Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Income Taxes

17. Income Taxes

The provision for income taxes consisted of the following:

	Year Ended December 31,
(In thousands)	2012		2011		2010
Current income tax expense
Federal	$	104,152	$	83,569	$	91,325
State	1		1		11
Total current	104,153		83,570		91,336
Deferred income tax expense (benefit)	11,311		24,469		(32,840		)
Total provision	$	115,464	$	108,039	$	58,496

A reconciliation of the income tax provision computed using the U.S. statutory federal income tax rate compared to the income tax provision for income included in the Consolidated Statements of Income is:

	Year Ended December 31,
(In thousands)	2012		2011		2010
Tax at U.S. statutory rate on income before income taxes	$	114,496	$	107,600	$	52,630
Change in valuation allowance	—		—		296
State taxes	1		1		11
Non-deductible loss on retirement or conversion of convertible notes	—		—		4,960
Other	967		438		599
Total	$	115,464	$	108,039	$	58,496

Deferred tax assets and liabilities are determined based on the differences between financial reporting and income tax bases of assets and liabilities, as well as net operating loss carryforwards and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The significant components of our net deferred tax assets and liabilities are:

	December 31,
(In thousands)	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	6,686		$	7,308
Research and other tax credits	15,205			5,743
Intangible assets	5,487			7,403
Stock-based compensation	222			273
Reserves and accruals	229			10,087
Deferred revenue	—			600
Unrealized loss on foreign currency hedge contracts	2,740			1,031
Other	227			974
Total deferred tax assets	30,796			33,419
Valuation allowance	(20,392		)	(10,930		)
Total deferred tax assets, net of valuation allowances	10,404			22,489
Deferred tax liabilities:
Deferred gain on repurchase of convertible notes	(954		)	(954		)
Debt modifications	(3,285		)	—
Total deferred tax liabilities	(4,239		)	(954		)
Net deferred tax assets	$	6,165		$	21,535

As of December 31, 2012 and 2011, we had federal net operating loss carryforwards of $41.1 million and $42.9 million, respectively. We also had California net operating loss carryforwards of $215.5 million as of December 31, 2012 and 2011. The federal net operating loss carryforwards will expire in the year 2023 and the California net operating loss carryforwards will expire in 2019, if not utilized. As of December 31, 2012 and 2011, we had $20.0 million of state tax credit carryforwards that will expire in 2028, if not utilized. The net operating loss carryforwards and tax credit carryforwards which resulted from exercises of stock options were not recorded on the Consolidated Balance Sheet.

Utilization of the federal and state net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. We have an annual limitation on the utilization of our federal operating losses of $1.8 million for each of the years ending December 31, 2013 to 2022, and $1.3 million for the year ending December 31, 2023. As of December 31, 2012, we estimate that at least $22.0 million of the $41.1 million of federal net operating loss carryforwards and $18.7 million of the $18.7 million state net operating losses will expire unutilized.

A reconciliation of our unrecognized tax benefits, excluding accrued interest and penalties, for 2012 and 2011 is:

	December 31,
(In thousands)	2012		2011
Balance at the beginning of the year	$	23,061	$	23,061
Increases related to tax positions from prior fiscal years	4,029		—
Increases related to tax positions taken during current fiscal year	5,557		—
Expiration of statute of limitations for the assessment of taxes	—		—
Balance at the end of the year	$	32,647	$	23,061

The future impact of the unrecognized tax benefit of $32.6 million, if recognized, is as follows: $12.2 million would affect the effective tax rate and $20.4 million would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. We periodically evaluate our exposures associated with our tax filing positions. During 2012, as a result of the evaluation of our uncertain tax positions, we increased the unrecognized tax benefits by $9.6 million primarily related to our tax attributes.

Estimated interest and penalties associated with unrecognized tax benefits increased income tax expense in the Consolidated Statements of Income by $0.2 million during the year ended December 31, 2012, $0.5 million during the year ended December 31, 2011, and decreased income tax expense by approximately $26,000 during the year ended December 31, 2010. In general, our income tax returns are subject to examination by U.S. federal, state, and local tax authorities for tax years 1996 forward. Interest and penalties associated with unrecognized tax benefits accrued on the balance sheet were $0.7 million and $0.6 million as of December 31, 2012 and 2011, respectively. In May 2012, PDL received a “no-change” letter from the Internal Revenue Service (IRS) upon completion of an examination of the Company's 2008 Federal tax return. We are currently under income tax examination in the state of California for tax years 2009 and 2008.

Although the timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year, we do not anticipate any material change to the amount of our unrecognized tax benefits over the next twelve months.