Income Taxes

The provision for income taxes consists of the following (in thousands):



Years ended December 31:	2011			2010			2009
Current:
Federal	$	—		$	—		$	—
State	69			43			67
Foreign	5,655			6,025			4,226
Total current	5,724			6,068			4,293
Deferred:
Federal	—			—			—
State	—			—			—
Foreign	(1,145		)	(3,408		)	(134		)
Total deferred	(1,145		)	(3,408		)	(134		)
Total	$	4,579		$	2,660		$	4,159

The income tax provision differs from the amount computed by applying the federal statutory income tax rate to income before income taxes as follows:



Years ended December 31:	2011		2010		2009
Income tax provision, at statutory federal rate	34	%	34	%	34	%
State and local income taxes, net of federal income taxes effect	(62	)	7		(1	)
Credits	—		—		(3	)
Permanent differences	156		11		5
Goodwill impairment	169		—		—
Fiberxon settlement	—		—		(40	)
Foreign taxes at rates different than domestic rates	(51	)	6		(2	)
Expired capital loss carry forwards	—		—		25
Change in tax rates	(293	)	—		—
Change in valuation allowance	440		(35	)	4
Total	393	%	23	%	22	%

The effective tax rate varies from the statutory tax rate, due to losses in jurisdictions where the Company maintains a valuation allowance against its deferred tax assets and thus records no tax benefit, permanent differences between book income and taxable income, differences in tax rate between the United States and the various jurisdictions where it conducts operations and pays income tax, and state and local income taxes. The effective tax rate for 2011 is relatively high, due to the significant amount of taxable income in foreign jurisdictions in comparison to the consolidated pre-tax book income.

The components of deferred income taxes consist of the following (in thousands):



December 31:	2011			2010
Allowance for doubtful accounts	$	209		$	343
Inventory reserve	1,837			1,471
Accrued liabilities	4,121			4,267
Other	6,582			8,121
	12,749			14,202
Valuation allowance	(10,687		)	(11,691		)
Net current deferred income tax assets	2,062			2,511
Net operating losses	112,263			88,159
Tax credits	775			794
Depreciation and amortization	(2,015		)	(823		)
Investments	(38		)	(36		)
Capital loss carry forwards	41,515			39,524
Other	(669		)	(411		)
	151,831			127,207
Valuation allowance	(148,129		)	(125,082		)
Net long-term deferred income tax asset	3,702			2,125
Total	$	5,764		$	4,636

MRV records valuation allowances against deferred income tax assets, when necessary, in accordance with ASC 740 Accounting for Income Taxes. Realization of deferred income tax assets, such as net operating loss ("NOL") carry forwards and income tax credits, is dependent on future taxable earnings and is therefore uncertain. At least quarterly, the Company assesses the likelihood that the deferred income tax asset balance will be recovered from future taxable income. To the extent management believes that recovery is unlikely, the Company establishes a valuation allowance against the deferred income tax asset, which increases income tax expense in the period such determination is made. During 2011 the Company recorded an additional valuation allowance totaling $23.0 million against additional deferred income tax assets, principally domestic and foreign net operating losses. Although realization is not assured, management believes it is more likely than not that the net deferred income tax assets, which relate primarily to profitable foreign subsidiaries, will be realized.

As of December 31, 2011, MRV had federal, state, and foreign NOL carry forwards available of $227.4 million, $161.8 million and $89.9 million, respectively. For the year ended December 31, 2011, federal NOL carry forwards increased by $50.9 million, and state net operating loss carry forwards increased by $5.0 million. For federal and state income tax purposes, the NOLs are available to offset future taxable income through 2031. Certain foreign NOL carry forwards and tax credits are available indefinitely. As of December 31, 2011, federal and state capital loss carry forwards amounted to $109.1 million, and $58.9 million, respectively. The capital loss carry forwards, which were generated by the sale of Source Photonics, expire in 2015.

Under the provisions of ASC 718 Compensation — Stock Compensation, MRV recognizes tax benefits associated with the exercise of stock options and vesting of restricted stock directly to stockholders' equity only when realized. Accordingly, deferred tax assets are not recognized for NOL carry forwards resulting from these tax benefits occurring from January 1, 2006 onward. A tax benefit occurs when the actual tax benefit realized upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award. At December 31, 2011, deferred tax assets do not include $1.0 million of loss carryovers from share-based compensation.

MRV has not recorded U.S. income tax expense for foreign earnings that it has declared as indefinitely reinvested offshore, thus reducing its overall income tax expense. At December 31, 2011, MRV had approximately $74.5 million of accumulated but undistributed earnings at certain foreign entities. The amount of earnings designated as indefinitely reinvested offshore is based upon our expectations of the future cash needs of the Company's foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be repatriated. In the event actual cash needs of the Company's U.S. entities exceed current expectations or the actual cash needs of the Company's foreign entities are less than expected, the Company may need to repatriate foreign earnings that have been designated as indefinitely reinvested offshore. This would result in recording additional U.S. income tax expense.

With limited exception, the Company is no longer subject to U.S. federal audits by taxing authorities for years through 2007 and certain state, local and foreign income tax audits through 2005 to 2007. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. No reserve was needed or recorded under ASC 740, as the topic relates to accounting for uncertainty in income taxes as of December 31, 2011.

The Company recognized an income tax expense of $0.7 million and $2.1 million, for the years ended December 31, 2010 and 2009, respectively, with respect to its discontinued operations. There was no tax expense recorded for the year ended December 31, 2011 related to discontinued operations.