Note 10. INCOME TAXES

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Text Block]

Note 10.  INCOME TAXES

The income tax benefit is based on the following pre-tax income (loss):

	For the Years Ended December 31,
	2011			2010
	(Amounts in Thousands)
Domestic	$	5,726		$	(4,558	)
Foreign		(1,149	)		(1,000	)
Total	$	4,577		$	(5,558	)

The income tax benefit consists of the following:

	For the Years Ended December 31,
	2011			2010
	(Amounts in Thousands)
Current tax (benefit) provision:
Federal	$	(260	)	$	(517	)
State		30			26
Total benefit	$	(230	)	$	(491	)

Actual income taxes reported from continuing operations are different than what would have been computed by applying the federal statutory tax rate to income from continuing operations before income taxes.  The reasons for this difference are as follows:

	For the Years Ended December 31,
	2011			2010
	(Amounts in Thousands)
Provision (benefit) from income taxes at statutory rate	$	1,602		$	(1,945	)
State income taxes, net of federal benefit		20			17
Foreign tax credits		-			433
Net operating losses adjustments		228			254
Valuation allowance adjustments		(1,855	)		2,460
Settlement of existing obligation to Pentland USA, Inc.		-			(1,269	)
Permanent items		18			26
Reduction of tax reserves		(260	)		(517	)
Other, net		17			50
Net benefit from income taxes	$	(230	)	$	(491	)

The significant components of the Company’s deferred income tax liabilities and assets are as follows:

	As of December 31,
	2011			2010
	(Amounts in Thousands)
Deferred tax liabilities
Inventory costs	$	(477	)	$	(122	)
Deferred tax assets
Allowance for doubtful receivables	$	23		$	36
Accrued expenses and other items		6,885			6,133
Difference between book and tax bases of property		993			3,819
Operating loss carry-forwards - domestic		53,962			53,929
Operating loss carry-forwards - foreign		1,664			1,110
Tax credit carry-forwards		13,299			13,299
		76,826			78,326
Less valuation allowance		(76,349	)		(78,204	)
		477			122
Net deferred income tax asset	$	-		$	-

At December 31, 2011, the Company had approximately $142.9 million of Federal net operating loss carry-forwards (“Federal NOLs”), which will expire in years 2020 through 2031 if not utilized prior to that time.  Due to tax laws governing change in control events and their relation to the Recapitalization, approximately $5.1 million of the Federal NOLs are subject to certain limitations as to the amount that can be used to offset taxable income in any single year.  The remainder of the Company’s domestic and foreign net operating loss carry-forwards relate to certain U.S. operating subsidiaries, and the Company’s Canadian operations, respectively, and can only be used to offset income from these operations.  At December 31, 2011, the Company’s Canadian subsidiary has Canadian net operating loss carry-forwards of approximately $4.9 million that will expire in 2028 through 2030.  The tax credit carry-forwards relate to United States federal minimum tax credits of $1.2 million that have no expiration date, general business credits of $0.1 million that expire in years 2020 through 2022, and foreign tax credit carryovers of $12.0 million that expire in years 2013 through 2017.

Valuation allowances are recorded when it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.  A history of operating losses incurred by the domestic and foreign subsidiaries provides significant negative evidence with respect to the Company’s ability to generate future taxable income, a requirement in order to recognize deferred tax assets.  For this reason, the Company was unable to conclude that it was more likely than not that certain deferred tax assets would be utilized in the future.  The valuation allowance relates to federal, state and foreign net operating loss carry-forwards, foreign and domestic tax credits, and certain other deferred tax assets to the extent they exceed deferred tax liabilities.

Accounting for Uncertainty in Income Taxes

A reconciliation of the beginning and ending balance for liabilities associated with unrecognized tax benefits is as follows (amounts in thousands):

Balances at January 1, 2010	$	887
Tax positions related to prior years		16
Reductions for tax positions related to prior years		(196	)
Lapse of applicable statute of limitations		(337	)
Balances at December 31, 2010		370
Tax positions related to prior years		5
Reductions for tax positions related to prior years		(88	)
Lapse of applicable statute of limitations		(178	)
Balances at December 31, 2011	$	109

At December 31, 2011 and 2010, the Company had reserves totaling $0.1 million and $0.4 million, respectively, primarily for various foreign income tax issues all of which, if recognized, would affect the effective tax rate.

The Company recognizes interest and penalties accrued related to the unrecognized tax benefits in the provision for income taxes.  During 2011 and 2010, the Company recognized an insignificant amount in interest and penalties.  The Company had approximately $25,000 and $0.1 million for the payment of interest and penalties accrued at December 31, 2011 and 2010, respectively.

The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will change within the next twelve months.  The Company has certain tax return years subject to statutes of limitation which will close within the next twelve months.  Unless challenged by tax authorities, the closure of those statutes of limitation is expected to result in the recognition of uncertain tax positions in the amount of $0.1 million.

Examination of Tax Returns

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions.  The Company and its subsidiaries are generally no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2007.

The IRS concluded its examination of the Company’s 2007 Federal tax return in February 2010 and issued a summary report.  The results of the 2007 examination did not have a material effect on the Company’s unrecognized tax benefits, financial condition or results of operations.