NOTE 10. INCOME TAXES

Under the FASB’s accounting guidance related to uncertain tax positions, among other things, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, the guidance provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company’s consolidated balance sheets at December 31, 2015 or December 31, 2014, and has not recognized interest and/or penalties in the statement of comprehensive loss for the year ended December 31, 2015.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1998 (federal)/2002 (California) and forward are subject to examination by the United States and California tax authorities due to the carry forward of unutilized net operating losses and R&D credits.

At December 31, 2015, the Company had deferred tax assets of $382.4 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating loss and R&D credit carry forwards to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that could occur in the future. The Company has determined that no ownership changes have occurred through December 31, 2015.

At December 31, 2015, the Company had Federal and California income tax net operating loss carry forwards of approximately $736.0 million and $567.3 million, respectively. The Federal tax loss carry forwards will begin to expire in 2021, unless previously utilized.

The California net operating loss carry forwards will expire as follows (in thousands):


Year		Amount
2016		116,600
2017		51,900
2018		140,600
2028 and beyond		258,100

In addition, the Company has Federal and California R&D tax credit carry forwards of $38.2 million and $27.2 million, respectively. The Federal R&D tax credit carry forwards begin expiring in 2018 and will continue to expire unless utilized. The California R&D tax credit carryforwards carry forward indefinitely. The Company also has Federal Alternative Minimum Tax credit carryforwards of approximately $213,000, which will carry forward indefinitely. At December 31, 2015, approximately $77.0 million of the net operating loss carry forwards relate to stock option exercises, which will result in an increase to additional paid-in capital and a decrease in income taxes payable at the time when the tax loss carryforwards are utilized.

Significant components of the Company’s deferred tax assets as of December 31, 2015 and 2014 are listed below. A valuation allowance of $382.4 million and $367.1 million at December 31, 2015 and 2014, respectively, has been recognized to offset the deferred tax assets as realization of such assets is uncertain. Amounts are shown as of December 31 as of each respective year (in thousands):


	2015			2014
Deferred tax assets:
Net operating losses	$	257,900		$	260,600
Research and development credits		33,500			29,000
Capitalized research and development		58,900			45,700
Share-based compensation expense		10,900			6,900
Deferred revenue		4,300			800
Deferred gain on sales leaseback		5,000			7,200
Intangibles		6,900			10,600
Cease-use expense		700			1,100
Fixed assets		400			500
Other		3,900			4,700

Total deferred tax assets		382,400			367,100
Valuation allowance		(382,400	)		(367,100	)

Net deferred tax assets	$	—		$	—

The provision for income taxes on earnings subject to income taxes differs from the statutory Federal rate at December 31, 2015, 2014 and 2013, due to the following (in thousands):


	2015			2014			2013
Federal income taxes at 35%	$	(31,126	)	$	(21,190	)	$	(16,131	)
State income tax, net of Federal benefit		2			(3,410	)		(2,611	)
Tax effect on non-deductible expenses		172			10			7
Share-based compensation expense		201			91			215
Change in tax rate		10,773			—			—
Expired tax attributes		5,594			315			151
Research credits		(6,638	)		(1,882	)		(3,458	)
Change in valuation allowance		15,029			25,366			20,504
Uncertain tax positions		5,940			621			1,283
Other		53			79			40

	$	—		$	—		$	—

The following table summarizes the activity related to our unrecognized tax benefits (in thousands):


	2015		2014		2013
Balance as of the beginning of the year	$	23,854	$	23,131	$	21,672
Increases related to prior year tax positions		6,636		47		543
Increases related to current year tax positions		2,584		676		916
Expiration of the statute of limitations for the assessment of taxes		—		—		—

Balance as of the end of the year	$	33,074	$	23,854	$	23,131

The Company, under authoritative guidance, excluded those deferred tax assets that are not more likely than not to be sustained under the technical merits of the tax position. These unrecognized tax benefits totaled $6.6 and $2.6 million for prior year tax positions and current year tax positions, respectively, as reflected in the tabular rollforward above.

As of December 31, 2015, the Company had $26.2 million of unrecognized tax benefits that, if recognized and realized, would effect the effective tax rate.

In the next twelve months, the Company does not expect a significant change in their unrecognized tax benefits.