Income Taxes

The Company is subject to U.S. federal, state, and foreign income taxes. Components of income before income taxes consist of the following (foreign income before income taxes in 2012 was not material):



	Year Ended December 31,
	2014			2013
United States	$	1,115,958		$	812,278
Foreign	(340,211		)	(98,918		)
	$	775,747		$	713,360

Components of income tax expense (benefit) consist of the following:



		Year Ended December 31,
		2014			2013			2012
Current:
	Federal	$	447,370		$	201,475		—
	State	28,718			23,489			$	4,308
	Foreign	2,879			433			—
	Total current tax expense (benefit)	478,967			225,397			4,308
Deferred:
	Federal	(68,700		)	54,910			(300,319		)
	State	18,891			8,700			(39,837		)
	Foreign	(1,485		)	(9		)	—
	Total deferred tax expense (benefit)	(51,294		)	63,601			(340,156		)
		$	427,673		$	288,998		$	(335,848	)

In 2014, the Company utilized $448.6 million of net operating loss carry-forwards related to exercises of Nonqualified Stock Options and disqualifying dispositions of ISOs, which were credited to additional paid-in capital as realized.

In 2013, the Company utilized substantially all of the net operating loss carry-forwards for which deferred tax assets were recorded as of December 31, 2012. The Company also utilized $216.9 million of net operating loss carry-forwards related to exercises of Nonqualified Stock Options and disqualifying dispositions of ISOs, which were credited to additional paid-in capital as realized.

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.

The Company also recorded an income tax provision in its Statement of Comprehensive Income of $27.1 million during the year ended December 31, 2014 in connection with unrealized gains (losses) on "available-for-sale" marketable securities. For both the years ended December 31, 2013 and 2012, no such income tax provision or benefit was required.

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



	Year Ended December 31,
	2014		2013		2012
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes	2.0		3.4		5.4
Change in state effective rate	2.8		—		5.4
Foreign income tax rate differential	15.3		4.9		—
Income tax credits	(7.4	)	(4.9	)	—
Reclassification of net operating losses related to exercises of stock options	—		—		9.3
Provision (benefit) attributable to valuation allowances	—		—		(139.0	)
Provision (benefit) related to uncertain tax positions	2.5		—		—
Non-deductible Branded Prescription Drug Fee	2.7		1.1		—
Other permanent differences	2.2		1.0		2.8
Effective income tax rate	55.1	%	40.5	%	(81.1	)%

In 2014, the difference between the U.S. federal statutory rate of 35% and the Company's effective tax rate of 55.1% is primarily attributable to increases related to state and local taxes, the non-deductible Branded Prescription Drug Fee, increases to provisions for uncertain tax positions, and losses incurred in foreign jurisdictions with rates lower than the federal statutory rate. These increases were partially offset by federal and state income tax credits. In December 2014, The Tax Increase Prevention Act of 2014 was enacted, which included a provision to extend the income tax credit for increased research activities retroactively to the tax year ended December 31, 2014. As a result of the extension, the Company recognized the benefit of 2014 federal research tax credit.

In 2013, the difference between the U.S. federal statutory rate of 35% and the Company's effective tax rate of 40.5% is primarily attributable to increases related to state and local taxes, the non-deductible Branded Prescription Drug Fee, and losses incurred in foreign jurisdictions with rates lower than the federal statutory rate. These increases were partially offset by federal and state income tax credits. In January, 2013, The American Taxpayer Relief Act was enacted, which included a provision to extend the income tax credit for increased research activities retroactively to the tax year ended December 31, 2012, as well as for 2013. As a result of the extension, during 2013, the Company recognized the benefit of both the 2012 and 2013 federal research tax credit, which totaled $34.0 million.

In 2012, the difference between the U.S. federal statutory rate of 35% and the Company's effective tax rate of (81.1)% was primarily attributable to the benefit of the impact of releasing substantially all of the valuation allowance against deferred tax assets as discussed above, partly offset by increases related to state and local income taxes and non-deductible expenses.

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,
	2014			2013
Deferred tax assets:
Net operating loss carry-forward	$	150		$	135
Fixed assets	8,078			18,902
Deferred revenue	75,503			88,033
Deferred compensation	194,489			109,715
Income tax credit carry-forwards	16,099			9,372
Capitalized research and development costs	12,908			18,942
Other	41,252			34,215
	348,479			279,314
Valuation allowance	(359		)	(1,830		)
Total deferred tax assets	348,120			277,484

Deferred tax liabilities:
Unrealized gains/losses on marketable securities	(28,186		)	—
Convertible senior notes	(252		)	(929		)
Other	(3,578		)	—
	(32,016		)	(929		)
Net deferred tax assets	$	316,104		$	276,555

In 2014, the Company's deferred tax assets increased primarily due to increases in assets related to deferred compensation and tax credit carryforwards. These increases in deferred tax assets were partly offset by decreases in assets related to fixed assets, capitalized research and development costs, and deferred revenue. At December 31, 2014, the Company 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. The Company's deferred tax liabilities increased due to the tax impact of changes in unrealized gains (loss) on available-for-sale marketable securities.

In 2013, the Company's net deferred tax assets (before valuation allowance) decreased compared to the prior year primarily due to utilization of the deferred tax assets relating to net operating loss carry-forward and tax credits to offset tax liabilities associated with the Company's 2013 pre-tax income. These decreases in deferred tax assets were partially offset by increases in the deferred tax assets related to deferred compensation.

The Company expects to use its remaining federal net operating loss carry-forwards, which will expire in various years from 2018 to 2032, in connection with its 2014 income tax return. The tax benefit of these net operating loss carry-forwards related to exercises of Nonqualified Stock Options and disqualifying dispositions of Incentive Stock Options, which are 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% 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.

The Company's 2012 and 2013 federal income tax returns remain open to examination by the IRS. In 2014, U.S. federal tax authorities concluded an examination of the Company's 2011 federal income tax return with no material adjustments. The Company's 2012 federal income tax return is currently under audit by the IRS. During 2014, New York State tax authorities finalized their audit of the Company's 2009, 2010, and 2011 business corporation franchise tax returns with no adjustments. 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 the Company's net operating loss and tax credit carry-forward positions 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 $51.2 million, $23.5 million, and $8.4 million as of December 31, 2014, 2013, and 2012, respectively.



	2014			2013			2012
Balance as of January 1	$	26,627		$	11,274		$	5,596
Gross increases related to current year tax positions	27,538			7,620			1,873
Gross increases related to prior year tax positions	6,464			8,305			3,805
Gross decrease due to settlements, recapture, filed returns, and lapse of statutes of limitation	(3,014		)	(572		)	—
Balance as of December 31	$	57,615		$	26,627		$	11,274

In 2014, the increase in unrecognized tax benefits related primarily to the Company’s calculation of certain tax credits and other items related to the Company's international operations, while the decreases resulted from the settlement of the IRS audit of the 2011 tax year and the New York State audit of the 2009 to 2011 tax years, as well as the reduction in the New York state income tax rate. In 2013 and 2012, the increase in unrecognized tax benefits related primarily to the Company's calculation of certain tax credits. Due to the amounts of the Company's net operating loss and tax credit carry-forwards, the Company has not accrued material interest or penalties related to these unrecognized tax benefits. The Company believes that it is reasonably possible that its unrecognized tax benefits at December 31, 2014 may increase within the next twelve months relating to operations during that period, in excess of potential decreases due to the resolution of the federal audit.