Income Taxes

The components of income (loss) before provision for (benefit from) income taxes during the three years ended December 31, 2012 consisted of the following:



	2012			2011			2010
	(in thousands)
United States	$	256,816		$	343,515		$	(719,859	)
Foreign	(269,197		)	(283,070		)	(34,767		)
Income (loss) before provision for (benefit from) income taxes	$	(12,381	)	$	60,445		$	(754,626	)

The components of provision for (benefit from) income taxes during the three years ended December 31, 2012 consisted of the following:



	2012			2011			2010
	(in thousands)
Current taxes:
United States	$	2,057		$	22,275		$	—
Foreign	(1,865		)	(561		)	—
State	1,902			8,655			—
Total current taxes	$	2,094		$	30,369		$	—
Deferred taxes:
United States	$	31,308		$	19,629		$	—
Foreign	—			(32,692		)	—
State	5,352			1,960			—
Total deferred taxes	$	36,660		$	(11,103	)	$	—
Provision for (benefit from) income taxes	$	38,754		$	19,266		$	—

The Company’s federal statutory income tax rates for 2012, 2011 and 2010 were 35%, 35% and 34%, respectively. The Company had income from operations in 2012 and 2011 and incurred losses from operations in 2010. The Company recorded a valuation allowance against its net operating losses and other net deferred tax assets due to uncertainties related to the realizability of these tax assets.

The difference between the Company’s “expected” tax provision (benefit), as computed by applying the U.S. federal corporate tax rate to income (loss) before provision for (benefit from) income taxes, and actual tax is reconciled as follows:



	2012			2011			2010
	(in thousands)
Income (loss) before provision for (benefit from) income taxes	$	(12,381	)	$	60,445		$	(754,626	)
Expected tax provision (benefit)	(4,333		)	21,156			(256,574		)
State taxes, net of federal benefit	7,075			10,624			(46,108		)
Foreign rate differential	62,425			43,629			632
Tax credits	(1,980		)	(51,086		)	(23,292		)
Unbenefited operating losses	(30,364		)	(6,286		)	322,551
Non-deductible expenses	3,198			1,953			2,158
Rate change	3,275			—			—
Other	(542		)	(724		)	633
Provision for (benefit from) income taxes	$	38,754		$	19,266		$	—

For federal income tax purposes, as of December 31, 2012, the Company has net operating loss carryforwards of approximately $2.6 billion and tax credits of $98.0 million, which may be used to offset future federal income and tax liability, respectively. For state income tax purposes, the Company has net operating loss carryforwards of approximately $1.5 billion and tax credits of $60.3 million, which may be used to offset future state income and tax liability, respectively. These operating loss carryforwards began to expire in 2006, and the tax credit carryforwards began to expire in 2005. After consideration of all the evidence, both positive and negative, the Company continues to maintain a valuation allowance for the full amount of the 2012 deferred tax asset because it is more likely than not that the deferred tax asset will not be realized. In future periods, if management determines that it is more likely than not that the deferred tax asset will be realized, (i) the valuation allowance would be decreased, (ii) a portion or all of the deferred tax asset would be reflected on the Company’s consolidated balance sheet and (iii) the Company would record non-cash benefits in its consolidated statements of operations related to the reflection of the deferred tax asset on its consolidated balance sheet.

Unrecognized tax benefits during the two years ended December 31, 2012 consisted of the following:



	2012			2011
	(in thousands)
Unrecognized tax benefits beginning of year	$	4,360		$	2,374
Gross change for current year positions	598			2,569
Increase for prior period positions	—			—
Decrease for prior period positions	—			—
Decrease due to settlements and payments	—			—
Decrease due to statute limitations	(852		)	(583		)
Unrecognized tax benefits end of year	$	4,106		$	4,360

The Company had gross unrecognized tax benefits of $4.1 million and $4.4 million, respectively, as of December 31, 2012 and 2011. At December 31, 2012, $4.1 million represented the amount of unrecognized tax benefits that, if recognized, would result in a reduction of the Company’s effective tax rate. In 2013, it is reasonably possible that the Company will reduce the balance of its unrecognized tax benefits by $0.3 million due to the application of statute of limitations and settlements with taxing authorities, all of which would reduce the Company’s effective tax rate.

Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred taxes were as follows:



	As of December 31,
	2012			2011
	(in thousands)
Deferred tax assets:
Net operating loss	$	777,687		$	870,367
Tax credit carryforwards	147,074			167,759
Property and equipment	10,701			15,537
Intangibles	63,353			71,076
Deferred revenues	44,867			59,939
Stock-based compensation	83,979			90,563
Inventories	56,564			23,883
Accrued expenses	27,945			30,636
Unrealized loss	—			245
Gross deferred tax assets	1,212,170			1,330,005
Valuation allowance	(1,211,561		)	(1,329,775		)
Total deferred tax assets	609			230
Deferred tax liabilities:
Unrealized gain	(376		)	—
Contingent milestone and royalty payment obligation	(50,904		)	(14,241		)
Acquired intangibles	(229,696		)	(229,696		)
Net deferred tax liabilities	$	(280,367	)	$	(243,707	)

Generally, tax return deductions are allowable on stock-based compensation plans but may arise in different amounts and periods from when stock-based compensation expense is recognized in the financial statements. If the tax return deduction for an award exceeds the cumulative stock-based compensation expense recognized in the financial statements, any excess tax benefit is recognized as additional paid-in capital when the deduction reduces income tax payable. The net tax amount of the unrealized excess tax benefits as of December 31, 2012 was approximately $115 million. As of December 31, 2012, the gross amount of this excess tax deduction in the net operating loss carryforward was approximately $525 million.

The valuation allowance decreased by $118.2 million from December 31, 2011 to December 31, 2012 because the Company utilized net operating losses in 2012 to offset taxable income.

The Company files United States federal income tax returns and income tax returns in various state, local and foreign jurisdictions. The Company is no longer subject to any tax assessment from an income tax examination in the United States before 2007 and any other major taxing jurisdiction for years before 2005, except where the Company has net operating losses or tax credit carryforwards that originate before 2005. The Company is currently under examination by Revenue Quebec for the year ended March 11, 2009 and the year ended December 31, 2007. No adjustments have been reported. The Company is not under examination by any other jurisdictions for any tax year.

The Company currently intends to reinvest the total amount of its unremitted earnings, which have not been significant to date, in the local international jurisdiction or to repatriate the earnings only when tax-effective. As a result, the Company has not provided for U.S. federal income taxes on the unremitted earnings of its international subsidiaries. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to U.S. federal income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of the unrecognized deferred U.S. federal income tax liability is not practical due to the complexity associated with this hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of the U.S. federal income tax liability.