INCOME TAXES

Loss from continuing operations before income taxes consists of the following (in thousands):



	Year ended December 31,
	2015			2014			2013
United States	$	(16,826	)	$	(15,515	)	$	(31,521	)
International	758			(6,280		)	8,369
Loss from continuing operations before income taxes	$	(16,068	)	$	(21,795	)	$	(23,152	)

The components of the provision for (benefit from) income taxes consist of the following (in thousands):



	Year ended December 31,
	2015			2014			2013
Current:
Federal	$	(1,981	)	$	(11,525	)	$	(38,243	)
State	120			8			93
International	1,966			1,619			1,988
Deferred:
Federal	—			25,722			(10,543		)
State	—			8,249			3,023
International	(512		)	380			(1,059		)
Total provision for (benefit from) income taxes	$	(407	)	$	24,453		$	(44,741	)

The differences between the provision for (benefit from) income taxes computed at the U.S. federal statutory rate at 35% and the Company’s actual provision for (benefit from) income taxes are as follows (in thousands):



	Year ended December 31,
	2015			2014			2013
Benefit from for income taxes at U.S. Federal statutory rate	$	(5,624	)	$	(7,628	)	$	(8,103	)
State taxes	120			5,368			2,940
Differential in rates on foreign earnings	1,584			4,311			(1,396		)
Non-deductible amortization expense	947			3,138			4,311
Change in valuation allowance	2,230			26,053			(996		)
Change in liabilities for uncertain tax positions	(1,083		)	(8,126		)	(35,742		)
Non-deductible stock-based compensation	1,398			1,665			981
Research and development tax credits	(178		)	(841		)	(5,044		)
Non-deductible meals and entertainment	395			361			346
Non-deductible acquisition cost	457			—			—
Adjustments related to tax positions taken during prior years	(781		)	—			(1,154		)
Tax-exempt investment income	—			—			(304		)
Other	128			152			(580		)
Total provision for (benefit from) income taxes	$	(407	)	$	24,453		$	(44,741	)

The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. Our effective income tax rate may be affected by changes in or interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carry forwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets. The Company’s effective tax rate varies from year to year primarily due to the absence of several onetime, discrete items that benefited or decremented the tax rates in the previous years.

In 2015, the Company had worldwide consolidated loss before tax of $16.1 million and tax benefit of $0.4 million, with an effective income tax rate of 3%. The Company’s 2015 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to a difference in foreign tax rates and the Company’s U.S. losses generated for the year received no tax benefit as a result of a full valuation allowance against all of its U.S. deferred tax assets, as well as adjustments relating to its 2014 U.S. federal tax return filed in September 2015 and the reversal of uncertain tax positions resulting from the expiration of statutes of limitations. In addition, the impairment of the VJU investment (see Note 5, “Investments in Other Equity Securities”) received no tax benefit.

In 2014, as a result of cumulated losses in the recent years and the analysis of all available positive and negative evidence, the Company recorded a full valuation allowance against the beginning of year U.S. net deferred tax assets of $34.0 million. In addition, in 2014, the Company carried back its 2013 federal net operating loss to 2011 resulting in a tax refund. Certain federal R&D credits were also freed up as a result and utilized to offset income tax reserves as a result of the adoption of the ASU 2013-11. These two events reduced the valuation allowance by approximately $5.0 million and led to the net change of valuation allowance of $29.0 million. This unfavorable net impact was offset partially by a tax benefit of $9.0 million associated with the release of tax reserves including accrued interest and penalties, for our 2010 tax year in the United States, as a result of the expiration of the applicable statute of limitation for that year.

The benefit from income taxes for 2013 included a release of $39.0 million of tax reserves, including accrued interests and penalties, for our 2008 and 2009 tax years in the United States, as a result of the expiration of the applicable statute of limitations for those tax years. In addition, in 2013, the Company recorded a $2.4 million tax benefit arising from the reinstatement of the 2012 United States federal research tax credit.

