Note 16 - Income Taxes:

The components of our provision (benefit) for income taxes on income from continuing operations for the years ended December 31, 2011, 2010 and 2009 are as follows ($ amounts in thousands):


	For the Years Ended December 31,
	2011			2010			2009
Current income tax (benefit) provision:
Federal	$	3,522		$	37,205		$	21,208
State		(6,261	)		5,253			3,300
		(2,739	)		42,458			24,508
Deferred income tax (benefit) provision:
Federal		(7,813	)		1,188			22,398
State		4,556			(1,666	)		1,977
		(3,257	)		(478	)		24,375
	$	(5,996	)	$	41,980		$	48,883

Deferred tax assets and (liabilities) as of December 31, 2011 and 2010 are as follows ($ amounts in thousands):


	December 31,			December 31,
	2011			2010
Deferred tax assets:
Accounts receivable	$	25,454		$	20,892
Inventories		6,527			3,876
Intangible assets		-			53,161
Litigation settlements and contingencies		13,135			-
Accrued expenses		1,214			4,714
Net operating losses and credit carryforwards		24,502			10,351
Asset impairments		1,486			1,900
Stock options and restricted shares		10,189			14,412
Product contribution carryforwards		1,264			1,536
Other		5,044			7,737
Total deferred tax assets		88,815			118,579

Deferred tax liabilities:
Fixed assets		(14,381	)		(11,303	)
Intangible assets		(33,524	)		-
Other		(909	)		(1,400	)
Total deferred tax liabilities		(48,814	)		(12,703	)

Less valuation allowance - Net operating losses		(10,009	)		(10,351	)
Net deferred tax asset	$	29,992		$	95,525

We have net operating loss ("NOL") carryforwards at December 31, 2011 of approximately $169.2 million for state income tax purposes and $27.9 million for federal income tax purposes. State NOL carry forwards will begin expiring in 2012. A valuation allowance on the deferred tax assets related to certain state NOL's and credit carryforwards has been established due to the uncertainty of realizing those deferred tax assets in the future. In addition, we have carryforwards for product donations at December 31, 2011 of approximately $3.5 million for which deferred tax assets have been recorded. These carryforwards are utilized against available taxable income in future years. If not used, these product donation carryforwards will expire in 2014.

The exercise of stock options resulted in tax benefits of $2.4 million in 2011 and $2.1 million in 2010. Because we had a net operating loss for the tax year 2011, per FASB ASC 718-10 the tax benefits for 2011 have not been reflected in our consolidated balance sheet. The 2010 tax benefit was credited to additional paid-in capital.

The table below provides reconciliation between the statutory federal income tax rate and the effective rate of income tax expense for each of the years shown as follows:


	For the Years Ended December 31,
	2011			2010			2009
Federal statutory tax rate		35	%		35	%		35	%
State tax – net of federal benefit		2			3			3
Domestic manufacturing deduction		-			(4	)		(1	)
Change in valuation of deferred tax assets		(9	)		-			-
Tax contingencies		8			(3	)		-
Non-deductible legal settlements		(14	)
Non-deductible annual pharmaceutical manufacturers' fee		(5	)		-			-
Non-deductible transaction costs		(4	)		-			-
Other		(2	)		-			2
Effective tax rate		11	%		31	%		39	%

Tax Contingencies

Significant judgment is required in evaluating our tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for tax contingencies are provided for in accordance with the requirements of ASC 740-10. We reflect interest and penalties attributable to income taxes, to the extent they arise, as a component of its income tax provision or benefit.

At December 31, 2011, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $14.4 million. Of this total, $9.8 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate related to continuing income in future periods. The total amount of accrued interest and penalties resulting from such unrecognized tax benefits was $5.8 million at December 31, 2011 and $11.3 million at December 31, 2010. During the years ended December 31, 2011, 2010, and 2009, we recognized approximately $0.4 million, $0.6 million, and $0.7 million in interest and penalties.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits as of December 31, 2011 and 2010 are as follows ($ amounts in thousands):


	2011			2010			2009
Balance at January 1	$	31,571		$	30,023		$	30,217
Additions based on tax positions related to the current year		1,779			4,487			1,074
Additions for tax positions of prior years		3,217			655			-
Reductions for tax positions of prior years		(5,013	)		-			-
Reductions due to lapse of applicable statute of limitations		(16,720	)		(3,394	)		-
Settlements paid		(425	)		(200	)		(1,268	)
Balance at December 31	$	14,409		$	31,571		$	30,023

We believe that it is reasonably possible that approximately $0.9 million of our current unrecognized tax positions may be recognized within the next twelve months as a result of settlements or a lapse of the statute of limitations.

Anchen is currently being audited by the IRS for tax years 2007 to 2009. The Company is no longer subject to IRS audit for periods prior to 2007. Anchen is currently under audit in three state jurisdictions for the years 2005 to 2010. The Company is also currently under audit in one additional state jurisdiction for the years 2003 through 2006. In most other state jurisdictions, the Company is no longer subject to examination by state tax authorities for years prior to 2007.