Income Taxes

The Company is subject to U.S. federal and state income taxes. Income tax expense (benefit) for the year ended December 31, 2012 consists of the following:



		2012
Current:
	Federal
	State	$	4,308
	Total current tax expense (benefit)	4,308
Deferred:
	Federal	(300,319		)
	State	(39,837		)
	Total deferred tax expense (benefit)	(340,156		)
Total income tax expense (benefit)		$	(335,848	)

During the year ended December 31, 2012, substantially all income tax expense relating to the Company's pre-tax income was offset by releasing a portion of the Company's valuation allowance. In addition, in the fourth quarter of 2012, the Company recorded a $340.2 million income tax benefit attributable to the release of substantially all of the remaining valuation allowance against the Company's deferred tax assets. The decision to release this valuation allowance was made after the Company determined that it was more likely than not that these deferred tax assets would be realized, and was based on the evaluation and weighting of positive and negative evidence. For example, in the fourth quarter of 2012, the Company achieved a cumulative three-year income position; a significant positive factor that overcame substantive prior negative evidence. In addition, the Company considered forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration.

For the year ended December 31, 2011, the Company incurred a net loss for tax purposes and recognized a full valuation allowance against deferred taxes. In 2011, the Company recognized a $1.1 million income tax benefit, consisting of (i) $0.7 million related to tax legislation that allowed the Company to claim a refund for a portion of its unused pre-2006 research tax credits and (ii) $0.4 million in connection with the net tax effect of the change in the Company's unrealized gain (loss) on “available for sale” marketable securities, which was included in other comprehensive income (loss).

For the year ended December 31, 2010, the Company incurred a net loss for tax purposes and recognized a full valuation allowance against deferred taxes. No provision or benefit for income taxes was recognized by the Company in 2010.

A reconciliation of the U.S. statutory income tax rate to the Company's effective income tax rate is as follows:



	2012
U.S. federal statutory tax rate	35.0	%
State and local income taxes	5.4	%
Change in state effective rate	5.4	%
Other non-deductible and permanent differences	2.8	%
Reclassification of net operating losses related to exercises of stock options	9.3	%
Provision (benefit) attributable to valuation allowances	(139.0	)%
Effective income tax rate	(81.1	)%

In 2011 and 2010, the difference between the Company's effective income tax rate and the U.S federal statutory rate of 35% was primarily attributable to an increase in the Company's deferred tax valuation allowance.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:



	As of December 31,
	2012			2011
Deferred tax assets:
Net operating loss carry-forward	$	77,119		$	282,480
Fixed assets	1,380			14,847
Deferred revenue	99,659			120,490
Deferred compensation	53,367			47,092
Income tax credit carry-forwards	71,164			67,734
Capitalized research and development costs	24,437			31,371
Other	23,511			15,956
	350,637			579,970

Deferred tax liabilities:
Accruals	(6,824		)
Convertible senior notes	(1,171		)	(1,428		)
	(7,995		)	(1,428		)

Net deferred tax assets	342,642			578,542
Valuation allowance	(2,486		)	(578,542		)
	$	340,156		$	—

In 2012, the Company's net deferred tax assets (before valuation allowance) decreased, due primarily to utilization of a portion of the net operating loss carry-forward deferred tax asset to offset potential tax liabilities associated with the Company's 2012 pre-tax income. In addition, as described above, (i) substantially all income tax expense related to the Company's 2012 pre-tax income was offset by releasing a portion of the Company's valuation allowance during 2012 and (ii) in the fourth quarter of 2012, the Company released substantially all of the remaining valuation allowance against the Company's deferred tax assets, resulting in the recognition of a $340.2 million income tax benefit. At December 31, 2012, the Company has retained a valuation allowance against certain state tax credits and other tax-related carry-forwards, as the realizability of these deferred tax assets within the carry-forward period is uncertain.

As of December 31, 2012, the Company had available for tax purposes unused federal and state net operating loss carry-forwards of $876.6 million which will expire in various years from 2018 to 2032. The tax benefit of $666.4 million of these net operating loss carry-forwards related to exercises of Nonqualified Stock Options and disqualifying dispositions of Incentive Stock Options, which will be credited to additional paid-in capital when realized. The Internal Revenue Code contains certain provisions that can limit a taxpayer's ability to utilize net operating losses and tax credit carry-forwards in any given year resulting from cumulative changes in ownership interests in excess of 50 percent over a three-year period. The Company does not believe, however, that any such limitation would have a significant impact on the Company's ability to utilize its net operating losses or income tax credit carry-forwards prior to expiration.

In 2011, the Company's net deferred tax assets (before valuation allowance) increased, due primarily to increases in the Company's net operating loss carry-forward and tax credit carry-forwards, and the full recognition of the $165.0 million up-front payment received from Astellas in 2010 as taxable income in 2011. At December 31, 2011, the Company recognized a full valuation allowance against net deferred tax assets.

In 2011 and early 2012, U.S. federal tax authorities concluded examinations of the Company's 2007, 2008, and 2009 federal income tax returns. Tax years subsequent to 2007 remain open to examination by New York State tax authorities. The United States and many states generally have statutes of limitation ranging from 3 to 5 years; however, those statutes could be extended due to our net operating loss carry-forward position in a number of the Company's tax jurisdictions. In general, tax authorities have the ability to review income tax returns for loss periods in which the statute of limitation has previously expired to adjust the net operating loss carry-forward or tax credits generated in those years.

The following table summarizes the gross amounts of unrecognized tax benefits, without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled. The amount, if recognized, that would impact the effective tax rate is $8.4 million, $4.2 million, and $12.0 million as of December 31, 2012, 2011, and 2010, respectively.



	2012		2011			2010
Balance as of January 1	$	5,596	$	12,819
Gross increases related to current year tax positions	1,873		2,192			$	3,550
Gross increases related to prior year tax positions	3,805					9,269
Gross decrease due to settlements and lapse of statue of limitations			(9,415		)
Balance as of December 31	$	11,274	$	5,596		$	12,819

In 2012, the gross increase in unrecognized tax benefits related to the Company's calculation of certain tax credits. In 2011, the gross decrease in unrecognized tax benefits related to prior year tax positions was primarily due to the conclusion of examinations of the Company's 2007, 2008, and 2009 federal income tax returns by U.S. federal tax authorities. In 2010, the gross increases in unrecognized tax benefits related to prior year tax positions was primarily due to the Company's calculations of certain pre-2010 tax credits. Due to the amounts of the Company's net operating loss carry-forward and tax credit carry-forwards, the Company has not accrued interest or penalties related to these unrecognized tax benefits. The Company does not currently expect to reverse any portion of its unrecognized tax benefits at December 31, 2012 within the next year.

On January 2, 2013, The American Taxpayer Relief Act was enacted, retroactively extending various expiring tax provisions, including the credit for increased research activities, from January 1, 2012 through January 1, 2014. As a result, during 2013, the Company will recognize the benefit of both the 2012 and 2013 federal research tax credit.