BCSI » Topics » Provision (Benefit) for Income Taxes

These excerpts taken from the BCSI 10-K filed Jun 22, 2009.

Provision (Benefit) for Income Taxes

The provision for income taxes for the year ended April 30, 2009 was $9.1 million compared to $(2.0) million for the year ended April 30, 2008. The provision primarily reflects current U.S. federal and state income taxes, foreign income taxes in taxable foreign jurisdictions and changes in our valuation allowance. The primary difference between the effective tax rate and the federal statutory tax rate relates to taxes in foreign jurisdictions with a tax rate different than the U.S. federal statutory rate, non-deductible stock-based compensation expense and changes in valuation allowance. See Note 9 in the Notes to Consolidated Financial Statements for additional information.

 

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On February 20, 2009, the California Budget Act of 2008 was signed into law which revised certain provisions of the California State Tax Code, including the option to elect an alternative method to attribute taxable income to California for tax years beginning on or after January 1, 2011. We now expect that in fiscal years 2012 and beyond, our income subject to tax in California will be lower than under prior tax law. This change in law did not impact our current tax provision nor do we expect it to have a material impact on our future effective tax rate.

Our provision for income taxes increased for the year ended April 30, 2009 compared to the year ended April 30, 2008, primarily due to lower current year earnings, an increase in the valuation allowance for the current fiscal year, partially offset by a reduction in the amount of unbenefitted foreign losses. The benefit for income taxes of $2.0 million for fiscal 2008 is primarily related to a partial reversal of a valuation allowance on deferred tax assets that was recorded as a reduction to income tax expense, partially offset by foreign income taxes and the current tax provision for U.S. federal and state taxes due primarily from a prepayment of certain intercompany expenses associated with our foreign subsidiaries.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized in future periods. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including operating results, our history of losses and forecasts of future taxable income. Our conclusion that a portion of our deferred tax assets is more likely than not to be realized is strongly influenced by our projections of future taxable income. Our estimate of future taxable income considers available positive and negative evidence regarding our current and future operations, including projections of income in various states and foreign jurisdictions. We believe our estimate of future taxable income is reasonable; however, it is inherently uncertain, and if our future operations generate taxable income greater than projected, we may record reductions to our valuation allowance. Conversely, if our ability to generate future taxable income necessary to realize a portion of the deferred tax asset is materially reduced, we may record additions to our valuation allowance.

At April 30, 2009, our projections of future taxable income enabled us to conclude that it is more likely than not that we can realize a portion of our net deferred tax asset. Accordingly, we have recognized deferred tax assets of $27.4 million ($24.9 million of federal and $2.5 million of state) at April 30, 2009. The recognition of deferred tax assets in the current year was recorded as a provision for income taxes of $2.3 million and a credit to goodwill related to recognition of Packeteer deferred tax assets of $10.5 million. At April 30, 2009 and 2008, we had a valuation allowance on our U.S. deferred tax assets of approximately $36.4 million and $23.1 million, respectively, which when released will benefit the income tax provision. The net increase in the valuation allowance was primarily due to a tax accounting methodology change and certain adjustments identified upon filing our 2008 federal and state income tax returns.

As of April 30, 2009, we had net operating loss carryforwards for federal income tax purposes of approximately $183.3 million, which will expire in fiscal years ending in 2012 through 2027 if not utilized. We also had net operating loss carryforwards for state income tax purposes of approximately $68.4 million, which will expire in fiscal years 2010 through 2027 if not utilized. Of the total tax attributes, we have $84.7 million of federal net operating loss carryforwards and $56.8 million of state net operating loss carryforwards for which no deferred tax asset was recorded until the tax benefit relating to excess stock compensation deduction is realized in accordance with Footnote 82 of SFAS 123(R). We also had federal and California credit carryforwards of approximately $13.9 million and $11.9 million respectively. The federal research credit carryforwards will expire in fiscal years 2027, 2028 and 2029 if not utilized. The federal alternative minimum tax credit and California credit carryforwards are not subject to expiration.

