Income Taxes

Income tax expense consists of:



(In thousands)	2011			2010		2009
Current tax expense:
United States (“U.S.”)	$	21,618		$	30,305	$	12,654
State	235			1,224		10,273
Foreign	40,771			19,158		37,439

Total current tax expense	62,624			50,687		60,366

Deferred taxes:
U.S.	21,024			11,252		(6,741		)
State	(22		)	23,004		851
Foreign	(5,345		)	—		—

Total deferred tax expense (benefit)	15,657			34,256		(5,890		)

Total income tax expense	$	78,281		$	84,943	$	54,476

Deferred income tax assets were as follows:



(In thousands)	December 31, 2011			December 31, 2010
Deferred income on sales to distributors	$	13,710		$	19,576
Acquisition costs	2,894			6,271
Deferred compensation	24,523			23,805
Stock compensation	18,506			22,999
Other accrued expenses and reserves	32,501			38,109
Tax credits	13,640			2,438

Gross deferred tax assets	105,774			113,198
Valuation Allowance	(10,898		)	(2,700		)
Deferred tax assets, net of valuation allowance	94,876			110,498

Depreciation and amortization	(9,832		)	(6,340		)

Net deferred tax assets	$	85,044		$	104,158

As of December 31, 2011, we had $10.7 million of California research and development tax credit carry forwards. The California credits can be carried forward indefinitely.

The valuation allowance of $10.9 million as of December 31, 2011 primarily relates to a California law change providing the option to elect an alternative method to attribute taxable income to California for tax years beginning on or after January 1, 2011. We expect that the income subject to tax in California will be lower than under prior tax law and therefore realization of our California deferred tax assets is no longer more likely than not to occur.

The provisions related to the tax accounting for stock-based compensation prohibit the recognition of a deferred tax asset for an excess benefit that has not yet been realized. As a result, we will only recognize an excess benefit from stock-based compensation in additional paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available to us have been utilized. In addition, we have elected to account for the indirect benefits of stock-based compensation such as the R&D tax credit through the consolidated statements of income.

The items accounting for the difference between income taxes computed at the federal statutory rate and income tax expense are as follows:



(In thousands)	2011			2010			2009
Tax expense at U.S. statutory rates	$	297,151		$	303,849		$	106,977
State taxes, net of federal benefit	203			27,058			10,166
Foreign tax rate differential	(225,234		)	(240,873		)	(57,267		)
Executive compensation deduction limitation	3,237			1,277			351
Research tax credits	(16,649		)	(12,951		)	(12,508		)
Interest on unrecognized gross tax benefits	7,520			4,477			4,716
Deferred tax asset valuation allowance	8,198			2,700			—
Other, net	3,855			(594		)	2,041

Total income tax expense	$	78,281		$	84,943		$	54,476

We file income tax returns with the Internal Revenue Service (“IRS”) and in various U.S. states and foreign jurisdictions. In 2008, the IRS completed field examinations of our tax returns for 2002 through 2004 and assessed $34.5 million in additional taxes (excluding interest). We appealed the IRS notice and resolved a number of issues. In December 2011, the IRS issued a Statutory Notice of Deficiency, revising the assessment of additional taxes for those years to $19.8 million, excluding interest and penalties. We paid $18.0 million to the IRS in 2008, representing a payment on bond for items associated with the IRS field examinations for 2002 through 2004. We are evaluating our course of action relating to this assessment. As a result of the Statutory Notice of Deficiency received for 2002 through 2004, we recognized an income tax benefit of $4.3 million.

During 2010, the IRS completed field examinations of our tax returns for 2005 through 2007 and assessed $34.2 million in additional taxes (excluding interest). In January 2012, the IRS issued a Statutory Notice of Deficiency, revising the assessment of additional taxes for those years to $21.4 million, excluding interest and penalties. We are evaluating our course of action relating to this assessment.

We believe we have made adequate tax payments and/or accrued adequate amounts for our tax liabilities for 2002 through 2007 and that the outcome will not materially affect our consolidated operating results, cash flows or financial position.

Other significant jurisdictions in which we may be subject to examination for fiscal years 2002 forward include China (including Hong Kong), Malaysia, the United Kingdom, and the state of California. We believe that we have made adequate tax payments and/or accrued adequate amounts such that the outcome of these audits will not materially affect our consolidated operating results, cash flows or financial position. Due to the potential resolution of federal, state and foreign examinations, and the expiration of various statutes of limitations, it is reasonably possible that our gross unrecognized tax benefits may change within the next twelve months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

The aggregate changes in the balance of gross unrecognized tax benefits for 2011, 2010 and 2009 were as follows:



(In millions)	2011			2010			2009
Balance at beginning of year	$	263.3		$	244.1		$	199.2
Additions based on tax positions related to the current year	51.0			39.9			32.5
Additions for tax positions of prior years	5.7			—			13.3
Reductions for tax positions of prior years	(13.6		)	(20.7		)	(0.9		)
Balance at end of year	$	306.5		$	263.3		$	244.1

As of December 31, 2011 and December 31, 2010, the total amount of unrecognized tax benefit that, if recognized, would impact the effective tax rate was $284.9 million and $243.3 million, respectively. These amounts are presented net of federal benefits for the deduction of interest and other deductible items.

Estimated interest and penalties related to unrecognized tax benefits are recognized in tax expense. We recognized $4.8 million, $2.9 million, and $12.8 million of interest and penalties in 2011, 2010 and 2009, respectively. The balance of accrued and unpaid interest and penalties was $54.8 million and $50.0 million as of December 31, 2011 and 2010, respectively.

U.S. and foreign components of income before income taxes were:



(In thousands)	2011		2010		2009
U.S.	$	94,930	$	116,362	$	22,091
Foreign	754,062		751,465		283,447

Income before income taxes	$	848,992	$	867,827	$	305,538

Aggregate unremitted earnings of our foreign subsidiaries were $2.2 billion as of December 31, 2011. These earnings, which reflect full provisions for foreign income taxes, are indefinitely invested in foreign operations. If these earnings were remitted to the U.S., they would be subject to domestic and/or foreign taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.