Entity information:
.
TAXES
Our income tax provision consists of the following components for 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
Current
 

 
 

 
 

Federal
$
3,656

 
$
14,637

 
$
42,181

State
(1
)
 
(60
)
 
415

Foreign source withholding tax
47,592

 
79,932

 
55,276

 
51,247

 
94,509

 
97,872

Deferred
 

 
 

 
 

Federal
21,671

 
(48,086
)
 
(89,026
)
State
(1,074
)
 
(557
)
 
554

Foreign source withholding tax
49,832

 
70,925

 
55,221

 
70,429

 
22,282

 
(33,251
)
Total
$
121,676

 
$
116,791

 
$
64,621

The deferred tax assets and liabilities were comprised of the following components at December 31, 2017 and 2016 (in thousands):
 
2017
 
Federal
 
State
 
Foreign
 
Total
Net operating losses
$
1,804

 
$
122,364

 
$
988

 
$
125,156

Deferred revenue, net
9,058

 
35

 
29,189

 
38,282

Stock compensation
6,643

 
2,293

 
—

 
8,936

Patent amortization
16,052

 
7

 
—

 
16,059

Depreciation
(214
)
 
(65
)
 
—

 
(279
)
Other-than-temporary impairment
379

 
71

 
—

 
450

Other accrued liabilities
268

 
(26
)
 
—

 
242

Other employee benefits
3,449

 
649

 
—

 
4,098

 
37,439

 
125,328

 
30,177

 
192,944

Less: valuation allowance
(1,773
)
 
(121,155
)
 
(988
)
 
(123,916
)
Net deferred tax asset
$
35,666

 
$
4,173

 
$
29,189

 
$
69,028


 
2016
 
Federal
 
State
 
Foreign
 
Total
Net operating losses
$
—

 
$
89,162

 
$
463

 
$
89,625

Deferred revenue, net
60,320

 
288

 
31,686

 
92,294

Stock compensation
12,648

 
2,038

 
—

 
14,686

Patent amortization
24,145

 
—

 
—

 
24,145

Depreciation
(502
)
 
(70
)
 
—

 
(572
)
Other accrued liabilities
4,483

 
321

 
—

 
4,804

Other-than-temporary impairment
558

 
61

 
—

 
619

Other employee benefits
2,524

 
275

 
—

 
2,799

 
104,176

 
92,075

 
32,149

 
228,400

Less: valuation allowance
—

 
(89,352
)
 
(463
)
 
(89,815
)
Net deferred tax asset
$
104,176

 
$
2,723

 
$
31,686

 
$
138,585


                             
Note: Included within the balance sheet, but not reflected in the tables are deferred tax assets primarily related to foreign withholding taxes that are expected to be paid within the next twelve months of $14.9 million and $10.9 million as of December 31, 2017 and December 31, 2016, respectively.
The following is a reconciliation of income taxes at the federal statutory rate with income taxes recorded by the Company for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
Tax at U.S. statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State tax provision
—
 %
 
