Income Taxes:



	Year Ended
	December 29, 2012			December 31, 2011		January 1, 2011
Domestic	$	51,859		$	42,619	$	56,782
Foreign	(60,720		)	104		821
(Loss) income before income taxes	$	(8,861	)	$	42,723	$	57,603

The components of the income tax (provision) benefit are as follows (in thousands):



	Year Ended
	December 29, 2012			December 31, 2011			January 1, 2011
Current:
Federal	$	344		$	(13,463	)	$	(83	)
State	(36		)	137			(47		)
Foreign	(1,498		)	(541		)	(880		)
	(1,190		)	(13,867		)	(1,010		)
Deferred:
Federal	(18,000		)	45,423			296
State	(1,487		)	3,894			8
Foreign	(68		)	59			175
	(19,555		)	49,376			479
(Provision) benefit for income taxes	$	(20,745	)	$	35,509		$	(531	)

The (provision) benefit for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:



	Year Ended
	December 29, 2012	December 31, 2011	January 1, 2011
	%	%	%
Statutory federal rate	35	35	35
Adjustments for tax effects of:
State taxes, net	(7)	3	—
Intellectual property sale	—	144	—
Research and development credits	(1)	(3)	(2)
Foreign rate differential	(252)	2	—
Foreign dividends	3	1	—
Valuation allowance	(19)	(289)	(37)
Change in uncertain tax benefit accrual	3	31	—
Tax rate change	—	(7)	5
Other	4	—	—
Effective income tax rate	(234)	(83)	1

ASC 740, “Income Taxes”, provides for the recognition of deferred tax assets if realization of these assets is more-likely-than-not. We evaluate both positive and negative evidence to determine if some or all of our deferred tax assets should be recognized on a quarterly basis.

On December 31, 2011, we began to implement a global tax structure to more effectively align the Company's corporate structure with the geographic business operations including responsibility for sales and manufacturing activities. As part of this tax restructuring, we created new and realigned existing legal entities, completed intercompany sales of rights to intellectual property, inventory and fixed assets across different tax jurisdictions, and implemented cost-sharing and intellectual property licensing and royalty agreements between our U.S. and foreign entities. The intercompany sales of rights to intellectual property resulted in a gain for tax purposes, for which we recorded a $76.8 million tax provision in the fourth quarter of fiscal 2011 which was fully offset by the release of valuation allowance on deferred tax assets.

The global tax structure was completed during the first quarter of 2012 upon the intercompany sale of inventory and fixed assets. During 2012, this inventory has been sold to end customers in the ordinary course of business resulting in income before taxes in the U.S. and a loss before taxes in foreign jurisdictions. Taxes have been applied to the gain on sale based on U.S. statutory tax rates, offset by deferred tax assets. This resulted in an increase to the effective tax rate and a net income tax provision of $13.7 million during 2012.

Also during the fourth quarter of 2011, we concluded that it was more-likely-than-not that we would be able to realize the benefit of a portion of our remaining deferred tax assets, resulting in a tax benefit of $35.2 million and a net deferred tax asset of $49.7 million. We based this conclusion on improved operating results over the past two years and our expectations about generating taxable income in the foreseeable future including the implementation of a global tax structure discussed above. We exercised significant judgment and considered estimates about our ability to generate revenue, gross profits, operating income and taxable income in future periods under our new tax structure in reaching this decision. As of December 29, 2012 we have approximately $30.1 million of deferred tax assets. We will continue to evaluate both positive and negative evidence in future periods to determine if additional deferred tax assets should be recognized. We do not have a valuation allowance in any foreign jurisdictions as it has been concluded it is more-likely-than-not that we will realize the net deferred tax assets in future periods. The net increase in the total valuation allowance affecting the effective tax rate for the year ended December 29, 2012 was approximately $1.7 million.

The components of our net deferred tax assets are as follows (in thousands):



	December 29, 2012			December 31, 2011
Deferred tax assets:
Accrued expenses and reserves	$	1,791		$	4,011
Inventory	—			4,036
Deferred revenue	—			13,047
Stock-based and deferred compensation	4,164			3,716
Intangible assets	8,187			9,277
Fixed assets	—			124
Net operating loss carry forwards	127,400			125,013
Tax credit carry forwards	32,446			31,768
Capital loss carry forwards	6,926			6,916
Unrealized loss on securities	758			925
Other	120			81
	181,792			198,914
Less: valuation allowance	(149,209		)	(147,499		)
Net deferred tax assets	32,583			51,415
Deferred tax liabilities:
Fixed Assets	1,897			—
Prepaid expenses	—			768
Other	608			977
Total deferred tax liabilities	2,505			1,745
Net deferred tax assets	$	30,078		$	49,670

Of the total Net deferred tax assets, $0.9 million and $4.5 million is considered current and included in Prepaid expenses and other current assets on the Consolidated Balance Sheet as of December 29, 2012 and December 31, 2011, respectively.