The components of net deferred tax assets included in the Consolidated Balance Sheets are as follows (in thousands):



	December 31,
	2015			2014
Deferred tax assets:
Reserves and accruals	$	16,413		$	21,048
Net operating loss carryovers	27,023			24,946
Research and development credit carryovers	27,595			26,404
Deferred stock-based compensation	5,834			6,727
Other tax credits	2,738			2,738
Gross deferred tax assets	79,603			81,863
Valuation allowance	(64,545		)	(75,199		)
Gross deferred tax assets after valuation allowance	15,058			6,664
Deferred tax liabilities:
Depreciation and amortization	(1,189		)	(2,137		)
Intangibles	(899		)	(2,228		)
Convertible notes	(10,233		)	—
Other	(510		)	(589		)
Gross deferred tax liabilities	(12,831		)	(4,954		)
Net deferred tax assets	$	2,227		$	1,710

The following table summarizes the activity related to the Company’s valuation allowance (in thousands):



	Year ended December 31,
	2015			2014			2013
Balance at beginning of period	$	75,199		$	38,644		$	34,347
Additions	3,068			39,556			6,364
Deductions	(13,722		)	(3,001		)	(2,067		)
Balance at end of period	$	64,545		$	75,199		$	38,644

Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of available evidence, including such factors as recent earnings history and expected future taxable income on a jurisdiction by jurisdiction basis. In the event that the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

In 2015, the Company continued to record a valuation allowance against all of its United States deferred tax assets as well as its net operating losses generated in 2015 due to significant cumulative losses in the United States, resulting in a net increase in valuation allowance of $3.1 million. This increase in valuation allowance is offset partially by the release of $0.9 million valuation allowance against one of its Israel subsidiaries due to cumulative income generated in the recent years as well as the analysis of all available positive and negative evidence. Additionally, in December 2015, the Company issued $128.25 million of the Notes which led to the establishment of $10.3 million of net deferred tax liability associated with the equity component of the Notes and its related debt issuance costs which were recorded in the Company’s stockholders’ equity according to the applicable accounting guidance. (see Note 12, “Convertible Notes and Credit Facilities” for additional information on the Notes). This deferred tax liability has led to a net reduction of valuation allowance of an equal amount. As of December 31, 2015, the Company had a valuation allowance of $64.5 million against substantially all of its U.S. federal, California and other state and to a lesser extent, foreign net deferred tax assets, related to net operating loss carryforwards and R&D tax credit carryforwards.

In November 2015, the FASB issued an accounting standard update that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2017 and early adoption is permitted. The Company early-adopted this accounting standard update as of the end of its fiscal 2015 on a prospective basis, resulting in $15.9 million of net deferred tax assets, along with its related valuation allowance, being classified from current assets to non-current assets on the Consolidated Balance Sheet as of December 31, 2015. Other than this reclassification, the adoption of this accounting standard update did not have an impact on the Company’s consolidated financial statements.

As of December 31, 2015, the Company had $81.1 million, $11.8 million, $39.4 million and $11.8 million of foreign, U.S. federal, U.S. California state, and U.S. other states net operating loss carryforwards (“NOL”), respectively. There is no expiration to the utilization of the foreign NOL, while the U.S. federal and California NOL will begin to expire at various dates beginning in 2016 through 2035, if not utilized. As of December 31, 2015, the U.S. federal and California NOL included approximately $1.4 million and $6.4 million relating to stock options tax deductions. These amounts are not included in the Company’s gross or net deferred tax assets pursuant to applicable accounting guidance and, if and when realized, through a reduction in income tax payable, will be accounted for as a credit to additional paid-in capital.

As of December 31, 2015, the Company had U.S. federal and California state tax credit carryforwards of approximately $9.2 million and $31.3 million, respectively. If not utilized, the U.S. federal tax credit carryforwards will begin to expire in 2031, while the California tax credit forward will not expire. In addition, as of December 31, 2015, the Company had U.S. federal alternative minimum tax (“AMT”) credit carryforward of approximately $2.7 million, which will not expire.

