12. Income Taxes

As of December 31, 2013, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $61,516,000 and $27,325,000, respectively and federal and Massachusetts state research and development (“R&D”) credit carryforwards of approximately $1,578,000 and $1,110,000, respectively subject to limitation, may be available to offset future federal and state income tax liabilities through 2031.


Deferred tax assets consisted of the following as of December 31:	2013			2012
Net operating loss carryforward	$	22,952,000		$	31,338,000
Capitalized research and development expenses		6,055,000			10,402,000
License fees		277,000			325,000
Stock-based compensation expense		2,264,000			2,264,000
Other		547,000			737,000

Gross deferred tax assets		32,095,000			45,066,000
Valuation allowance		(32,095,000	)		(45,066,000	)

Net deferred tax assets	$	—		$	—

A reconciliation of the amount of reported tax benefit and the amount computed using the U.S. federal statutory rate of 35% for the years ended December 31 is as follows:


	2013			2012
Tax provision (benefit) at statutory rate	$	(321,000	)	$	(1,009,000	)
State taxes, net of federal benefit		985,000			267,000
Expiring state net operating loss carryforward		—			455,000
Gain on forgiven interest and cancellation of debt and other		2,567,000			2,567,000
Decrease in valuation allowance		(6,731,000	)		(5,080,000	)
Permanent items		6,069,000			2,800,000

	$	—		$	—

For the years ended December 31, 2013 and 2012, the Company did not record any federal or state tax expense given its continued net operating loss position. The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets, which are comprised principally of net operating losses (“NOL”) and capitalized research and development expenditures. Management has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance has been recorded.


Income tax benefit for the years ended December 31:	2013			2012

Federal	$	3,574,000		$	(2,737,000	)
State		817,000			(645,000	)

		4,391,000			(3,382,000	)
Valuation allowance		(4,391,000	)		3,382,000

	$	—		$	—

A reconciliation of the unrecognized tax benefits recorded for the years ended December 31 is as follows:


	2013		2012
Balance at January 1	$	2,822,531	$	2,822,531
Additions based on tax positions related to the current year		—		—

Balance at December 31	$	2,822,531	$	2,822,531

The balance of unrecognized tax benefits as of December 31, 2013 of approximately $2,822,531 are tax benefits that, if recognized, would not affect the Company’s effective tax rate since they are subject to a full valuation allowance.

The Company recognizes interest and penalties related to income tax matters in income tax expense. The Company has no accrual for interest and penalties as of December 31, 2013.

The Company is subject to both federal and state income tax for the jurisdiction within which it operates. Within these jurisdictions, the Company is open to examination for tax years ended December 31, 2010 through December 31, 2013. The U.S. Internal Revenue Service (IRS) had completed an audit of tax years 2007 and 2008 and had informed us that no adjustments to the federal tax returns as filed would be proposed as a result of the audit. However, because we are carrying forward income tax attributes such as the NOL from 2006, these attributes can still be audited when utilized on returns filed in the future.