000 of valuation allowances against deferred tax assets that we believe are now realizable as a result of the current period tax law change. We believe that in light of this law change, we will now generate sufficient taxable income to fully utilize our net deferred tax assets in the U.K.

Japan – Our subsidiary in Japan has a long history of profitable operations, and we continue to project profitability in Japan for the foreseeable future. Therefore, we continue to believe that we will fully realize the net deferred tax assets in Japan, and no valuation allowance is needed.

Other Foreign Jurisdictions - We also evaluated the need for a continued full valuation allowance against our foreign deferred tax assets in other jurisdictions. We concluded that a full valuation allowance against our deferred tax assets for other foreign jurisdictions was warranted due to, among other reasons, (i) the realized cumulative accounting losses, (ii) our long history of taxable losses and (iii) our uncertainty with respect to generating future taxable income in the near term given our recently completed projections and other inherent uncertainties in our business.

Each quarter, we assess the total weight of positive and negative evidence and evaluate whether release of all or any portion of the valuation allowance is appropriate. Should we come to the conclusion that a release of our valuation allowances is required, or that additional valuation allowance is required, there could be a significant increase or decrease in net income and earnings per share in the period of release, or the additional valuation allowance, due to the impact on the tax rate.

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

Balance at June 30, 2012	$	154
Additions based on tax positions related to the current year		-
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, 2013		154
Additions based on tax positions related to the current year		-
Additions for tax positions of prior years		143
Reductions for tax positions for prior year		-
Reductions for lapse in statute of limitations		-
Settlements		-
Balance at June 30, 2014	$	297

The amount of gross tax effected unrecognized tax benefits as of June 30, 2014 was approximately $297,000 of which approximately $248,000, if recognized, would affect the effective tax rate. During the fiscal year ended June 30, 2014, we recognized approximately $21,000 of interest and no penalties. We had approximately $236,000 and $215,000 of accrued interest at June 30, 2014 and 2013, respectively. We had approximately $88,000 of accrued penalties as of both June 30, 2014 and 2013. 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 12 months.