8.	Income Taxes

The Company’s (loss) income before income taxes consisted of the following:


	Years ended
	September 28, 2013			September 29, 2012			September 24, 2011
Domestic	$	(1,184,603	)	$	(46,018	)	$	235,204
Foreign		(8,358	)		(15,643	)		(7,818	)

	$	(1,192,961	)	$	(61,661	)	$	227,386

The (benefit) provision for income taxes contains the following components:


	Years ended
	September 28, 2013			September 29, 2012			September 24, 2011
Federal:
Current	$	154,900		$	146,164		$	97,834
Deferred		(182,739	)		(143,582	)		(33,808	)

		(27,839	)		2,582			64,026

State:
Current		15,305			15,348			15,739
Deferred		(16,709	)		(10,186	)		(5,909	)

		(1,404	)		5,162			9,830

Foreign:
Current		7,655			5,653			4,770
Deferred		1,465			(1,424	)		(8,390	)

		9,120			4,229			(3,620	)

	$	(20,123	)	$	11,973		$	70,236

The income tax (benefit) provision differs from the tax provision computed at the U.S. federal statutory rate due to the following:


	Years ended
	September 28, 2013			September 29, 2012			September 24, 2011
Income tax provision at federal statutory rate		(35.0	)%		(35.0	)%		35.0	%
Increase (decrease) in tax resulting from:
Goodwill impairment		32.8			3.3			—
Domestic production activities deduction		(1.2	)		(20.3	)		(4.1	)
State income taxes, net of federal benefit		(0.2	)		5.3			3.6
Research and investment tax credits		(1.2	)		(1.6	)		(3.2	)
Unrecognized tax benefits		0.3			13.5			(3.3	)
Contingent consideration		2.6			59.8			1.5
Nondeductible transaction expenses		—			7.5			—
Cessation of Adiana		—			(28.6	)		—
Executive compensation		0.2			2.3			(1.1	)
Foreign rate differential		0.1			3.1			0.8
Change in valuation allowance		(0.8	)		5.4			—
Other		0.7			4.7			1.7

		(1.7	)%		19.4	%		30.9	%

The Company’s effective tax rate in fiscal 2013 was lower than the statutory rate primarily due to the non-deductible goodwill impairment charge, non-deductible contingent consideration expense related to the TCT and Interlace acquisitions, and unbenefited foreign losses, partially offset by the domestic production activities deduction benefit and the release of a $19.9 million valuation allowance related to capital losses which were utilized to offset capital gains generated during the year.

The Company’s effective tax rate in fiscal 2012 was significantly impacted by non-deductible contingent consideration compensation expense, non-deductible acquisition costs, a non-deductible goodwill impairment charge, and a net increase in income tax reserves and valuation allowances on certain foreign losses. The items’unfavorable tax impact were partially offset by the domestic production activities deduction benefit and a loss claimed on the discontinued Adiana product line. The fiscal 2012 pre-tax loss magnified the permanent items’ impact on the effective tax rate.

The Company’s effective tax rate for fiscal 2011 was less than the statutory rate primarily due to reversing income tax reserves, the domestic production activities deduction benefit and both U.S. and Canadian research and development tax credits. The $9.1 million income tax reserve reversal was due to the Company favorably settling its U.S. federal income tax audit for fiscal years 2007 through 2009 and statutes of limitations expiring in several state and foreign jurisdictions.

The Company uses the liability method to account for income taxes in accordance with ASC 740, Income Taxes. Under this method, deferred income taxes are recognized for the future tax consequences of differences between the tax and financial accounting bases of assets and liabilities at each reporting period. Deferred income taxes are based on enacted tax laws and statutory tax rates applicable to the period in which these differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the expected realized amounts.

