Income Taxes (Tables)

12 Months Ended

Dec. 31, 2012

Income Taxes

Schedule of components of income tax expense or benefit

Total income tax expense or benefit for 2012, 2011 and 2010 was as follows (in thousands):

Holdings

	Year ended December 31,
	2012		2011			2010
Current:
Federal	$	—	$	—		$	(268	)
State	1,943		4,254			3,469
Total current tax provision	1,943		4,254			3,201
Deferred:
Federal	—		(20,991		)	(28,797		)
State	549		(4,430		)	(3,544		)
Total deferred tax provision	549		(25,421		)	(32,341		)
Total income tax expense (benefit)	$	2,492	$	(21,167	)	$	(29,140	)

Guitar Center 

	Year ended December 31,
	2012			2011			2010
Current:
Federal	$	20,005		$	4,917		$	16,004
State	4,750			3,620			1,335
Total current tax provision	24,755			8,537			17,339
Deferred:
Federal	(16,584		)	(29,171		)	(16,823		)
State	(1,268		)	(3,516		)	(2,778		)
Total deferred tax provision	(17,852		)	(32,687		)	(19,601		)
Total income tax expense (benefit)	$	6,903		$	(24,150	)	$	(2,262	)

Reconciliation of income tax expense or benefit to expected amount based on statutory rates

Actual income taxes differ from the statutory tax rate of 35% as applied to net income or loss before income taxes as follows (in thousands):

Holdings

	Year ended December 31,
	2012			2011			2010
Expected income tax benefit	$	(24,387	)	$	(90,337	)	$	(29,622	)
State income taxes, net of federal tax benefit	2,492			(1,463		)	(440		)
Goodwill impairment	—			37,460			—
Stock options	567			—			(159		)
Change in valuation allowance	23,348			32,247			—
Meals & entertainment and non-deductible items	352			348			337
Other	120			578			744
Actual income tax expense (benefit)	$	2,492		$	(21,167	)	$	(29,140	)

Guitar Center

	Year ended December 31,
	2012		2011			2010
Expected income tax expense (benefit)	$	3,604	$	(62,249	)	$	(3,894	)
State income taxes, net of federal tax benefit	2,280		(253		)	746
Goodwill impairment	—		37,460			—
Stock options	567		—			(159		)
Meals & entertainment and non-deductible items	352		348			337
Other	100		544			708
Actual income tax expense (benefit)	$	6,903	$	(24,150	)	$	(2,262	)

Schedule of components of deferred tax assets and liabilities

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are presented below (in thousands):

	Holdings						Guitar Center
	December 31,						December 31,
	2012			2011			2012			2011
Deferred tax assets:
Net operating loss	$	50,194		$	43,179		$	—		$	—
State net operating loss carryforward	2,247			2,042			—			—
Accrued liabilities	26,488			26,572			26,688			26,572
Merchandise inventories	3,215			2,961			3,215			2,961
Intangibles	8,743			8,084			8,743			8,084
Stock options	2,504			2,652			2,504			2,652
Capital loss carryover	133			129			133			129
Fixed assets	4,893			(2,203		)	4,893			(2,203		)
Total gross deferred tax assets	98,417			83,416			46,176			38,195
Less valuation allowance	(58,210		)	(32,558		)	(310		)	(310		)
Net deferred tax assets	40,207			50,858			45,866			37,885
Deferred tax liabilities:
Depreciation	(5,534		)	(5,813		)	(5,534		)	(5,813		)
Intangibles	(110,864		)	(120,196		)	(110,864		)	(120,196		)
Other	(181		)	(441		)	(181		)	(441		)
Total gross deferred tax liabilities	(116,579		)	(126,450		)	(116,579		)	(126,450		)
Net deferred tax liabilities	$	(76,372	)	$	(75,592	)	$	(70,713	)	$	(88,565	)

Schedule of changes in unrecognized tax benefits

The reconciliation of unrecognized tax benefits in 2012, the balance of which is classified as other current assets in the consolidated balance sheet, is as follows (in thousands):

Balance at January 1, 2012	$	1,245
Additions based on tax positions of current years	—
Additions based on tax positions of prior years	181
Reductions based on tax positions of prior years	(133		)
Balance at December 31, 2012	$	1,293