Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes
12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  
Income Taxes

12.     Income Taxes

The components of the income tax provision (benefit) charged to operations are summarized as follows:


    Year ended December 31,  
    2011     2010     2009  




    $ 261     $ -         $ -      


    459       (16     176  


    94       76       42  









      814       60       218  













    2,243       1,207       1,500  


    (60     266       98  


    (22     -           -      









      2,161       1,473       1,598  











    $     2,975       $         1,533     $         1,816  











Net deferred tax assets (liabilities) consist of the following:


      $00,00000       $00,00000  
    At December 31,  
    2011     2010  



Deferred revenue

    $ 30       $ 88  

Prepaid expenses and accruals

    162       19  







Net current deferred tax assets

    192       107  









Deferred rent

    $ 535       $ 471  

Net operating loss and tax credit carry-forwards

    9,910       14,836  

Loss on investments

    2,157       2,145  

Amortization and depreciation

    (4,516     (1,813


    2,050       1,454  







Net long-term deferred tax assets

    10,136       17,093  







Net deferred tax assets

    10,328       17,200  

Less valuation allowance

    (3,444     (3,444






      $         6,884               $ 13,756  







During 2010, the write-off of notes receivable from Fetter Logic (Note 17) was considered a capital loss for tax purposes. In assessing the realizability of this deferred tax asset, management determined that it was more-likely-than-not that all of this asset would not be realized and accordingly recorded an increase to our valuation allowance in the amount of $926. The valuation allowance for net deferred tax assets as of December 31, 2011 and 2010 was $3,444 and $3,444, respectively. The valuation allowance as of December 31, 2011 and 2010 was related to capital losses of $2,157 and Federal and state net operating losses of $1,287 primarily due to Section 382 limitations. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized.

The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which net operating losses and temporary differences are deductible. Management considers the scheduled reversal of deferred tax assets and liabilities (including the impact of available carry-back and carry-forward periods), projected taxable income, and tax-planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax code. Based on the level of taxable income and projections for future taxable income over the periods for which the net operating losses are available and deferred tax assets are deductible, management believes that it is more-likely-than-not that it will realize the benefits of the net operating losses and any other deferred tax assets. The amount of the deferred tax asset considered realizable however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced.

On July 28, 2010, in connection with the closing of the Company’s initial public offering, the Company entered into a merger transaction with the Envestnet Shareholder (Note 13). As a result of the merger, the Company recorded post tax net operating losses of $839 for federal and state income tax purposes.

Upon exercise of stock options, the Company recognizes any difference between GAAP compensation expense and income tax compensation expense as a tax windfall or shortfall. The difference is charged to equity in the case of a windfall. When the exercise results in a windfall and the windfall results in net operating loss (“NOL”), or the windfall increases an NOL carryforward, no windfall is recognized until the deduction reduces the income tax payable. For GAAP purposes, the Company has deferred the recognition of approximately $1,365 in windfall tax benefits associated with its stock-based compensation until a tax cash savings is realized. The benefit will be recorded in stockholder’s equity when utilized on an income tax return to reduce taxes payable, and as such, it will not impact the Company’s effective tax rate.

The expected tax provision calculated at the statutory federal rate differs from the actual provision as follows:


      $00,00000       $00,00000       $00,00000  
    Year ended December 31,  
    2011     2010     2009  

Tax provision, at U.S. Federal statutory tax rate

    $ 3,597       $ 308       $ 321  

State income tax, net of Federal tax benefit

    449       42       42  

Effect of permanent items

    487       66       51  

Effect of accounting method change

    (234     -           -      

Effect of return to provision adjustment


Change in valuation allowance

    -           927       1,396  

Effect of contract settlement

    (1,186     -           -      

Effect of change in rate

    -           -           (78

Uncertain tax positions

    (25     106       42  

Foreign income taxes

    -           76       42  


    -           8       -      










Income tax provision

    $         2,975       $         1,533       $         1,816  










At December 31, 2011, the Company had NOL carryforwards for federal income tax purposes of $22,192, which are available to offset future federal taxable income, if any, and expire as follows:


Years ending December 31:      


    $ 2,613  

























      $         22,192  




Of the $22,192 in NOLs listed above, due to Section 382 limitations, approximately $2,131 in NOLs will not be utilized.


In addition, the Company has alternative minimum tax credit carry-forwards of approximately $985 which are available to reduce future federal regular income taxes, if any, over an indefinite period.

A reconciliation of the beginning and ending amount of unrecognized tax benefit was as follows:


    Year ended December 31,  
    2011     2010     2009  

Unrecognized tax benefits balance at beginning of year

    $ 612       $ 475       $ 407  

Additions based on tax positions related to the current year

    119       136       103  

Additions (deletions) based on tax positions related to the prior periods

    (158     9       15  

Reductions for lapses of statute of limitations

    -           (8     (50










Unrecognized tax benefits balance at end of year

    $         573       $         612       $         475  










At December 31, 2011, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $445.

The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2011 and 2010, income tax expense includes $14 and $53, respectively of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $209 and $195 as of December 31, 2011 and 2010, respectively.

The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, a subsidiary of the Company files a tax return in a foreign jurisdiction. The Company’s tax returns for the fiscal years ended March 31, 2009 and 2008 and calendar years ended December 31, 2011, 2010 and 2009 remain open to examination by the Internal Revenue Service in their entirety. They also remain open with respect to state taxing jurisdictions.