Utilization of our net operating loss and credit carryforwards are subject to substantial annual limitations due to the ownership change provisions of the Internal Revenue Code and similar state provisions. Annual limitations have resulted in the expiration of net operating loss and tax credit carryforwards before utilization of approximately $20.8 million and $3.6 million, respectively. Utilization of federal and state net operating losses of approximately $162.5 million and $68.4 million, respectively, as well as $10.3 million and $11.9 million of

 

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federal and state credits, respectively, are subject to annual limitations ranging from approximately $7.0 million to $17.0 million. See Note 9 in the Notes to Consolidated Financial Statements for additional information.

Our total gross unrecognized tax benefits as of April 30, 2009, 2008 and 2007 were $18.8 million, $2.8 million and $2.2 million, respectively. Included in our gross unrecognized tax benefits as of April 30, 2009 is approximately $17.4 million of tax benefits that, if recognized, would result in an adjustment to our effective tax rate.

In accordance with FIN 48, we have elected to classify interest and penalties related to uncertain tax positions as a component of our provision for income taxes. Accrued interest and penalties relating to our unrecognized tax benefits was approximately $1.0 million, $0.03 million and $0.02 million as of April 30, 2009, 2008 and 2007, respectively, with approximately $0.3 million and $0.02 million included as a component of our provision for income taxes for fiscal year 2009 and 2008, respectively.

Due to our taxable loss position from inception through fiscal year 2007, all tax years are subject to examination in U.S. federal and state jurisdictions. We are also subject to examination in various foreign jurisdictions for tax years 2000 forward, none of which are individually material. We are unable to anticipate the change in the balance of the unrecognized tax benefits in the next twelve months due to the possibility of tax examinations and our continued assessment of potential contingencies.

Provision (Benefit) for Income Taxes

FACE="Times New Roman" SIZE="2">The provision for income taxes for the year ended April 30, 2009 was $9.1 million compared to $(2.0) million for the year ended April 30, 2008. The provision primarily reflects current U.S. federal and state
income taxes, foreign income taxes in taxable foreign jurisdictions and changes in our valuation allowance. The primary difference between the effective tax rate and the federal statutory tax rate relates to taxes in foreign jurisdictions with a tax
rate different than the U.S. federal statutory rate, non-deductible stock-based compensation expense and changes in valuation allowance. See Note 9 in the Notes to Consolidated Financial Statements for additional information.

STYLE="margin-top:0px;margin-bottom:0px"> 


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On February 20, 2009, the California Budget Act of 2008 was signed into law which revised certain
provisions of the California State Tax Code, including the option to elect an alternative method to attribute taxable income to California for tax years beginning on or after January 1, 2011. We now expect that in fiscal years 2012 and beyond,
our income subject to tax in California will be lower than under prior tax law. This change in law did not impact our current tax provision nor do we expect it to have a material impact on our future effective tax rate.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Our provision for income taxes increased for the year ended April 30, 2009 compared to the year ended April 30, 2008, primarily due to lower
current year earnings, an increase in the valuation allowance for the current fiscal year, partially offset by a reduction in the amount of unbenefitted foreign losses. The benefit for income taxes of $2.0 million for fiscal 2008 is primarily
related to a partial reversal of a valuation allowance on deferred tax assets that was recorded as a reduction to income tax expense, partially offset by foreign income taxes and the current tax provision for U.S. federal and state taxes due
primarily from a prepayment of certain intercompany expenses associated with our foreign subsidiaries.

We record a valuation allowance to
reduce our deferred tax assets to the amount that is more likely than not to be realized in future periods. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including operating
results, our history of losses and forecasts of future taxable income. Our conclusion that a portion of our deferred tax assets is more likely than not to be realized is strongly influenced by our projections of future taxable income. Our estimate
of future taxable income considers available positive and negative evidence regarding our current and future operations, including projections of income in various states and foreign jurisdictions. We believe our estimate of future taxable income is
reasonable; however, it is inherently uncertain, and if our future operations generate taxable income greater than projected, we may record reductions to our valuation allowance. Conversely, if our ability to generate future taxable income necessary
to realize a portion of the deferred tax asset is materially reduced, we may record additions to our valuation allowance.

