TAXES

Our income tax provision consists of the following components for 2011, 2010, and 2009 (in thousands):



	2011			2010			2009
Current
Federal	$	30,990		$	85,848		$	(5,839	)
State	131			38			37
Foreign source withholding tax	5,453			35,707			40,997
	36,574			121,593			35,195
Deferred
Federal	(21,308		)	(31,747		)	909
State	(416		)	277			—
Foreign source withholding tax	20,603			(5,292		)	(12,316		)
Reversal of valuation allowance	—			—			—
(Decrease) increase in valuation allowance — federal	(313		)	—			1,659
	(1,434		)	(36,762		)	(9,748		)
Total	$	35,140		$	84,831		$	25,447

The deferred tax assets and liabilities are comprised of the following components at December 31, 2011 and 2010 (in thousands):



	2011
	Federal			State			Foreign		Total
Net operating losses	$	—		$	73,754		$	—	$	73,754
Deferred revenue, net	56,128			435			22,751		79,314
Foreign tax credits	—			—			—		—
Stock compensation	10,748			1,686			—		12,434
Patent amortization	11,909			35			—		11,944
Depreciation	1,182			162			—		1,344
Other accrued liabilities	2,726			447			—		3,173
Other employee benefits	938			159			—		1,097
	83,631			76,678			22,751		183,060
Less: valuation allowance	(2,225		)	(76,272		)	—		(78,497		)
Net deferred tax asset	$	81,406		$	406		$	22,751	$	104,563



	2010
	Federal			State			Foreign		Total
Net operating losses	$	—		$	60,187		$	—	$	60,187
Deferred revenue, net	43,042			96			37,901		81,039
Foreign tax credits	—			—			—		—
Stock compensation	8,011			1,311			—		9,322
Patent amortization	11,321			2			—		11,323
Depreciation	1,641			233			—		1,874
Other accrued liabilities	2,115			362			—		2,477
Other employee benefits	898			152			—		1,050
	67,028			62,343			37,901		167,272
Less: valuation allowance	(1,659		)	(62,375		)	—		(64,034		)
Net deferred tax asset	$	65,369		$	(32	)	$	37,901	$	103,238

The following is a reconciliation of income taxes at the federal statutory rate with income taxes recorded by the Company for the years ended December 31, 2011, 2010, and 2009 (in thousands):



	2011			2010			2009
Tax at U.S. statutory rate	$	43,612		$	83,456		$	39,446
Foreign withholding tax, with no U.S. foreign tax credit	—			—			—
State tax provision	(14,251		)	(1,252		)	24
Change in federal and state valuation allowance	13,608			1,554			1,659
Adjustment to tax credits	—			—			(19,055		)
Adjustments to uncertain tax positions	(6,775		)	—			2,655
Other	(1,054		)	1,073			718
Total tax provision	$	35,140		$	84,831		$	25,447

Valuation Allowances and Net Operating Losses

We establish a valuation allowance for any portion of our deferred tax assets for which management believes it is more likely than not that we will be unable to utilize the assets to offset future taxes. We believe it is more likely than not that the vast majority of our state deferred tax assets will not be utilized; therefore and we have maintained a near full valuation allowance against our state deferred tax assets as of December 31, 2011.

Under Internal Revenue Code Section 382, the utilization of a corporation’s net operating loss (“NOL”) carryforwards is limited following a change in ownership (as defined by the Internal Revenue Code) of greater than 50% within a three-year NOL period. If it is determined that prior equity transactions limit our NOL carryforwards, the annual limitation will be determined by multiplying the market value of the Company on the date of the ownership change by the federal long-term tax-exempt rate. Any amount exceeding the annual limitation may be carried forward to future years for the balance of the NOL carryforward period.

Uncertain Income Tax Positions

The Company’s unrecognized tax benefits as of December 31, 2011, 2010, and 2009 were $0.0 million, $6.5 million, and $6.5 million, respectively, which if recognized, would reduce the Company’s effective income tax rate in the period of recognition. The total amount of unrecognized tax benefits could increase within the next twelve months for a number of reasons including audit settlements, tax examination activities, and the recognition and measurement considerations under this guidance.

As of January 1, 2009, we had unrecognized tax benefits of $4.4 million, primarily related to NOL carryforwards. During 2009, we received a settlement offer from the Internal Revenue Service related to our 2006 Internal Revenue Service audit and we reclassified $0.6 million from the reserve to offset our current receivable. In 2011, we settled the 2006 Internal Revenue Service audit and recognized the remaining tax benefit of $3.8 million.

