Note 11: Income Taxes

The components of income (loss) before income taxes are as follows (in thousands):


	For the years ended December 31,
	2011		2010			2009
U.S.	$	3,143	$	(18,818	)	$	24,470
Foreign		27,277		17,188			(8,435	)

Total	$	30,420	$	(1,630	)	$	16,035

The provision (benefit) for income taxes is summarized as follows (in thousands):


	For the years ended December 31,
	2011			2010			2009
Current:
U.S. Federal	$	1,685		$	(6,819	)	$	7,049
State		1,202			136			2,395
Foreign		2,759			1,756			1,956

Total current		5,646			(4,927	)		11,400

Deferred:
U.S. Federal		(688	)		(2,384	)		6,430
State		(1,114	)		(1,407	)		456
Foreign		(889	)		(399	)		(80	)

Total deferred		(2,691	)		(4,190	)		6,806

Provision for (benefit from) income taxes	$	2,955		$	(9,117	)	$	18,206

Reconciliation between the income tax provision (benefit) computed at the federal statutory rate and the actual tax provision (benefit) is as follows (in thousands):


	For the years ended December 31,
	2011					2010					2009
Tax expense (benefit) at federal statutory rate	$	10,647		35.0	%	$	(571	)	35.0	%	$	5,613		35.0	%
State income taxes, net of federal benefit		57		0.2			(826	)	50.6			1,853		11.6
Research and development credits		(2,274	)	(7.5	)		(2,572	)	157.7			(1,219	)	(7.6	)
Foreign tax rate differential		(4,626	)	(15.2	)		(894	)	54.8			6,529		40.7
Reduction in accrual for estimated potential tax assessments		(2,295	)	(7.6	)		(8,163	)	500.5			(397	)	(2.5	)
Non-deductible travel & entertainment		368		1.2			332		(20.4	)		274		1.7
Non-deductible stock-based compensation charge		2,179		7.2			4,002		(245.4	)		6,512		40.6
Valuation allowance changes affecting provision for income taxes		(706	)	(2.3	)		123		(7.5	)		(763	)	(4.8	)
Other		(395	)	(1.3	)		(548	)	33.7			(196	)	(1.2	)

	$	2,955		9.7	%	$	(9,117	)	559.0	%	$	18,206		113.5	%

The tax effects of temporary differences that give rise to deferred tax assets (liabilities) are as follows (in thousands):


	December 31,
	2011			2010
Reserves and accruals not currently deductible for tax purposes	$	8,986		$	8,371
Net operating loss carryforwards		14,172			20,644
Tax credit carryforwards		46,707			38,681
Stock-based compensation		8,884			7,853
Other		5,586			6,361

Gross deferred tax assets		84,335			81,910

Depreciation		(9,508	)		(8,829	)
Amortization of identified intangibles		(9,835	)		(5,599	)
State taxes		(4,858	)		(5,122	)

Gross deferred tax liabilities		(24,201	)		(19,550	)

Deferred tax valuation allowance		(2,566	)		(3,551	)

Net deferred tax assets	$	57,568		$	58,809

We have $31.2 million ($60.4 million for state tax purposes) and $23.6 million ($23.1 million for state tax purposes) of loss and credit carryforwards at December 31, 2011 for U.S. federal and state tax purposes. These losses and credits will expire between 2015 and 2031. A significant portion of these net operating loss and credit carryforwards relate to recent acquisitions and utilization of these loss and credit carryforwards will be subject to an annual limitation under the IRC. We also have a valuation allowance related to foreign tax credits resulting from the 2003 acquisition of Best GmbH, compensation limitations potentially limited by IRC 162(m), and net operating loss carryforwards resulting from the 2010 Radius acquisition. If these foreign tax credits, compensation deductions, and net operating loss carryforwards are ultimately utilized, the resulting benefit would reduce income tax expense.

As of December 31 2011, 2010, and 2009, the total amount of gross unrecognized benefits that would affect the effective tax rate if recognized was $35.6, $32.5, and $37.0 million, respectively, offset by deferred tax benefits of $2.5, $2.9, and $2.6 million related to the federal tax effect of state taxes for the same periods. Over the next twelve months, our existing tax positions will continue to generate an increase in liabilities for unrecognized tax benefits. A reconciliation of the change in the gross unrecognized tax benefits from January 1, 2009 to December 31, 2011 is as follows (in millions):


	Federal, State, and Foreign Tax			Accrued Interest and Penalties			Gross Unrecognized Income Tax Benefits
Balance at January 1, 2009	$	32.2		$	1.6		$	33.8
Additions for tax positions of prior years		0.8			0.7			1.5
Additions for tax positions related to 2009		4.3			—			4.3
Reductions for tax positions of prior years		(0.3	)		(0.1	)		(0.4	)
Settlements		(1.1	)		(0.5	)		(1.6	)
Reductions due to lapse of applicable statute of limitations		(0.5	)		(0.1	)		(0.6	)

Balance at December 31, 2009	$	35.4		$	1.6		$	37.0
Additions for tax positions of prior years		0.4			0.4			0.8
Additions for tax positions related to 2010		4.2			—			4.2
Reductions for tax positions of prior years		(0.2	)		—			(0.2	)
Settlements		—			—			—
Reductions due to lapse of applicable statute of limitations		(8.1	)		(1.2	)		(9.3	)

Balance at December 31, 2010	$	31.7		$	0.8		$	32.5
Additions for tax positions of prior years		—			0.4			0.4
Additions for tax positions related to 2011		5.6			—			5.6
Reductions for tax positions of prior years		(0.1	)		—			(0.1	)
Settlements		(0.6	)		(0.1	)		(0.7	)
Reductions due to lapse of applicable statute of limitations		(2.0	)		(0.1	)		(2.1	)

Balance at December 31, 2011	$	34.6		$	1.0		$	35.6

We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2011, 2010, and 2009, we have accrued $1.7, $1.3 and $2.7 million, respectively, for potential payments of interest and penalties.

We were subject to examination by the Internal Revenue Service for the 2007-2010 tax years, state tax jurisdictions for the 2007-2010 tax years, and the Netherlands tax authority for the 2009-2010 tax years. It is reasonably possible that our unrecognized tax benefits will decrease up to $8.8 million in the next 12 months. These adjustments, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits in our income statement. The reduction in unrecognized tax benefits relates primarily to the lapse of the statutes of limitations for federal and state tax purposes.