(0.1
)%
 
0.5
 %
Change in federal and state valuation allowance
0.5
 %
 
0.1
 %
 
—
 %
Research and development tax credits
(0.8
)%
 
(0.5
)%
 
(1.2
)%
Uncertain tax positions
(2.4
)%
 
2.1
 %
 
—
 %
Permanent differences
1.0
 %
 
0.6
 %
 
1.2
 %
Domestic production activities deduction
(2.0
)%
 
(9.8
)%
 
—
 %
Stock compensation
(4.0
)%
 
—
 %
 
—
 %
Rate change (a)
14.6
 %
 
—
 %
 
—
 %
Other
(0.3
)%
 
0.3
 %
 
0.2
 %
Total tax provision (b)
41.6
 %
 
27.7
 %
 
35.7
 %
(a) In 2017, the inclusion of the revaluation of the deferred tax assets attributable to the Tax Reform Act signed into law in December 2017 increased the tax provision by 14.6%.
(b) In 2016, the inclusion of benefits associated with domestic production activities, net of uncertain tax provisions, related to prior years reduced the tax provision by 5.6%.
Income Tax Reform
On December 22, 2017, the Tax Reform Act was signed into law. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things: lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018; imposing a 13.125% tax rate on income that qualifies as Foreign Derived Intangible Income ("FDII"); repealing the deduction for domestic production activities; implementing a territorial tax system; and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.
As a result of the Tax Reform Act, we recorded a tax charge of approximately $42.6 million in 2017 due to a re-measurement of deferred tax assets and liabilities, and we do not expect a material repatriation tax liability to be owed. We will continue to monitor as additional guidance is released. The tax charge represents provisional amounts and the Company’s current best estimates. Any adjustments recorded to the provisional amounts through fourth quarter 2018 will be included in net income as an adjustment to tax expense. The provisional amounts incorporate assumptions made based upon our current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance. On a go-forward basis, we currently expect a significant portion of our income to qualify as FDII and thus be subject to the 13.125% tax rate.
Valuation Allowances and Net Operating Losses
We establish a valuation allowance for any portion of our deferred tax assets for which management believes it is more likely than not that we will be unable to utilize the assets to offset future taxes. We believe it is more likely than not that the majority of our state deferred tax assets will not be utilized; therefore we have maintained a near full valuation allowance against our state deferred tax assets as of December 31, 2017. All other deferred tax assets are fully benefited.
As discussed in Note 2, the Company adopted ASU 2016-09 effective January 1, 2017. Under ASU 2016-09, tax windfalls and shortfalls related to the tax effects of employee share-based compensation no longer reside within additional paid-in-capital, rather these windfalls and shortfalls are included within our income tax provision. During 2017, we realized $12.1 million of tax windfalls which was recorded as a reduction to our income tax provision. In the past, we recognized excess tax benefits associated with share-based compensation to shareholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation had been realized, we followed the with and without approach excluding any indirect effects of the excess tax deductions. Under the approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company. During 2016 and 2015, we realized $0.6 million and $2.5 million of tax windfalls, respectively, and were recorded as a corresponding entry to additional paid-in capital. As of December 31, 2016, we had $11.9 million of state unrealized tax benefits associated with share-based compensation. These amounts were recorded on the balance sheet in 2017 when the company adopted ASU 2016-09. There was no impact to retained earnings as the amount was offset by a full valuation allowance.
Uncertain Income Tax Positions
As of December 31, 2017, 2016 and 2015, we had $3.3 million, $10.4 million and $1.5 million, respectively, of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate. The total amount of unrecognized tax benefits could change within the next twelve months for a number of reasons including audit settlements, tax examination activities and the recognition and measurement considerations under this guidance.
During 2017, we released a reserve of $6.5 million as a result of the IRS Joint Committee issuing a letter ruling in acceptance of the refund claims associated with the domestic production activities deduction and research and development credit. Additionally, we reduced the previously established reserve for the 2016 domestic production activities deduction and research and development credit by $1.6 million. These reductions in reserves were partially offset by the establishment of a $1.0 million reserve related to the 2017 research and development and manufacturing deduction credit, as well an increase for interest and penalty on previously recognized reserves.
During 2016, we established a reserve of $3.2 million related to the recognition of the 2016 research and development credit and manufacturing deduction credit. We also established a reserve of $6.3 million related to the recognition of a gross benefit for manufacturing deduction credits related to prior years and released a reserve of $0.6 million for research and development credits. The 2016 reserve was also increased for interest and penalty on previously recognized reserves. During 2015, the reserve was increased for interest and penalty on previously recognized reserves, and we also established a reserve of $0.1 million related to the recognition of the 2015 research and development credit.
The following is a roll forward of our total gross unrecognized tax benefits, which if reversed would impact the effective tax rate, for the fiscal years 2015 through 2017 (in thousands):
 
2017
 
2016
 
2015
Balance as of January 1
$
10,397

 
$
1,469

 
$
1,361

Tax positions related to current year:


 


 
 

Additions
1,009

 
3,209

 
141

Reductions
—

 
—

 
—

Tax positions related to prior years:
 
 
 
 
 
Additions
—

 
6,281

 
—

Reductions
(1,610
)
 
—

 
(33
)
Settlements
(6,544
)
 
(562
)
 
—

Lapses in statues of limitations
—

 
—

 
—

Balance as of December 31
$
3,252

 
$
10,397

 
$
1,469


Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For certain positions that related to years prior to 2017, we have recorded approximately $0.1 million of accrued interest during 2017 and 2016.
The Company and its subsidiaries are subject to United States federal income tax, foreign income and withholding taxes and income taxes from multiple state jurisdictions. Our federal income tax returns for 2011 to the present are currently open and will not close until the respective statutes of limitations have expired. The statutes of limitations generally expire three years following the filing of the return or in some cases three years following the utilization or expiration of net operating loss carry forwards. The statute of limitations applicable to our open federal returns will expire at the end of 2020. The 2017 return is expected to be filed by October 16, 2018 and the statute of limitations will expire three years from the date it is filed. Specific tax treaty procedures remain open for certain jurisdictions for 2007, 2008 and 2009. Many of our subsidiaries have filed state income tax returns on a separate company basis. To the extent these subsidiaries have unexpired net operating losses, their related state income tax returns remain open. These returns have been open for varying periods, some exceeding ten years. The total amount of state net operating losses is $1.6 billion. The Company has an ongoing audit of its California tax returns for years 2012 through 2015.
The U.S. Internal Revenue Service ("IRS") concluded their audit of tax years 2010 through 2012 in 2015 and the refund, related to research and development tax credits, was reviewed by the Joint Committee on Taxation, as all refund claims in excess of $5.0 million are reviewed. In February 2016, we received correspondence from the Joint Committee on Taxation confirming the results of the IRS exam with no exception. We reversed our related reserve for unrecognized tax benefits of $0.6 million in first quarter 2016. In second quarter 2016, we filed amended returns for 2011 through 2014 related to the manufacturing deduction and received notice from the IRS in third quarter 2016 that the amended years, along with the originally filed return for 2015, were open to examination. The examination concluded in second quarter 2017 and the refund claims were confirmed by the Joint Committee on Taxation in third quarter 2017. Accordingly, we adjusted our reserve for unrecognized tax benefits in the amount of $8.0 million in 2017.
Foreign Taxes
We pay foreign source withholding taxes on patent license royalties and state taxes when applicable. We apply foreign source withholding tax payments against our United States federal income tax obligations to the extent we have foreign source income to support these credits. In 2017, 2016 and 2015, we paid $46.7 million, $79.9 million and $55.3 million in foreign source withholding taxes, respectively, and applied these payments as credits against our United States federal tax obligation.
Between 2007 and 2017, we paid approximately $422.3 million in foreign taxes for which we have claimed foreign tax credits against our U.S. tax obligations. Of this amount, $275.2 million relates to taxes paid to foreign governments that have tax treaties with the U.S. It is possible that as a result of tax treaty procedures, the U.S. government may reach an agreement with the related foreign governments that will result in a partial refund of foreign taxes paid with a related reduction in our foreign tax credits. Due to both foreign currency fluctuations and differences in the interest rate charged by the U.S. government compared to the interest rates, if any, used by the foreign governments, any such agreement could result in net interest expense and/or foreign currency gain or loss.