NOTE 11. INCOME TAXES

The provision (benefit) for income taxes includes:

	52 Weeks Ended			52 Weeks Ended			52 Weeks Ended

	December 29, 2012			December 31, 2011			January 1, 2011
Current:
Federal	$	(8,000	)	$	44,000		$	16,000
State		87,000			(294,000	)		69,000

		79,000			(250,000	)		85,000

Deferred:
Federal		(843,000	)		454,000			(4,105,000	)
State		(521,000	)		(20,000	)		(619,000	)

		(1,364,000	)		434,000			(4,724,000	)

Provision (benefit) for income taxes	$	(1,285,000	)	$	184,000		$	(4,639,000	)

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			52 Weeks Ended

	December 29, 2012			December 31, 2011			January 1, 2011
Federal statutory tax rate		34.0	%		34.0	%		34.0	%
State and local income taxes, net of federal tax benefit		4.6	%		8.0	%		4.2	%
Valuation allowance		(28.3	)%		(24.8	)%		(20.9	)%
Change in unrecognized tax benefits		0.0	%		(12.0	)%		0.0	%
Other net, primarily permanent differences		(0.7	)%		2.9	%		(0.1	)%

Provision for income taxes		9.6	%		8.1	%		17.2	%

The major components of the Company's net deferred tax assets (liabilities) at December 29, 2012 and December 31, 2011 are as follows:

Current	December 29, 2012			December 31, 2011

Group insurance	$	227,000		$	233,000
Sales return reserve		189,000			172,000
Inventory		639,000			585,000
Prepaid expenses		(514,000	)		(415,000	)

		541,000			575,000
Valuation allowance		(189,000	)		(221,000	)

Total Current	$	352,000		$	354,000

Non-Current	December 29, 2012			December 31, 2011

Federal and State tax net operating loss carry-forwards	$	13,556,000		$	6,785,000
Deferred rent		1,380,000			1,383,000
Deferred construction allowances		(7,273,000	)		(6,334,000	)
Other (principally depreciation expense)		10,968,000			11,607,000

		18,631,000			13,441,000
Valuation allowance		(8,774,000	)		(4,951,000	)

Total Non-current	$	9,857,000		$	8,490,000

During fiscal 2012 and 2010, the Company generated federal net operating losses of approximately $17.9 million and $17.3 million, respectively. During fiscal 2011, the Company generated federal taxable income of $2.2 million. At December 29, 2012, the Company had a federal net operating loss ("NOL") carry-forward of approximately $32.9 million, available for carry-forward for the next 20 years, expiring from 2030 through 2032.

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. At December 29, 2012, the Company increased the federal valuation allowance to $8.3 million, primarily due to the operating losses generated in fiscal 2012. 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. At December 29, 2012, the Company increased the state valuation allowance to $676,000, primarily due to the operating losses generated in fiscal 2012.The Company's state NOLs expire from 2013 through 2032.

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. As of December 29, 2012 and December 31, 2011, the Company had no reserve recorded for potential tax contingencies.

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 29, 2012, 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 received refunds for its NOL carry-backs for 2008 and 2009. The refund claims were examined by the IRS and approved by the Joint Committee of Taxation 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 2008.