NOTE 11—INCOME TAXES

Income (loss) before income taxes consists of the following:


	Year Ended December 31,
	2011			2010			2009
Domestic	$	35,045,000		$	(43,716,000	)	$	(2,261,000	)
Foreign		(754,000	)		(760,000	)		(685,000	)

	$	34,291,000		$	(44,476,000	)	$	(2,946,000	)

The income tax (benefit) provision consists of the following:


	Year Ended December 31,
	2011			2010		2009
Current:
Federal	$	(140,000	)	$	33,000	$	—
State		176,000			76,000		50,000

		36,000			109,000		50,000
Deferred:
Federal		—			12,373,000		(855,000	)
State		—			1,279,000		296,000

		—			13,652,000		(559,000	)

	$	36,000		$	13,761,000	$	(509,000	)

The reconciliation between income taxes at the federal statutory rate and the amount recorded in the accompanying consolidated financial statements is as follows:


	Year Ended December 31,
	2011			2010			2009
Tax (benefit) at statutory rate	$	11,659,000		$	(15,122,000	)	$	(1,001,000	)
Impact of foreign taxes		45,000			46,000			41,000
State income taxes, net		1,258,000			(1,703,000	)		220,000
Federal alternative minimum tax		119,000			33,000			—
Refund of prior years alternative minimum tax paid		(257,000	)		—			—
Federal research and development tax credit		(138,000	)		(74,000	)		(121,000	)
Change in unrecognized tax benefits		92,000			(60,000	)		156,000
Adjustment to deferred income tax assets due to incremental rate change		584,000			49,000			121,000
Other permanent differences, primarily meals and entertainment and stock option expense		237,000			(64,000	)		52,000
Change in valuation allowance		(13,563,000	)		30,656,000			23,000

	$	36,000		$	13,761,000		$	(509,000	)

The significant components of the Company's net deferred tax assets (liabilities) are as follows:


	December 31,
	2011			2010
Deferred tax assets (liabilities):
Barnhard litigation reserve	$	7,194,000		$	17,883,000
Net operating loss and credit carryforwards		6,647,000			8,569,000
Warranty reserves		2,025,000			1,644,000
Other accruals and reserves		2,909,000			2,735,000
Bad debt and lease loss reserves		497,000			930,000
Intangibles		919,000			1,444,000
Other, net		458,000			542,000

Total deferred tax assets		20,649,000			33,747,000
Depreciation		(2,054,000	)		(1,589,000	)
Valuation allowance		(18,595,000	)		(32,158,000	)

	$	—		$	—

At December 31, 2011, the Company had U.S. federal net operating loss carryforwards (exclusive of the settlement payment for the Barnhard litigation of approximately $18,500,000 that was made in 2012), which are scheduled to expire as follows:


2021	$	2,036,000
2022		4,354,000
2023 and thereafter		3,145,000

	$	9,535,000

In addition, the Company has foreign net operating loss carryforwards of $6,626,000, which have an unlimited life, federal alternative minimum tax credit carryforwards of $539,000, which do not expire, federal research and development tax credit carryforwards of $490,000, which begin to expire in 2021 and various net operating loss and credit carryforwards for state tax purposes.

The Company recorded an increase in the valuation allowance of $30,656,000 in 2010 to fully offset net deferred tax assets of $32,158,000 as of December 31, 2010. A valuation allowance for deferred tax assets is recorded to the extent it cannot be determined that the realization of these assets is more likely than not. Due to the uncertainty created by the unfavorable Barnhard jury verdict (see Note 14), it was determined that a valuation allowance against the entire amount of deferred tax assets as of December 31, 2010 was necessary. Since the required settlement payment for the Barnhard litigation in 2012 will increase the Company's net operating loss carryforwards by approximately $18,500,000, and since the Company incurred cumulative losses during the three year period ended December 31, 2011, it was determined that a valuation allowance against the entire amount of deferred tax assets continues to be appropriate as of December 31, 2011. Therefore, the Company's net deferred tax assets of $18,595,000 are fully reserved as of December 31, 2011, and the need for this valuation allowance will be assessed in future periods. As of December 31, 2011, approximately $47,700,000 of future taxable income is needed to fully realize the Company's deferred tax assets. The difference between this figure and the net operating loss carryforwards and credits is primarily cumulative book versus tax differences related to various expenses.

The Company files income tax returns in the U.S. federal jurisdiction, the United Kingdom and various state jurisdictions. The Company is no longer subject to U.S. federal, United Kingdom and state income tax examinations by tax authorities for years before 2006.

The Company has evaluated any uncertain tax positions in its federal income tax return, United Kingdom return and the state tax returns it is currently filing. The Company has also made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. Based on this analysis, the Company has recorded an unrecognized tax liability.

A reconciliation of the beginning and ending balance of the unrecognized tax liability is as follows:


	Year Ended December 31,
	2011		2010			2009
Balance as of January 1	$	230,000	$	290,000		$	249,000
Increases for tax positions related to the current year		78,000		69,000			86,000
Increases (decreases) for tax positions related to the prior year		14,000		(26,000	)		(45,000	)
Decreases for settlements with taxing authorities		—		(103,000	)		—

Balance as of December 31	$	322,000	$	230,000		$	290,000

As of December 31, 2011 and 2010, the unrecognized tax liability of $322,000 and $230,000, respectively, is comprised of $160,000 and $101,000, respectively, included in accrued liabilities, and $162,000 and $129,000, respectively, included in the valuation allowance for deferred taxes, since the items comprising this amount are included in deferred tax assets. Therefore, $160,000 and $101,000, respectively, of the unrecognized tax liability would impact the effective tax rate if recognized. The entire amount of the unrecognized tax liability as of December 31, 2009 would impact the effective tax rate if recognized. Consistent with its current policy, the Company will include any interest and penalties related to uncertain tax positions as a component of income tax expense.