(8) Income Taxes

The Company maintains a valuation allowance for a portion of its U.S. deferred tax assets. The valuation allowance is calculated in accordance with the provisions of ASC 740 “Income Taxes,” which requires that a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. In the event the Company’s expectations of future operating results change, the valuation allowance may need to be adjusted upward or downward. As of September 30, 2011, the Company’s unreserved U.S. deferred tax assets totaled $11.1 million. These existing unreserved deferred tax assets are currently considered to be “more likely than not” realized.

The Company’s effective tax rates for the three months ended September 30, 2011 and 2010 were 27.9% (provision on income) and 18.8% (benefit on income), respectively. For the three months ended September 30, 2010, the Company recorded a benefit of $3.9 million related to alternative minimum tax. Excluding the benefit related to alternative minimum tax included in the third quarter of 2010, the Company’s effective tax rate would have been 22.2% (provision on income). The increase in the Company’s effective tax rate for the three months ended September 30, 2011 was due to changes in the distribution of earnings between U.S. and foreign jurisdictions.

The Company’s effective tax rate for the nine months ended September 30, 2011 was 27.7%, a provision on income, compared to a provision on a loss of 27.7% for the nine months ended September 30, 2010. The difference between these effective tax rates relates primarily to the transactions involved in the completion of the INOVA Geophysical joint venture transaction and to changes in the distribution of earnings between U.S. and foreign jurisdictions, partially offset by recognition of the benefit related to alternative minimum tax for the three months ended September 30, 2010.

A reconciliation of the expected income tax expense (benefit) on income (loss) before income taxes using the statutory federal income tax rate of 35% for the nine months ended September 30, 2011 and 2010 to income tax expense is as follows (in thousands):


	Nine Months Ended
	September 30,
	2011			2010
Expected income tax expense (benefit) at 35%	$	5,963		$	(15,688	)
Alternative minimum tax (benefit) provision		—			(3,910	)
Foreign taxes (tax rate differential and foreign tax differences)		(3,212	)		348
Formation of INOVA Geophysical		—			10,507
Nondeductible expenses and other		5			118
Deferred tax asset valuation allowance on formation of INOVA Geophysical		—			20,213
Deferred tax asset valuation allowance on equity in losses of INOVA Geophysical		1,960			812

Total income tax expense	$	4,716		$	12,400

The Company has no significant unrecognized tax benefits and does not expect to recognize significant increases in unrecognized tax benefits during the next twelve month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.

The Company’s U.S. federal tax returns for 2007 and subsequent years remain subject to examination by tax authorities. The Company is no longer subject to IRS examination for periods prior to 2007, although carryforward attributes that were generated prior to 2007 may still be adjusted upon examination by the IRS if they either have been or will be used in an open year. In the Company’s foreign tax jurisdictions, tax returns for 2007 and subsequent years generally remain open to examination.