At December 29, 2012, we have federal net operating loss carryforwards (pretax) of approximately $296.9 million that expire at various dates between 2023 and 2032. We have state net operating loss carryforwards (pretax) of approximately $173.4 million that expire at various dates from 2013 through 2032. We also have federal and state credit carryforwards of $14.1 million and $24.8 million of which $22.1 million do not expire. The remaining credits expire at various dates from 2013 through 2031.

Future utilization of federal and state net operating losses and tax credit carry forwards may be limited if cumulative changes to ownership exceed 50% within any three-year period. However, if there is a significant change in ownership the future utilization may be limited and the deferred tax asset would be reduced to the amount available.

At December 29, 2012, U.S. income taxes were not provided for approximately $2.0 million of the undistributed earnings of our Chinese subsidiary. We intend to reinvest these earnings indefinitely. If these earnings were distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes.

At December 29, 2012, our unrecognized tax benefits associated with uncertain tax positions were $21.7 million, of which $20.5 million, if recognized, would affect the effective tax rate, subject to valuation allowance. As of December 29, 2012, interest and penalties associated with unrecognized tax benefits were $0.4 million.

The following table summarizes the changes to unrecognized tax benefits for fiscal years 2012, 2011 and 2010 (in thousands):



Unrecognized tax benefit	Amount
Balance at January 2, 2010	$	6,969
Additions based on tax positions related to the current year	786
Additions based on tax positions of prior years	60
Reduction for tax positions of prior years	—
Settlements	—
Reduction as a result of lapse of applicable statute of limitations	(74		)
Balance at January 1, 2011	7,741
Additions based on tax positions related to the current year	15,005
Additions based on tax positions of prior years	—
Additions for acquisition of SiliconBlue	298
Reduction for tax positions of prior years	(106		)
Settlements	(1,248		)
Reduction as a result of lapse of applicable statute of limitations	(138		)
Balance at December 31, 2011	21,552
Additions based on tax positions related to the current year	384
Additions based on tax positions of prior years	192
Reduction for tax positions of prior years	(26		)
Settlements	(30		)
Reduction as a result of lapse of applicable statute of limitations	(392		)
Balance at December 29, 2012	$	21,680

At December 29, 2012, it is reasonably possible that $0.4 million of unrecognized tax benefits and $0.2 million of associated interest and penalties could significantly change during the next twelve months. The $0.4 million potential change would represent a decrease in unrecognized tax benefits, comprised of items related to tax filings for years that will no longer be subject to examination under expiring statutes of limitations.

The Internal Revenue Service has examined our income tax returns for 2001 and 2002, and issued proposed adjustments of $1.4 million, plus interest. These adjustments relate to the treatment of acquisition costs and a tax accounting method change for prepaid expenses. We reached an agreement regarding the acquisition costs during the three months ended March 29, 2008. We made a payment of $0.3 million related to this settlement agreement. On May 23, 2008, we filed a petition with the Tax Court seeking a redetermination of the prepaid expense adjustment. On May 9, 2011 the United States Tax Court ruled that the IRS did not err in denying our request to change our accounting method with respect to prepaid expenses and held that we were not allowed a deduction for prepaid expenses on our 2002 tax return. During the quarter ended October 1, 2011, we decided not to pursue further litigation with regard to the prepaid expense adjustment and paid the adjustments to the IRS. As a result, we paid $1.0 million in October 2011 related to disallowed prepaid expense deductions and the corresponding carry back of those deductions to the 1999 and 2000 tax returns through a net operating loss carry back. The amount paid was fully reserved. A benefit of approximately $0.9 million was recognized in the three months ended October 1, 2011 for the reversal of uncertain tax positions and related interest for the years effectively settled.

We are not currently under examination in any tax jurisdictions.

We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate. Additionally, the years that remain subject to examination are 2009 for federal income taxes, 2008 for state income taxes, and 2006 for foreign income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward amount.

The American Taxpayer Relief Act of 2012, which reinstated the United States federal research and development tax credit retroactively from January 1, 2012 through December 31, 2013, was not enacted into law until the first quarter of 2013. Therefore, the expected tax benefit, if any, resulting from reinstatement for 2012 will not be reflected in the Company's annual effective tax rate until 2013.