This excerpt taken from the MCRL 10-Q filed Aug 8, 2007.
14. INCOME TAXES
The income tax provision for the three and six months ended June 30, 2007, as a percentage of income before taxes, was 35.7% and 36.2%, respectively, decreasing from 40.7% for each of the comparable periods in the prior year. These decreases resulted from decreased non-deductible share-based compensation expense combined with increased tax benefits from the federal research and development credit and federal qualified production activity deductions. The income tax provision for such interim periods differs from taxes computed at the federal statutory rate primarily due to the effect of non-deductible share-based compensation expense, state income taxes, federal and state research and development credits and federal qualified production activity deductions.
Effective January 1, 2007, the Company adopted the provisions of FIN No. 48. The adoption of FIN No. 48 did not result in a cumulative effect adjustment to retained earnings as of January 1, 2007. Consistent with the provisions of FIN No. 48, the company reclassified $4.4 million of current income tax liabilities (classified net of income tax receivable as of December 31, 2006 and included in prepaid expenses and other in the Condensed Consolidated Balance Sheet) as follows: $1.9 million increase to non-current income taxes payable and $2.5 million decrease to non-current deferred tax assets. Upon adoption, the gross liability for income taxes associated with uncertain tax positions at January 1, 2007 was $6.6 million. This gross liability can be reduced by $2.2 million of offsetting tax benefits primarily associated with the federal effects of potential state income tax uncertainties.
As of June 30, 2007, the gross liability for uncertain tax positions was $7.3 million and the net liability, reduced for the federal effects of potential state tax exposures, was $4.9 million. If these uncertain tax positions are sustained upon tax authority audit, or otherwise become certain, the net $4.9 million would favorably affect the companys tax provision in such future periods. The company does not anticipate a significant change to the net liability for uncertain income tax positions within the next 12 months.
The Company continues to recognize interest and penalties related to income tax matters as part of the income tax provision. As of January 1, 2007 and June 30, 2007, the Company had $140,000 and $190,000, respectively, accrued for interest and $0 accrued for penalties for both periods. These accruals are included as a component of non-current income taxes payable.
The Company is required to file U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company may be subject to examination by the Internal Revenue Service (IRS) for calendar years 2002 and forward. Significant state tax jurisdictions include California, New York and Texas, and generally, the Company is subject to routine examination for years 2001 and forward in these jurisdictions. In addition, any research and development credit carryforwards that were generated in prior years and utilized in these years may also be subject to examination by respective state taxing authorities. Generally, the Company is subject to routine examination for years 2000 and forward in various immaterial foreign tax jurisdictions in which it operates.
Deferred tax assets and liabilities result primarily from temporary differences between book and tax bases of assets and liabilities, state and federal research and development credit carryforwards and state manufacturers credit carryforwards. The Company had net current deferred tax assets of $19.9 million and net long-term deferred tax assets of $9.5 million as of June 30, 2007. The Company must regularly assess the likelihood that future taxable income levels will be sufficient to ultimately realize the tax benefits of these deferred tax assets. The Company currently believes that future taxable income levels will be sufficient to realize the tax benefits of these deferred tax assets and has not established a valuation allowance. Should the Company determine that future realization of these tax benefits is not likely, a valuation allowance would be established, which would increase the Company's tax provision in the period of such determination.