Note 12 — Income Taxes

For financial reporting purposes, "Loss before provision for income taxes," includes the following components (in thousands):


	Year Ended December 31,
	2011			2010			2009
Domestic	$	(135,880	)	$	(39,321	)	$	(103,295	)
Foreign		2,920			2,264			523

Total	$	(132,960	)	$	(37,057	)	$	(102,772	)

Provision (Benefit) for Income Taxes

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


	Year Ended December 31,
	2011		2010		2009
Current:
Federal	$	—	$	1	$	(522	)
State		1		2		(28	)
Foreign		921		698		352

Total Current		922		701		(198	)

Deferred:
Federal		—		—		—
State		—		—		—
Foreign		96		180		(55	)

Total Deferred		96		180		(55	)

Provision (benefit) for income taxes	$	1,018	$	881	$	(253	)

Income tax provision (benefit) related to continuing operations differs from the amount computed by applying the statutory income tax rate of 35% to pretax loss as follows (in thousands):


	Year Ended December 31,
	2011			2010			2009
U.S. federal benefit
At statutory rate	$	(46,536	)	$	(12,970	)	$	(35,970	)
State taxes		1			2			(28	)
Change in valuation allowance		48,959			15,123			34,327
Foreign tax differential		(129	)		86			114
Unrecognized tax credits		(893	)		(1,833	)		(882	)
Expiring tax attributes		—			—			1,569
Other		(384	)		473			617

Total	$	1,018		$	881		$	(253	)

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets for federal and state income taxes are as follows (in thousands):


	December 31,
	2011			2010
Deferred tax assets:
Net operating loss carryforwards	$	342,128		$	318,257
Research and other credits		51,125			49,657
Capitalized research expenses		9,514			5,797
Deferred revenue		48,732			31,411
Property and equipment		8,081			7,654
Reserve and accruals		8,083			5,732
Stock-based compensation		32,268			28,157
Other		3,895			4,275

Deferred tax assets before valuation allowance		503,826			450,940
Valuation allowance for deferred tax assets		(503,689	)		(450,781	)

Total deferred tax assets		137			159

Deferred tax liabilities:
Property and equipment		(75	)		—

Total deferred tax liabilities		(75	)		—

Net deferred tax assets	$	62		$	159

Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of our lack of U.S. earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $52.9 million and $8.3 million during the years ended December 31, 2011 and 2010, respectively. The valuation allowance includes approximately $35.6 million of income tax benefit at both December 31, 2011 and December 31, 2010 related to stock-based compensation and exercises prior to the implementation of ASC 515 and 718 that will be credited to additional paid in capital when realized.

Undistributed earnings of our foreign subsidiary in India are considered to be permanently reinvested and accordingly, no deferred U.S. income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. income tax. At the present time it is not practicable to estimate the amount of U.S. income taxes that might be payable if these earnings were repatriated.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2011, we had a net operating loss carryforward for federal income tax purposes of approximately $874.0 million, portions of which will begin to expire in 2018. We had a total state net operating loss carryforward of approximately $584.8 million, which will begin to expire in 2012. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. During January 2011, we sold 19 million shares of our common stock to the public. We do not believe this event created a "change in ownership."

We have federal research credits of approximately $23.8 million, which will begin to expire in 2019 and state research credits of approximately $14.0 million which have no expiration date. We have federal orphan drug credits of $13.0 million which will begin to expire in 2026. These tax credits are subject to the same limitations discussed above.

Unrecognized tax benefits

We have incurred net operating losses since inception and we do not have any significant unrecognized tax benefits. Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for income taxes in the consolidated statements of operations. If we are eventually able to recognize our uncertain positions, our effective tax rate would be reduced. We currently have a full valuation allowance against our net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Any adjustments to our uncertain tax positions would result in an adjustment of our net operating loss or tax credit carry forwards rather than resulting in a cash outlay.

We file income tax returns in the U.S., California, Alabama, India and the U.K. We are currently under examination in the U.S. for tax year 2009. We are also under examination in India for the 2008-2009 tax year. In February 2012, Alabama notified the Company that they will be examining certain prior year returns. Because of net operating losses and research credit carryovers, substantially all of our tax years remain open and subject to examination.

We have the following activity relating to unrecognized tax benefits (in thousands):


	December 31,
	2011		2010			2009
Beginning balance	$	13,058	$	13,084		$	11,660
Tax positions related to current year Additions:
Federal		297		259			415
State		221		208			318
Reductions		—		—			—
Tax positions related to prior year Additions:
Federal		—		—			—
State		—		—			691
Reductions		—		(493	)		—
Settlements		—		—			—
Lapses in statute of limitations		—		—			—

Ending balance	$	13,576	$	13,058		$	13,084

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next 12 months. During the years ended December 31, 2011, 2010 and 2009, no interest or penalties were required to be recognized relating to unrecognized tax benefits.