NOTE 8. Income Taxes

In the first quarter of 2012, the Company recorded an income tax provision benefit of $32 million due to a tax benefit of $36 million relating to the SeaMicro acquisition and a $1 million tax benefit for the tax effects of items credited directly to other comprehensive income, which was offset by $5 million of foreign taxes in profitable locations. The tax impact of the transfer of the Company's remaining shares of capital stock in GF to GF during the first quarter of 2012 was not material due to the existence of the U.S. valuation allowance.

In the first quarter of 2011, the Company recorded an income tax provision of $2 million consisting of foreign taxes in profitable locations of $3.5 million, partially offset by $1.5 million of U.S. tax benefits from the monetization of U.S. tax credits. The tax impact of the non-cash gain related to the dilution of the Company's equity interest in GF during the first quarter of 2011 was not material due to the existence of the U.S. valuation allowance.

Purchase accounting for the SeaMicro acquisition required the establishment of a deferred tax liability related to the book tax basis differences of identifiable intangible assets that increased goodwill. The deferred tax liability created an additional source of U.S. future taxable income which resulted in a release of a portion of the Company's U.S. valuation allowance. This resulted in a discrete income tax provision benefit of approximately $36 million in the first quarter of 2012.

As of March 31, 2012, substantially all of the Company's U.S. and Canadian deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which as of March 31, 2012, in management's estimate, is not more likely than not to be achieved.

The Company's gross unrecognized tax benefits decreased by $4 million during the first quarter of 2012 due to unrecognized tax benefits in foreign jurisdictions. The total gross unrecognized tax benefits as of March 31, 2012 were approximately $66 million. The Company has recognized $6 million of liabilities for unrecognized tax benefits as of March 31, 2012. The net impact on the effective tax rate for the net decrease in gross unrecognized tax benefits in the first quarter of 2012 was an increase of $1 million. There were no material changes to penalties or interest in the first quarter of 2012.

During the 12 months beginning April 1, 2012, the Company believes that it is reasonably possible that it will reduce its unrecognized tax benefits by approximately $4 million as a result of certain changes in tax status and potential audit resolutions. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. However, the resolution and/or closure of open audits are highly uncertain.