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INCOME TAXES | 12 Months Ended
--- | ---
Dec. 31, 2012
INCOME TAXES |
INCOME TAXES | (14) INCOME TAXES The components of income tax expense attributable to continuing operations consist of the following:
|  | Year Ended December 31, |
--- | --- | --- | ---
|  | 2012 |  | 2011 |  | 2010 |
|  | (In thousands) |
Income tax benefit (provision): |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 19,394 |  | $ | 16,204 |  | $ | 1,512 |
State |  |  | 4,237 |  |  | 3,131 |  |  | 779 |
Foreign |  |  | — |  |  | 84 |  |  | 107 |
Expiration of Net Operating Losses and Research & Development Tax Credits |  |  | (1,426 | ) |  | (411 | ) |  | (13,924 | )
|  |  | 22,205 |  |  | 19,008 |  |  | (11,526 | )
Deferred tax valuation allowance |  |  | (22,205 | ) |  | (19,008 | ) |  | 11,526 |
|  | $ | — |  | $ | — |  | $ | — |
A reconciliation between the amount of reported income tax and the amount computed using the U.S. Statutory rate of 34% follows:
|  | 2012 |  | 2011 |  | 2010 |
--- | --- | --- | --- | --- | --- | --- | ---
|  | (In thousands) |
Pre-tax loss |  | $ | (59,123 | ) | $ | (44,799 | ) | $ | (2,533 | )
Loss at Statutory Rates |  |  | (20,102 | ) |  | (15,213 | ) |  | (838 | )
Research and Development Credits |  |  | — |  |  | (1,736 | ) |  | (1,498 | )
State Taxes |  |  | (4,237 | ) |  | (3,131 | ) |  | (779 | )
Other |  |  | 708 |  |  | 661 |  |  | 717 |
Expiration of Net Operating Losses and Research & Development Tax Credits |  |  | 1,426 |  |  | 411 |  |  | 13,924 |
Change in Valuation Allowance |  |  | 22,205 |  |  | 19,008 |  |  | (11,526 | )
Income tax (benefit) provision |  | $ | — |  | $ | — |  | $ | — |
Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future expected enacted rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. The principal components of the deferred tax assets and liabilities at December 31, 2012 and 2011, respectively, are as follows:
|  | December 31, 2012 |  | December 31, 2011 |
--- | --- | --- | --- | --- | ---
|  | (In thousands) |
Gross Deferred Tax Assets |  |  |  |  |  |  |
Net Operating Loss Carryforwards |  | $ | 67,728 |  | $ | 58,802 |
Tax Credit Carryforwards |  |  | 20,692 |  |  | 20,285 |
Deferred Expenses |  |  | 43,226 |  |  | 31,002 |
Stock-based Compensation |  |  | 3,264 |  |  | 3,184 |
Fixed Assets |  |  | 2,156 |  |  | 2,029 |
Accrued Expenses and Other |  |  | 241 |  |  | 197 |
|  |  | 137,307 |  |  | 115,499 |
Gross Deferred Tax Liabilities |  |  |  |  |  |  |
Other Acquired Intangibles |  |  | (4,481 | ) |  | (4,878 | )
IPR&D Intangibles |  |  | (4,661 | ) |  | (4,661 | )
|  |  | (9,142 | ) |  | (9,539 | )
Total Deferred Tax Assets and Liabilities |  |  | 128,165 |  |  | 105,960 |
Deferred Tax Assets Valuation Allowance |  |  | (132,826 | ) |  | (110,621 | )
Net Deferred Tax Asset (Liability) |  | $ | (4,661 | ) | $ | (4,661 | )
The net deferred tax liability of $4.7 million at December 31, 2012 and 2011 relates to the temporary differences associated with the IPR&D intangible assets acquired in the CuraGen acquisition, which are not deductible for tax purposes. As of December 31, 2012, the Company had the following federal net operating loss ("NOL") carryforwards: • Prior to the merger of the Company and AVANT, $33.0 million was generated by the Company which expire at various dates starting in 2023 and going through 2028; • Prior to the merger of the Company and AVANT, $101.2 million, net of expirations and utilization, was generated by AVANT which expire at various dates starting in 2018 and going through 2028. During the years ended, December 31, 2012 and 2011, NOLs of $16.4 million and $14.8 million expired, respectively; • Following the merger of the Company and AVANT, $98.4 million was generated by the combined company which expire at various dates starting in 2028 and going through 2032; and • Prior to its acquisition by the Company, $518.3 million was generated by CuraGen. In general, an ownership change, as defined by Section 382 of the Internal Revenue Code, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Such ownership changes can significantly limit the amount of NOLs that may be utilized in future periods. The Company currently expects that it is remote that the CuraGen NOLs may be utilized and, as such, no related asset has been recorded for such losses. The Company has not completed an analysis of losses generated by AVANT, however, the Company believes it is remote that $60.8 million of the AVANT NOLs may be utilized in future periods and there may be substantial limitations on the Company's ability to use the remaining NOLs of $40.4 million. Following the merger of the Company and AVANT, the Company experienced changes in ownership as defined by Section 382 in June 2009 and December 2009. Further, prior to the AVANT merger, the Company as a stand alone company experienced a change in ownership in October 2007. As a result of the ownership change in October 2007, utilization of the Company's NOLs prior to October 2007 is subject to an annual limitation of $4.5 million on $28.3 million of NOLs generated before that date. As a result of the ownership changes in June 2009 and December 2009, there is an annual limitation amount of $6.0 million on $67.7 million NOLs. Any unused annual limitation may be carried over to later years, and the amount of the limitation may, under certain circumstances, be subject to adjustment if the fair value of the Company's net assets are determined to be below or in excess of the tax basis of such assets at the time of the ownership change, and such unrealized loss or gain is recognized during the five-year period after the ownership change. Similar to the AVANT and CuraGen NOL carryforwards above, the Company believes that it is not more likely than not that federal and state research and development ("R&D") credits of $20.8 million and $14.4 million, respectively, will be utilized in the future periods. Further, the Company's ability to use the state NOLs of approximately $99.2 million and the remaining federal and state R&D credit carryforwards of approximately $13.8 million and $10.2 million, respectively, may be substantially limited. These state NOLs and federal and state credits expire at various dates starting in 2013 going through 2031. The Company has not yet completed a study of these credits to substantiate the amounts. Until a study is completed, no amounts are being presented as an uncertain tax position. Subsequent ownership changes, as defined in Section 382, could further limit the amount of net operating loss carryforwards and research and development credits that can be utilized annually to offset future taxable income. The Company applies the authoritative guidance on account for and disclosure of uncertainty in income tax positions which requires the Company to determine whether an income tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For income tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced to the largest benefit that has a greater than fifty perfect likelihood of being realized upon the ultimate settlement with the relevant taxing authority. At December 31, 2012 and 2011, we had no unrecognized tax benefits. A full valuation allowance has been provided against our deferred tax assets and liabilities and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required. Massachusetts, New Jersey and Connecticut are the three states in which the Company primarily operates or has operated and has income tax nexus. The Company is not currently under examination by any other jurisdictions for any tax year. The Company has evaluated the positive and negative evidence bearing upon the realizability of its net deferred tax assets, which are comprised principally of net operating loss carryforwards, capitalized R&D expenditures and R&D tax credit carryforwards. The Company has determined that it is more likely than not that it will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance was maintained at December 31, 2012 against the Company's net deferred tax assets. The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 under which the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 through December 31, 2013. The effects of the change in the tax law will be recognized in the first quarter of 2013, which is the quarter in which the law was enacted.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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