INCOME TAXES

6 Months Ended

Jun. 30, 2012

INCOME TAXES

INCOME TAXES

12.INCOME TAXES

The Company accounts for income taxes in accordance with “Income Taxes”, Topic 740 of the FASB ASC. This guidance requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, using applicable tax rates for the years in which the differences are expected to reverse. At December 31, 2011, the Company maintained $8.8 million of net deferred tax assets, of which approximately $5.1 million related to federal tax operating loss carry-forwards and $1.6 million related to state tax net operating loss (“NOL”) carry-forwards. In addition, during the 26-week period ended June 30, 2012, the Company recorded an income tax benefit of $127,000, primarily related to the net loss incurred.  The Company established a federal valuation allowance of $4.6 million at December 31, 2011. For state income tax purposes, the Company had a valuation allowance in the amount of $538,000 at December 31, 2011, 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. These amounts remained unchanged as of June 30, 2012.

At June 30, 2012, December 31, 2011 and July 2, 2011 the current portion of deferred tax assets and liabilities of $359,000, $354,000 and $269,000, respectively, were included in prepaid expenses and other current assets, while the non-current portion of deferred tax assets and liabilities of $8.6 million, $8.5 million and $7.8 million, respectively were included in other assets on the Company’s accompanying condensed consolidated balance sheets. These amounts are net of the valuation allowance discussed above.

When tax contingencies become probable, a liability for the contingent amount is estimated based upon the Company’s best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of June 30, 2012, December 31, 2011, and July 2, 2011 the Company had no reserve recorded for potential tax contingencies. During the 13-week period ended July 2, 2011, the Company recorded a reversal of the state income tax reserve of $277,000, net of federal benefit, based on the completion of a state income tax audit of the Company’s state income tax returns.