During 2009, we established a reserve of $2.7 million related to the recognition of a $19.1 million gross benefit for amending tax returns for the periods 1999 — 2005 to switch foreign tax payments made during that period from a deduction to a foreign tax credits. In 2011, we recorded an additional tax benefit of $8.3 million to eliminate this tax contingency and recognize interest income on the associated refund. As of December 31, 2011, our reserve was $0.0 million. We do not expect a material change in this estimate in the next twelve months, although a change is possible.

The following is a roll forward of our total gross unrecognized tax benefits, which if reversed would impact the effective tax rate, for the fiscal years 2009 through 2011 (in thousands):



	2011			2010		2009
Balance as of January 1	$	6,459		$	6,459	$	4,404
Tax positions related to current year:
Additions	—			—		—
Reductions	—			—		—
Tax positions related to prior years:
Additions	—			—		2,655
Reductions	(6,459		)	—		—
Settlements	—			—		(600		)
Lapses in statues of limitations	—			—		—
Balance as of December 31	$	—		$	6,459	$	6,459

Our policy is to recognize interest and or penalties related to income tax matters in income tax expense. In addition to the balance of unrecognized tax benefits in the above table, we have accrued related interest of $0.0 million, $0.3 million, and $0.0 million as of December 31, 2011, 2010, and 2009, respectively. The accrued interest was not included in the reserve balances listed above.

The Company and its subsidiaries are subject to United States federal income tax, foreign income and withholding taxes, and income taxes from multiple state jurisdictions. Our federal income tax returns for 2007 to the present are currently open and will not close until the respective statutes of limitations have expired. The statutes of limitations generally expire three years following the filing of the return or in some cases three years following the utilization or expiration of net operating loss carry forwards. The statute of limitations applicable to our open federal returns will expire at the end of 2014. Specific tax treaty procedures remain open for certain jurisdictions for 2006 and 2007. Many of our subsidiaries have filed state income tax returns on a separate company basis. To the extent these subsidiaries have unexpired net operating losses, their related state income tax returns remain open. These returns have been open for varying periods, some exceeding ten years.

Currently the Company is under audit by the State of New York for tax years 2002 through 2008. The State is claiming that prior to 2007 the Company should have reported its returns as a combined report instead of as a separate entity as the Company had filed. The Company has reviewed the findings of the State and believes that it is more likely than not that the Company will successfully sustain its separate company reporting and thus has not accrued any tax, interest or penalty exposure under the accounting for uncertain income tax position guidance.

Foreign Taxes

We pay foreign source withholding taxes on patent license royalties and state taxes when applicable. We apply foreign source withholding tax payments against our United States federal income tax obligations to the extent we have foreign source income to support these credits. In 2011, 2010, and 2009, we paid $5.5 million, $35.6 million, and $40.9 million in foreign source withholding taxes, respectively, and applied these payments as credits against our United States federal tax obligation. We previously accrued approximately $2.9 million of the 2011 foreign source withholding payments and established a corresponding deferred tax asset representing the associated foreign tax credit that we expect to utilize to offset future U.S. federal income taxes. At December 31, 2011, we accrued $2.8 million of foreign source withholding taxes payable associated with expected royalty payments from licensees and recorded corresponding deferred tax assets related to the expected foreign tax credits that will result from these payments.

Between 1999 and 2005 we paid approximately $29.3 million of foreign taxes. During this period we were in a net operating loss position for U.S. federal income tax purposes and elected to deduct these foreign tax payments as expenses on our United States federal income tax returns rather than take them as foreign tax credits. We elected this strategy because: a) we had no United States cash tax obligations at the time and b) net operating losses can be carried forward significantly longer than foreign tax credits. We utilized most of our net operating losses in 2006 and began to generate United States cash tax obligations. At that time, we began to treat our foreign tax payments as foreign tax credits on our United States federal income tax return.

During fourth quarter 2009, we completed a study to assess the Company’s ability to utilize foreign tax credit carryovers into the tax year 2006. As a result of the study, we amended our United States federal income tax returns for the periods 1999 — 2005 to reclassify $29.3 million of foreign tax payments we made during those periods from deductions to foreign tax credits. We also amended our federal tax returns for the periods 2006 - 2008 to utilize the resulting tax credits. When we completed the study, we established a basis to support amending the returns and estimated that the maximum incremental benefit would be $19.1 million.