Note 9 - Income Taxes

9 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Text Block]

9.            Income Taxes

Income tax expense was as follows (in thousands):

	Nine Months Ended September 30,				Three Months Ended September 30,
	2012		2011		2012		2011
Income tax expense	$	2,014	$	1,904	$	144	$	342

The Company evaluates its deferred tax assets, including net operating losses and tax credits, to determine if a valuation allowance is required.  The Company assesses whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard.  In making such judgments, significant weight is given to evidence that can be objectively verified.  A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable.

At September 30, 2012, the Company's valuation allowance was $49,064,000.  At September 30, 2012, the Company had a net deferred tax asset after valuation allowance of $2,043,000 which consisted of U.S. foreign tax credits of $35,000 for the eventual carryback of foreign tax credits to the 2006 tax year as the Company believes it is more-likely-than-not that it will be utilized and foreign net operating losses of $2,008,000 which is related to the pre-acquisition losses of Palladium, a French company, which has an unlimited carryforward period and therefore the Company believes it is more-likely-than-not that the loss carryforward will be utilized.  The ultimate realization of this loss carryforward is dependent upon the generation of future taxable income in France during the periods in which those temporary differences become deductible.  This assessment could change in future periods if the Company does not achieve taxable income in France or projections of future taxable income decline.  Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.  The accounting for deferred taxes is based upon an estimate of future operating results.  Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position.  If an increase in the valuation allowance in future periods is required, this would result in an increase in the Company’s income tax expense and could materially impact the effective income tax rate in the period recorded.

At September 30, 2012, uncertain tax positions and the related interest, which are included in other liabilities on the Consolidated Balance Sheet, were $7,707,000 and $1,431,000, respectively, all of which would affect the income tax rate if reversed.  Income tax expense related to uncertain tax positions was as follows (in thousands):

	Nine Months Ended September 30,				Three Months Ended September 30,
	2012		2011		2012		2011
Income tax expense related to uncertain tax positions	$	595	$	640	$	168	$	210
Interest expense related to uncertain tax positions		159		185		54		63
Total income tax expense related to uncertain tax positions	$	754	$	825	$	222	$	273

The federal income tax returns for 2006 through 2009 and certain state returns for 2007 and 2008 are currently under various stages of audit by the applicable taxing authorities.  The Company received a Notice of Proposed Adjustment from the Internal Revenue Service (“IRS”) for tax years 2006 and 2007 of $7,114,000 (which includes $1,186,000 in penalties).  Interest will be assessed, and at this time it is estimated at approximately $1,812,000.  This issue, which relates to intercompany transfer pricing, has been sent to the IRS Appeal’s office for further consideration.  The Company does not believe that an additional tax accrual is required at this time.

In January 2012, the Company received a Notice of Proposed Adjustment for the 2008 tax year, also regarding intercompany transfer pricing.  The 2008 proposed adjustment is $251,000.  Interest will be assessed, and at this time it is estimated at approximately $37,000.  This issue has been sent to the IRS Appeal’s office for further consideration.  This will not create any additional financial statement impact due to the available U.S. tax losses that may be carried back from the 2010 tax year to the 2008 tax year.

Also in January 2012, the Company received a Notice of Proposed Adjustment for the 2009 tax year of $496,000 related to the gain on sale of certain Royal Elastics assets.  Interest will not be assessed as the adjustment will reduce the Company’s net operating loss for 2009.  The Company has agreed to this adjustment. The IRS did not propose an adjustment to the Company's 2009 intercompany transfer pricing even though the Company's intercompany transfer pricing methodology has been the same during the 2006 to 2009 period.

The Company does not agree with the 2006 through 2008 adjustments and plans to vigorously defend its position.  The amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.  The Company’s material tax jurisdiction is the United States.