(14) Income Taxes

Income tax (benefit) expense consisted of the following components (dollars in thousands):

	2012			2011			2010

Current:
Federal	$	416		$	(1,160	)	$	18,524
State		782			1,282			5,026
Foreign		3,362			5,632			6,118

		4,560			5,754			29,668
Deferred:
Federal		(19,423	)		(25,146	)		(4,289	)
State		(7,565	)		(8,409	)		(766	)
Foreign		(168	)		962			740

		(27,156	)		(32,593	)		(4,315	)

Total	$	(22,596	)	$	(26,839	)	$	25,353

Income before income taxes consisted of the following (dollars in thousands):

	2012			2011			2010

U.S.	$	(248,101	)	$	(222,337	)	$	45,000
Foreign		(22,354	)		15,709			4,333

Total	$	(270,455	)	$	(206,628	)	$	49,333

Deferred income taxes are provided for temporary differences in reporting certain items. The tax effects of temporary differences that gave rise to the net deferred tax assets (liabilities) at December 31 were as follows (dollars in thousands):

	2012			2011

Deferred tax assets:
Compensation and benefits	$	9,474		$	9,565
Net operating loss and capital loss carry forward		19,012			15,810
Share-based compensation		8,506			12,430
Allowance for doubtful accounts		1,149			663
Tax benefits on uncertain tax positions		2,696			2,846
Goodwill and other intangibles		24,746			2,370
Depreciation		649			—
Other		9,203			8,914

Total deferred tax assets		75,435			52,598
Less: valuation allowance		20,774			16,279

Total deferred tax assets, net of valuation allowance		54,661			36,319

Deferred tax liabilities:
Depreciation		—			(2,038	)
Capitalized software		(15,226	)		(17,769	)
Other		(573	)		(738	)

Total deferred tax liabilities		(15,799	)		(20,545	)

Net deferred tax assets (liabilities)	$	38,862		$	15,774

At December 31, 2012, the Company believes that it is more likely than not that future reversals of its existing taxable temporary differences and the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of valuation allowance. The Company's valuation allowance is primarily the result of historical operating losses in the Asia Pacific entities, where we maintain a full valuation for all deferred tax assets and net operating losses and in certain entities in the European Operations where we currently have net operating losses.

Net operating loss carry forwards expire as follows (dollars in thousands):

	Amount		Years remaining

Hong Kong, Australia, U.K. and Ireland operating losses	$	77,068	Indefinite
United States		3,909	17 years

	$	80,977

The effective tax rate varied from the U.S. federal statutory income tax rate due to the following:



U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of U.S. federal income tax effect	1.8		2.2		6.0
Foreign tax impact, net	(3.6	)	(0.9	)	9.8
Non-deductible costs *	(24.3	)	(23.7	)	1.1
Other, net	(0.5	)	0.4		(0.5	)

Effective income tax rate	8.4	%	13.0	%	51.4	%

*: Non-deductible costs reflect the goodwill impairment charges incurred in 2012 and 2011 and a portion of Majestic acquisition costs incurred in 2010.

For the years ended December 31, 2012, 2011 and 2010, the tax benefits realized on the exercises of employee stock options and the vesting of employee restricted share awards were less than the deferred benefits that were recorded based on grant date fair values. The resulting tax shortfalls on these awards, along with the impact of cancelled awards reduced additional paid-in capital by $4.1 million, $3.3 million and $2.2 million in 2012, 2011 and 2010, respectively. For further discussion, see Note 20, Employee and Non-Employee Director Stock and Benefit Plans.

Tax Uncertainties

Under ASC 740, Income Taxes, a tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

During 2012, uncertain tax positions in the U.S. were resolved for the 2005-2011 fiscal years resulting in a decrease in our liability of $1.9 million and the related deferred tax asset of $0.7 million. As a result of this, we recognized a tax benefit of $0.9 million.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (dollars in thousands):

Uncertain Tax Benefits	2012			2011			2010

Balance, January 1	$	14,542		$	12,380		$	10,999
Additions based on tax positions related to the current year		568			2,402			2,088
Additions based on tax positions of prior years		857			647			897
Reductions for tax positions of prior years		(2,024	)		(42	)		(35	)
Reductions due to settlements with taxing authorities		(217	)		(516	)		(758	)
Reductions due to expiration of statute of limitations		—			(329	)		(811	)

Balance, December 31	$	13,726		$	14,542		$	12,380

Included in the balance at December 31, 2012, 2011 and 2010, are $12.4 million, $12.0 million, and $10.8 million, respectively, of unrecognized tax benefits (net of federal benefits) which, if recognized, would affect the Company's effective tax rate.

With limited exception, the Company is no longer subject to U.S. federal, state, local or foreign income tax audits by taxing authorities for years preceding 2007. The Internal Revenue Service is currently examining the Company's U.S. federal income tax returns for 2007 through 2010. Certain state and local returns are also currently under various stages of audit. The Company does not anticipate a significant change to the total of unrecognized tax benefits within the next twelve months.

At December 31, 2012, interest expense of $3.3 million, gross of related tax effects of $1.4 million, was accrued related to unrecognized tax benefits. As a continuing policy, interest accrued related to unrecognized tax benefits is recorded as income tax expense. During 2012, 2011 and 2010, the Company recognized $0.8 million, $0.7 million and $0.5 million, respectively, of tax-related interest expense. Penalties of $0.1 million were recognized in 2010 as a component of income tax expense. No such penalties were incurred during 2011 or 2012.