Note 11. Income Taxes

A reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows (in thousands):

	Year Ended December 31,

	2012			2011			2010
Benefit at U.S. federal statutory rate	$	(15,451	)	$	(65,289	)	$	(11,146	)
Unbenefitted net operating losses and tax credits		6,492			57,102			(1,451	)
Non-deductible amortization of debt discount		8,347			7,612			6,937
Expiring capital loss carryforward		—			—			5,371
Other		786			575			289

Provision for income taxes	$	174		$	—		$	—

The provision for income taxes for the year ended December 31, 2012 was for state income taxes.

Significant components of our deferred tax assets are as follows (in thousands):

	December 31,

	2012			2011
Deferred tax assets:
Federal and state net operating loss carryforwards	$	493,000		$	484,000
Federal and state research credits		96,000			91,000
Capitalized research and development		14,000			20,000
Deferred revenue and accruals		44,000			72,000
Non-cash compensation		22,000			17,000
Investments		6,000			6,000
Other, net		2,000			3,000

Total gross deferred tax assets		677,000			693,000
Less valuation allowance for deferred tax assets		(677,000	)		(693,000	)

Net deferred tax assets	$	—		$	—

The valuation allowance for deferred tax assets decreased by approximately $16.0 million during the year ended December 31, 2012, and increased by approximately $72.0 million and $11.0 million during the years ended December 31, 2011 and 2010, respectively. Management believes the uncertainty regarding the realization of net deferred tax assets requires a full valuation allowance.

As of December 31, 2012, we had federal and state net operating loss carryforwards (NOLs) of approximately $1.3 billion that will expire at various dates beginning in 2021 through 2032, if not utilized. Our ability to utilize these NOLs may be limited under Internal Revenue Code Section 382 ("Section 382"). Section 382 imposes annual limitations on the utilization of NOL carryfowards and other tax attributes upon an ownership change. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in our stock by more than 50 percentage points over a testing period (generally three years). These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.

We completed a Section 382 through the year ended December 31, 2011. Based on this analysis, our NOLs and other tax attributes accumulated through 2011 should not be limited under Section 382. We have not yet updated our Section 382 analysis through 2012. Our future utilization of all of our NOLs and other tax attributes is dependent upon our ability to generate sufficient income during the carryforward periods and no future significant changes in ownership. When tax attributes are used, NOLs are used before tax credits and this will likely result in expiration of the tax credits.

We adopted the FASB uncertain tax positions guidance on January 1, 2007. We had no unrecognized tax benefits as of January 1, 2007 and provide a full valuation allowance on the net deferred tax asset recognized in the consolidated financial statements. As a result, the adoption effective January 1, 2007 had no effect on our financial position as of such date, or on net operating losses available to offset future taxable income.

We recognize interest and penalties related to uncertain tax positions, if any, in income tax expense. As of December 31, 2012 and 2011, we did not accrue any interest related to uncertain tax positions. Due to NOL and tax credit carryforwards, all income tax returns filed by us are subject to examination by the taxing jurisdictions.

In connection with the adoption of stock-based compensation guidance in 2006, we elected to follow the with-and-without approach to determine the sequence in which deductions and NOL carryforwards are utilized. Accordingly, no tax benefit related to stock options was recognized in any year as a result of the utilization of NOL carryforwards to offset any taxable income. The table of deferred tax assets shown above does not include certain deferred tax assets at December 31, 2012 and 2011 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for book purposes. Additional paid in capital will be increased by approximately $87.4 million if and when such deferred tax assets are ultimately realized.

At December 31, 2012, we also had federal and state research and development tax credit carryforwards of approximately $96.1 million that will expire at various dates, beginning in 2013 through 2032, if not utilized. The American Tax Relief Act of 2012, enacted January 2, 2013, retroactively reinstated the research and development credit for 2012. We will report credits of approximately $5.7 million in 2013 as a result of the retroactive restatement.