The Company has not provided U.S. federal and California state income taxes, as well as foreign withholding taxes, on approximately $8.3 million of cumulative undistributed earnings for certain non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investment in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable.

The Company applies the provisions of the applicable accounting guidance regarding accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the recognition of a tax benefit measured at the largest amount of such tax benefit that, in our judgment, is more than fifty percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period in which such determination is made. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of December 31, 2015, the Company had $15.6 million that would favorably impact the effective tax rate in future periods if recognized. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in millions):



	Year ended December 31,
	2015			2014			2013
Balance at beginning of period	$	15.7		$	24.2		$	52.1
Increase in balance related to tax positions taken during current year	0.7			1.0			5.4
Decrease in balance as a result of a lapse of the applicable statues of limitations	(0.9		)	(9.5		)	(1.3		)
Decrease in balance due to settlement with tax authorities	—			—			(32.1		)
Increase in balance related to tax positions taken during prior years	0.3			—			0.1
Decrease in balance related to tax positions taken during prior years	(0.2		)	—			—
Balance at end of period	$	15.6		$	15.7		$	24.2

The Company recognizes interest and penalties related to unrecognized tax positions in income tax expenses on the Consolidated Statements of Operations. The net interest and penalties reduction recorded for the years ended December 31, 2015, 2014 and 2013 related to unrecognized tax benefits was ($31,000), ($1.0) million and ($5.6) million, respectively. The net reduction in interest and penalties in 2015, 2014 and 2013 was attributable to the reversal of accrued interest and penalties of $0.2 million, $1.8 million and $7.5 million, respectively, due to decreases in unrecognized tax benefits resulting from the expiration of the statutes of limitations on the Company’s U.S. corporate tax returns for 2008 through 2011 tax years. The Company had approximately $0.5 million of accrued interest and penalties related to uncertain tax positions as of December 31, 2015 and December 31, 2014.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The U.S. Internal Revenue Service has concluded its audit for the 2008, 2009 and 2010 tax years. The statute of limitations on the Company’s 2008 and 2009, and 2010 and 2011 corporate income tax returns expired in September of 2013, 2014 and 2015, respectively. As a result, the Company released $39.0 million of related tax reserves, including accrued interests and penalties, for the 2008 and 2009 tax years in 2013. Additionally, the Company released $9.0 million and $0.5 million of related tax reserves, including accrued interests and penalties, for the 2010 and 2011 tax years in 2014 and 2015, respectively.

The 2012 through 2015 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, the 2007 through 2015 tax years generally remain subject to examination by their respective tax authorities. The Company is currently under examination by the U.S. Internal Revenue Service for its 2012 federal income tax return, which commenced officially in August 2015, and so far there has been no proposed adjustment received for the audit. In addition, a subsidiary of the Company is under audit for the 2012 and 2013 tax years, which commenced in the first quarter of 2015, by the Israel tax authority. If, upon the conclusion of these audits, the ultimate determination of taxes owed in the United States or Israel is for an amount in excess of the tax provision the Company has recorded in the applicable period, the Company’s overall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.

On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. On February 19, 2016, the U.S. Internal Revenue Service filed a notice of appeal in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), to the Ninth Circuit Court of Appeal. The Ninth Circuit will decide whether a regulation that mandates that stock-based compensation costs related to the intangible development activity of a qualified cost sharing arrangement (QCSA) must be included in the joint cost pool of the QCSA (the “all costs rule”) is consistent with the arm’s length standard as enunciated under section 482. The Company concluded that no adjustment to the consolidated financial statements as of December 31, 2015 is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.

The Company’s operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds of investment and employment in Switzerland. The Company has met these various thresholds and the Switzerland tax holiday is effective through the end of 2018. The income tax benefits attributable to the Switzerland holiday were estimated to be approximately $0.7 million, $0.7 million and $1.5 million in 2015, 2014 and 2013, respectively, increasing diluted earnings per share by approximately $0.008, $0.008 and $0.014 in 2015, 2014 and 2013, respectively.