The Company’s significant deferred tax assets and liabilities are as follows:


	September 28, 2013			September 29, 2012
Deferred tax assets
Net operating loss carryforwards	$	49,277		$	47,472
Capital losses		23,857			46,750
Non-deductible accruals		21,527			22,198
Non-deductible reserves		16,054			10,346
Stock-based compensation		30,190			31,437
Research and other credits		10,679			11,392
Debt issuance costs		—			811
Nonqualified deferred compensation plan		14,714			12,007
Other temporary differences		6,960			3,000

		173,258			185,413
Less: valuation allowance		(43,354	)		(64,337	)

	$	129,904		$	121,076

Deferred tax liabilities
Depreciation and amortization	$	(1,494,068	)	$	(1,635,043	)
Debt discounts and deferrals		(189,298	)		(209,011	)
Debt issuance costs		(10,941	)		—
Fair value adjustments to current assets and liabilities		—			(28,413	)
Investment in subsidiary		(10,713	)		(8,479	)

	$	(1,705,020	)	$	(1,880,946	)

	$	(1,575,116	)	$	(1,759,870	)

Under ASC 740, the Company can only recognize a deferred tax asset for the future benefit to the extent that it is “more likely than not” that these assets will be realized. After considering all available positive and negative evidence, the Company established a valuation allowance against specifically identified deferred tax assets because it is more-likely-than-not that these will not be realized. In determining these assets realizability, the Company considered numerous factors including historical profitability, the character and estimated future taxable income, prudent and feasible tax planning strategies, and the industry in which it operates. The valuation allowance decreased $21.0 million in fiscal 2013 from fiscal 2012 primarily due to the utilization of reserved capital losses to offset the Company’s capital gains generated during the year.

As of September 28, 2013, the Company had $24.4 million, $41.2 million and $55.2 million in gross federal, state, and foreign net operating losses respectively and $0.9 million, $12.8 million and $1.9 million in federal, state, and foreign credit carryforwards, respectively. These losses and credits expire between 2014 and 2033, except for $55.2 million in losses and $9.0 million in credits that have unlimited carryforward periods. The federal, state, and foreign net operating losses exclude $4.5 million, $69.3 million and $67.5 million, respectively, of net operating losses, which the Company expects will expire unutilized.

The Company had $121.8 million in gross unrecognized tax benefits, excluding interest, as of September 28, 2013 and $53.1 million as of September 29, 2012. The gross unrecognized tax benefits increased $68.7 million from September 29, 2012, of which $58.4 million resulted from uncertain tax positions related to the convertible debt exchange that took place in the second quarter of fiscal 2013. At September 28, 2013, $61.0 million represents the unrecognized tax benefits that, if recognized, would reduce the Company’s effective tax rate. In the next twelve months it is reasonably possible that the Company will reduce its unrecognized tax benefits by $2.0 to $4.0 million due to statutes of limitations expiring and favorably settling with taxing authorities which would reduce the Company’s effective tax rate.

The Company’s unrecognized income tax benefits activity for fiscal 2013 and 2012 are as follows:


	2013			2012
Balance at beginning of fiscal year	$	53,148		$	31,026
Tax positions related to current year:
Additions		64,992			11,673
Reductions		—			—
Tax positions related to prior years:
Additions related to change in estimate		3,317			1,327
Reductions		(363	)		307
Payments		(621	)		(197	)
Lapses in statutes of limitations and settlements		(2,323	)		(4,144	)
Acquired tax positions:
Additions related to reserves acquired from acquisitions		3,676			13,156

Balance as of the end of the fiscal year	$	121,826		$	53,148

The Company’s policy is to include accrued interest and penalties related to unrecognized tax benefits and income tax liabilities, when applicable, in income tax expense. As of September 28, 2013 and September 29, 2012, accrued interest was $3.6 million and $2.6 million, respectively. As of September 28, 2013, no penalties have been accrued.

The Company and its subsidiaries are subject to various federal, state, and foreign income taxes. The Company’s U.S. Federal income tax returns are no longer subject to examination prior to fiscal year 2010. State income tax returns are generally no longer subject to examination prior to fiscal year 2009. The Internal Revenue Service commenced its examination of the Company’s consolidated federal income tax return for fiscal 2011 in July 2013. The Company is also undergoing a tax examination in Germany for fiscal years 2008 through 2010. In November 2013, the IRS notified the Company that Gen Probe’s consolidated federal income tax returns for calendar years 2010 through the 2012 acquisition date were selected for examination. The Company has a tax holiday in Costa Rica that currently does not materially impact its effective tax rate and is scheduled to expire in 2015.

The Company intends to reinvest, indefinitely, approximately $33.4 million in unremitted foreign earnings. It is not practical to estimate the additional taxes that may be payable upon repatriation.