INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES

INCOME TAXES

NOTE 14. INCOME TAXES

        The provision (benefit) for income taxes includes:

	52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
	December 31, 2011			January 1, 2011			January 2, 2010
Current:
Federal	$	44,000		$	16,000		$	(3,148,000	)
State		(294,000	)		69,000			80,000
		(250,000	)		85,000			(3,068,000	)
Deferred:
Federal		454,000			(4,105,000	)		(1,934,000	)
State		(20,000	)		(619,000	)		(661,000	)
		434,000			(4,724,000	)		(2,595,000	)
Provision (benefit) for income taxes	$	184,000		$	(4,639,000	)	$	(5,663,000	)

        The Company's effective tax rate, as a percent of income before income taxes, differs from the statutory federal tax rates as follows:

	52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
	December 31, 2011			January 1, 2011			January 2, 2010
Federal statutory tax rate		34.0	%		34.0	%		34.0	%
Federal benefit on NOL carry back over 34%		0.0	%		0.0	%		1.3	%
State and local income taxes, net of federal tax benefit		8.0	%		4.2	%		4.5	%
Valuation allowance		(24.8	)%		(20.9	)%		(0.5	)%
Change in unrecognized tax benefits		(12.0	)%		0.0	%		0.0	%
Other net, primarily permanent differences		2.9	%		(0.1	)%		0.1	%
Provision for income taxes		8.1	%		17.2	%		39.4	%

        The major components of the Company's net deferred tax assets (liabilities) at December 31, 2011 and January 1, 2011 are as follows:

Current	December 31, 2011			January 1, 2011
Group insurance	$	233,000		$	197,000
Sales return reserve		172,000			209,000
Inventory		585,000			480,000
Prepaid expenses		(415,000	)		(392,000	)
		575,000			494,000
Valuation allowance		(221,000	)		(218,000	)
Total Current	$	354,000		$	276,000

Non-Current	December 31, 2011			January 1, 2011
Federal and State tax net operating loss carry-forwards	$	6,785,000		$	7,385,000
Deferred rent		1,383,000			1,416,000
Deferred construction allowances		(6,334,000	)		(5,580,000	)
Other (principally depreciation expense)		11,607,000			11,298,000
		13,441,000			14,519,000
Valuation allowance		(4,951,000	)		(5,516,000	)
Total Non-current	$	8,490,000		$	9,003,000

        During fiscal 2010 and 2009, the Company generated federal net operating losses of approximately $16.6 million and $9.0 million, respectively. During fiscal 2011, the Company generated federal operating income of $2.2 million. At December 31, 2011, the Company had a federal net operating loss ("NOL") carry-forward of $15.1 million available, for carry-forward for the next 19 years, through 2030. The loss generated in fiscal 2009 was carried back to offset taxable income generated in fiscal 2006.

        In assessing the realization of our deferred tax assets, we consider all available evidence to determine whether it is more likely than not that some portion or all of the net deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income, during the periods in which those temporary differences become realizable. We consider the scheduled reversal of deferred tax assets (including the impact of available carry-back and carry-forward periods) and projected taxable income in assessing the realization of federal deferred tax assets. In making such judgments, significant weight is given to evidence that can be objectively verified. The Company's current or previous losses are given more weight than its projected future performance. Consequently, based on our evaluation of all available evidence, in particular our recent operating losses, we established a federal valuation allowance of $5.1 million at January 1, 2011. At December 31, 2011, the Company reduced the federal valuation allowance to $4.6 million, primarily due to the utilization of net operating loss carry-forwards. For state income tax purposes, the Company has established a valuation allowance in the amount of $68,000 in fiscal 2009, primarily to reserve for the possible non-utilization of state NOL carry-forwards, which may not be realized in future periods before the NOLs expire. The Company increased the state valuation allowance at January 1, 2011 to $650,000. At December 31, 2011, the Company reduced the state valuation allowance to $538,000, primarily due to the utilization of net operating loss carry-forwards. The Company's state NOLs expire from 2013 through 2030.

        The Current portion of deferred tax assets and liabilities are included in prepaid expenses and other current assets, while the Non-current portion of deferred tax assets and liabilities are included in other assets on the Company's accompanying consolidated balance sheets.

        The Company accounts for Uncertainty in Income Taxes in accordance with Topic 740 of the FASB ASC which prescribes a comprehensive model of how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The provision also states that a tax benefit from an uncertain tax position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the ultimate settlement with a taxing authority having full knowledge of all relevant information.

        The cumulative effect of this adoption did not result in any adjustment in the Company's liability for unrecognized income tax benefits.

Balance at January 1, 2011	$	411,000
Additions based on tax positions related to the current year		—
Reductions for tax positions for prior years		(411,000	)
Reductions for tax positions for prior years due to lapse of applicable statute of limitations		—
Settlements		—
Balance at December 31, 2011	$	—

        As of December 31, 2011, the Company had no reserve recorded for potential tax contingencies. Comparatively, the Company had recorded a $271,000 reserve, net of federal benefit for potential tax contingencies, as of January 1, 2011.

        Although the Company believes that it has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company's accrued position. Accordingly, the Company's provisions on federal, state and local tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. As of December 31, 2011, the Company does not believe that its estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

        The Company and certain of its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and local jurisdictions.

        The Company had previously reached agreement with the Internal Revenue Service ("IRS") and closed the audit of fiscal year 2005, with no change to the tax return. The IRS has completed their examination of the 2008 and 2009 loss years and previously received refund claims in connection with Net Operating Loss carry-backs. Due to the size of the refunds, the results must be submitted to the Joint Committee on Taxation ("JCT") for approval. The IRS concluded that no adjustments were necessary and JCT accepted their findings in March 2012.

        As for state and local income taxes, with few exceptions, the Company is subject to state and local income tax examinations by taxing authorities for years after 2007.