At
April 30, 2009, our projections of future taxable income enabled us to conclude that it is more likely than not that we can realize a portion of our net deferred tax asset. Accordingly, we have recognized deferred tax assets of $27.4 million
($24.9 million of federal and $2.5 million of state) at April 30, 2009. The recognition of deferred tax assets in the current year was recorded as a provision for income taxes of $2.3 million and a credit to goodwill related to recognition
of Packeteer deferred tax assets of $10.5 million. At April 30, 2009 and 2008, we had a valuation allowance on our U.S. deferred tax assets of approximately $36.4 million and $23.1 million, respectively, which when released will benefit the
income tax provision. The net increase in the valuation allowance was primarily due to a tax accounting methodology change and certain adjustments identified upon filing our 2008 federal and state income tax returns.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">As of April 30, 2009, we had net operating loss carryforwards for federal income tax purposes of approximately $183.3 million, which will expire in
fiscal years ending in 2012 through 2027 if not utilized. We also had net operating loss carryforwards for state income tax purposes of approximately $68.4 million, which will expire in fiscal years 2010 through 2027 if not utilized. Of the total
tax attributes, we have $84.7 million of federal net operating loss carryforwards and $56.8 million of state net operating loss carryforwards for which no deferred tax asset was recorded until the tax benefit relating to excess stock compensation
deduction is realized in accordance with Footnote 82 of SFAS 123(R). We also had federal and California credit carryforwards of approximately $13.9 million and $11.9 million respectively. The federal research credit carryforwards will expire in
fiscal years 2027, 2028 and 2029 if not utilized. The federal alternative minimum tax credit and California credit carryforwards are not subject to expiration.

FACE="Times New Roman" SIZE="2">Utilization of our net operating loss and credit carryforwards are subject to substantial annual limitations due to the ownership change provisions of the Internal Revenue Code and similar state provisions. Annual
limitations have resulted in the expiration of net operating loss and tax credit carryforwards before utilization of approximately $20.8 million and $3.6 million, respectively. Utilization of federal and state net operating losses of approximately
$162.5 million and $68.4 million, respectively, as well as $10.3 million and $11.9 million of

 


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federal and state credits, respectively, are subject to annual limitations ranging from approximately $7.0 million to $17.0 million. See Note 9 in the Notes
to Consolidated Financial Statements for additional information.

Our total gross unrecognized tax benefits as of April 30, 2009, 2008
and 2007 were $18.8 million, $2.8 million and $2.2 million, respectively. Included in our gross unrecognized tax benefits as of April 30, 2009 is approximately $17.4 million of tax benefits that, if recognized, would result in an adjustment to
our effective tax rate.

In accordance with FIN 48, we have elected to classify interest and penalties related to uncertain tax positions
as a component of our provision for income taxes. Accrued interest and penalties relating to our unrecognized tax benefits was approximately $1.0 million, $0.03 million and $0.02 million as of April 30, 2009, 2008 and 2007, respectively, with
approximately $0.3 million and $0.02 million included as a component of our provision for income taxes for fiscal year 2009 and 2008, respectively.

SIZE="2">Due to our taxable loss position from inception through fiscal year 2007, all tax years are subject to examination in U.S. federal and state jurisdictions. We are also subject to examination in various foreign jurisdictions for tax years
2000 forward, none of which are individually material. We are unable to anticipate the change in the balance of the unrecognized tax benefits in the next twelve months due to the possibility of tax examinations and our continued assessment of
potential contingencies.

EXCERPTS ON THIS PAGE:

10-K (2 sections)
Jun 22, 2009
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