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Income Taxes
 9 Months Ended
Sep. 30, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
I)
Income Taxes.  Income tax expense for the three ended September 30, 2013 was a tax benefit of $901,000.  Income tax expense for the nine months ended September 30, 2013 was $169,000.  Income tax expense for 2013 was based on the U.S. statutory rate of 34%, increased by state income taxes.  Year-to-date tax expense also reflects two items related to 2012, including:
 
 
1.
a tax benefit of $95,000 related to the 2012 research tax credit. This credit was extended retroactively back to January 1, 2012, by the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013; and
 
2.
a tax benefit of $148,000 related to a reduction in the estimate of the 2012 tax expense recorded in our 2012 financial statements.
 
As of September 30, 2013, we had a total of $1.6 million of deferred tax assets for which we had recorded no valuation allowance.  We will continue to assess the level of valuation allowance in future periods.  Should evidence regarding the realizability of tax assets change at a future point in time, the valuation allowance will be adjusted accordingly.
 
In addition to deferred tax assets carried on our balance sheet, we also had net federal and state research and development credit carryforwards available at December 31, 2012 of $5.1 million and $0.7 million. These credits were not recorded as tax assets as they relate to excess stock compensation deductions that may not be recorded as tax assets under generally accepted accounting principles until the amounts have been utilized to reduce our tax liability. To the extent that these assets are used to reduce future taxes, the benefit will be recorded as a reduction to additional paid-in capital.
 
As a result of exit costs related to our DSL service assurance software business, we have revised our estimate of 2013 taxable income.  As a result, we do not expect to utilize any of our excess stock compensation benefits to reduce our tax liability in 2013. Accordingly, we have not recorded any tax benefit to additional paid-in capital in 2013.  As a separate matter, we reduced the benefit we recorded to additional paid-in capital in 2012 as a result of the reduction of our actual 2012 tax liability. The amount of the reduction to additional paid-in capital in 2013 related to 2012 was $63,000.
 
Income tax expense related to continuing operations was $6.6 million and $23.2 million for the three and nine months ended September 30, 2012, respectively. Income tax expense in 2012 was driven by an $86.4 million gain on sale of patent assets. Income tax expense of $23.2 million for the nine months ended September 30, 2012 consisted of a $7.5 million current income tax liability plus a $15.8 million non-cash adjustment related to cumulative deduction for stock options in excess of book expense that was recorded to equity.