NOTE 11 — Income Taxes

The following table presents a summary of our U.S. and foreign income (loss) from continuing operations before income taxes:


	Year Ended December 31,
	2011		2010		2009
			(In thousands)
U.S	$	112,210	$	286,326	$	347,677
Foreign		289,862		139,513		(27,901	)

Total	$	402,072	$	425,839	$	319,776

The following table presents a summary of our income tax expense components from continuing operations:


	Year Ended December 31,
	2011			2010			2009
				(In thousands)
Current income tax expense:
Federal	$	23,933		$	72,807		$	104,021
State		7,803			7,351			11,556
Foreign		34,053			21,003			7,476

Current income tax expense		65,789			101,161			123,053

Deferred income tax (benefit) expense:
Federal		19,837			25,122			(16,012	)
State		322			(2,353	)		(1,978	)
Foreign		(10,217	)		(3,588	)		(3,561	)

Deferred income tax (benefit) expense:		9,942			19,181			(21,551	)


Income tax expense	$	75,731		$	120,342		$	101,502

For all periods presented, we have computed current and deferred tax expense using our stand-alone effective tax rate.

For the period January 1, 2011 through the spin-off date, TripAdvisor was a member of the Expedia consolidated tax group. Accordingly, we will file a consolidated federal income tax return and certain state income tax returns on a combined basis with TripAdvisor for that period. We will pay the entire combined income tax liability related to these filings. Due to continuing business and ownership associations between Expedia and TripAdvisor after the spin-off, including unity of ownership, operation, and use, Expedia and TripAdvisor will be considered to have a unitary relationship in 2012 for state tax purposes. Consequently, Expedia and TripAdvisor will file as part of a unitary combined group for certain state tax returns for 2012.

We reduced our current income tax payable by $21 million, $23 million and $10 million for the years ended December 31, 2011, 2010 and 2009, for tax deductions attributable to stock-based compensation. We recorded less than $1 million for 2011, 2010 and 2009 as a reduction of goodwill.

The tax effect of cumulative temporary differences and net operating losses that give rise to our deferred tax assets and deferred tax liabilities as of December 31, 2011 and 2010 are as follows:


	December 31,
	2011			2010
	(In thousands)
Deferred tax assets:
Provision for accrued expenses	$	63,704		$	42,782
Net operating loss and tax credit carryforwards		28,430			28,986
Capitalized R&D expenditures		15			3,701
Stock-based compensation		45,149			47,139
Investment impairment		—			8,588
Other		23,531			13,187

Total deferred tax assets		160,829			144,383
Less valuation allowance		(23,422	)		(37,958	)

Net deferred tax assets	$	137,407		$	106,425


Deferred tax liabilities:
Prepaid merchant bookings and prepaid expenses	$	(59,333	)	$	(44,213	)
Intangible assets		(249,729	)		(234,258	)
Investment in subsidiaries		(9,603	)		(8,988	)
Unrealized gains		(13,106	)		(8,823	)
Property and equipment		(69,581	)		(47,829	)
Other		(534	)		(3,816	)

Total deferred tax liabilities	$	(401,886	)	$	(347,927	)

Net deferred tax liability	$	(264,479	)	$	(241,502	)

At December 31, 2011, we had federal, state and foreign net operating loss carryforwards ("NOLs") of approximately $6 million, $34 million and $78 million. If not utilized, the federal and state NOLs will expire at various times between 2012 and 2031, $71 million foreign NOLs can be carried forward indefinitely, and $7 million foreign NOLs will expire at various times between 2012 and 2031.

At December 31, 2011, we had a valuation allowance of approximately $23 million related to the portion of net operating loss carryforwards and other items for which it is more likely than not that the tax benefit will not be realized. This amount represented a decrease of $15 million over the amount recorded as of December 31, 2010.

We have not provided deferred U.S. income taxes on undistributed earnings of certain foreign subsidiaries that we intend to reinvest permanently outside of the United States; the total amount of such earnings as of December 31, 2011 was $390 million. Should we distribute earnings of foreign subsidiaries in the form of dividends or otherwise, we may be subject to U.S. income taxes. Due to complexities in tax laws and the uncertainties related to the timing and source of any potential distribution of such funds along with other important factors such as the amount of associated foreign tax credits, it is not practicable to estimate the amount of unrecognized deferred U.S. taxes on these earnings.

A reconciliation of total income tax expense to the amounts computed by applying the statutory federal income tax rate to income from continuing operations before income taxes is as follows:


	Year Ended December 31,
	2011			2010			2009
				(In thousands)
Income tax (benefit) expense at the federal statutory rate of 35%	$	140,725		$	149,050		$	111,928
Foreign rate differential and dividends from foreign subsidiaries		(74,431	)		(27,921	)		950
State income taxes, net of effect of federal tax benefit		5,262			4,290			4,746
Unrecognized tax benefits and related interest		8,297			(6,514	)		3,123
Change in valuation allowance		(7,740	)		(3,000	)		7,503
Worthless stock deduction		—			—			(23,124	)
Other, net		3,618			4,437			(3,624	)

Income tax expense	$	75,731		$	120,342		$	101,502

The effective tax rate in 2011 and 2010 was lower than the 35% federal statutory rate primarily due to increase in earnings in jurisdictions outside the United States, where our effective rate is lower. During 2009, we recorded a tax benefit of $23 million related to a worthless stock deduction associated with the closure of a foreign subsidiary.

By virtue of the previously filed separate company and consolidated income tax returns filed with IAC, we are routinely under audit by federal, state, local and foreign authorities. These audits include questioning the timing and the amount of income and deductions and the allocation of income among various tax jurisdictions. Annual tax provisions include amounts considered sufficient to pay assessments that may result from the examination of prior year returns. We are no longer subject to tax examinations by tax authorities for years prior to August 2003.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows, in thousands:


	2011			2010			2009
Balance, beginning of year	$	68,536		$	187,075		$	177,000
Increases to tax positions related to the current year		15,679			12,414			1,417
Increases to tax positions related to the prior year		1,047			1,207			21,910
Decreases to tax positions related to the prior year		(2,142	)		(95,687	)		(11,470	)
Reductions due to lapsed statute of limitations		(3,352	)		(25,048	)		—
Settlements during current year		—			(913	)		(4,413	)
Interest and penalties		1,914			(10,512	)		2,631

Balance, end of year	$	81,682		$	68,536		$	187,075

As of December 31, 2011, we had $82 million of unrecognized tax benefits, of which $80 million is classified as long-term and included in other long-term liabilities.

Included in the balance at December 31, 2011 and 2010 were $75 million and $46 million of liabilities for uncertain tax positions that, if recognized, would decrease our provision for income taxes.

During 2010, the IRS concluded its audit of our consolidated federal tax return for the periods ended December 31, 2005 through December 31, 2007. As a result, we decreased our liability for uncertain tax positions by $152 million, of which $16 million decreased our provision for income taxes, $112 million increased additional paid-in capital and the remaining amount was primarily a decrease to deferred tax assets. The increase in additional paid-in capital is attributable to excess tax benefits related to certain exercises of stock options during 2005 and 2007, the cash benefits of which were recognized during those years.

We recognize interest and penalties related to our liabilities for uncertain tax positions in income tax expense. As of December 31, 2011 and 2010, we had approximately $14 million and $13 million accrued for the potential payment of estimated interest and penalties. During the years ended December 31, 2011, 2010 and 2009, we recognized approximately $2 million, $(11) million and $(1) million of interest (income) expense, net of federal benefit and penalties, related to our liabilities for uncertain tax positions.