Note 13. Income Taxes

For the years ended December 31, 2011, 2010 and 2009, the following table summarizes the components of income before income taxes and the provision for income taxes:


	Year ended December 31,
(in thousands)	2011			2010			2009
Income (loss) before income taxes:
Domestic	$	252,381		$	210,819		$	37,020
Foreign		(44,374	)		(9,933	)		(7,068	)

Income before income taxes	$	208,007		$	200,886		$	29,952

Income tax expense (benefit):

Current:
Federal	$	79,850		$	45,727		$	7,614
State and local		6,601			9,684			4,018
Foreign		337			(33	)		16

Subtotal		86,788			55,378			11,648
Deferred:
Federal		1,318			26,926			21,588
State and local		(8,136	)		(4,198	)		10,684
Foreign		(12,622	)		(2,828	)		(2,891	)

Subtotal		(19,440	)		19,900			29,381

Income tax expense	$	67,348		$	75,278		$	41,029

Effective income tax rate		32.4	%		37.5	%		137.0	%

For the years ended December 31, 2011, 2010 and 2009, the following table reconciles the federal statutory income tax rate to the effective income tax rate:


	Year ended December 31,
(% of pre-tax income)	2011			2010			2009
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State and local income tax, net of federal tax benefit		1.7			1.8			44.3
Share-based compensation		0.3			0.6			5.0
Orphan drug credit		(0.2	)		(0.2	)		(20.5	)
Change in valuation allowance		(2.2	)		0.1			(1.6	)
Impairments		—			—			75.8
Manufacturing deduction		(4.1	)		—			—
Foreign rate differential		1.0			—			—
Other		0.9			0.2			(1.0	)

Effective income tax rate		32.4	%		37.5	%		137.0	%

In 2011, 2010 and 2009, respectively, $3.2 million, $1.6 million and $0.1 million related to current stock option tax benefits were allocated directly to stockholders' equity.

The following table summarizes the components of deferred income tax assets and liabilities:


	December 31,
(in thousands)	2011			2010
Deferred tax assets:
Net operating loss carryforwards	$	17,893		$	13,421
Capitalized research and development costs		6,503			6,419
Orphan drug credit carryforward		—			1,482
Research and development credit carryforward		—			3,449
Non-deductible reserves		6,118			5,385
Depreciation		273			670
Intangible asset amortization		11,179			6,965
Equity compensation		10,783			9,770
Other		1,267			1,316

Subtotal		54,016			48,877
Valuation allowance		(4,876	)		(6,238	)

Deferred tax assets		49,140			42,639
Deferred tax liabilities:
Intangible asset amortization		198,334			192,963
Convertible note		6,335			6,584
Prepaid expenses		1,388			1,207

Deferred tax liabilities		206,057			200,754

Net deferred tax assets (liability)	$	(156,917	)	$	(158,115	)

At December 31, 2011 and 2010, deferred tax assets and liabilities were classified on the Company's balance sheets as follows:


	December 31,
(in thousands)	2011			2010
Current assets	$	10,055		$	13,744
Non-current assets		11,786			4,252
Current liabilities		(52	)		—
Non-current liabilities		(178,706	)		(176,111	)

Net deferred tax liability	$	(156,917	)	$	(158,115	)

The following table summarizes the change in the valuation allowance:


	Year ended December 31,
(in thousands)	2011			2010		2009
Valuation allowance at beginning of year	$	6,238		$	5,949	$	6,436
Tax expense (benefit)		(4,662	)		289		(487	)
Acquisitions		3,435			—		—
Foreign exchange		(135	)		—		—

Valuation allowance at end of year	$	4,876		$	6,238	$	5,949

Due to uncertainty regarding the ability to realize the benefit of deferred tax assets relating to certain net operating loss carryforwards, valuation allowances have been established to reduce deferred tax assets to a level that is more likely than not to be realized. Realization of the remaining net deferred tax assets will depend on the generation of sufficient taxable income in the appropriate jurisdiction, the reversal of deferred tax liabilities, tax planning strategies and other factors prior to the expiration date of the carryforwards. A change in the estimates used to make this determination could require a reduction in deferred tax assets if they are no longer considered realizable.

As of December 31, 2011, our foreign subsidiaries have incurred cumulative losses and consequently no deferred tax liability has been established for any future distribution of funds from foreign subsidiaries.

The following table summarizes carryforwards of net operating losses and tax credits as of December 31, 2011.


(in thousands)	Amount		Expiration
Foreign net operating losses	$	29,390		Indefinite
State net operating losses		123,381		2020-2028

At December 31, 2011 and 2010, the Company had no gross unrecognized tax benefits. The Company does not expect any material increase or decrease in its gross unrecognized tax benefits during the next twelve months.

The Company and its domestic subsidiaries file consolidated income tax returns in the U.S. and certain states. In addition, separate income tax returns are filed in other states. The Company's foreign subsidiaries file separate income tax returns in the foreign jurisdictions in which they are located. We are not currently under IRS examination. We are currently under examination in a foreign jurisdiction and in certain states for years after 2007. The results of these examinations are not expected to have a material impact on the financial statements.

Our policy is to record interest and penalties related to tax matters in income tax expense.