Note 18. Income Taxes

The provision for income taxes consisted of the following for the fiscal years ended June 30:

(In thousands)	2013		2012		2011
Current Income Taxes
Federal	$	5,914	$	1,513	$	(3,179	)
State and Local Taxes	606		5		(132		)
Total	6,520		1,518		(3,311		)
Deferred Income Taxes
Federal	216		828		2,617
State and Local Taxes	567		254		233
Total	783		1,082		2,850
Total	$	7,303	$	2,600	$	(461	)

A reconciliation of the differences between the effective rates and federal statutory rates was as follows:

	2013		2012		2011

Federal income tax at statutory rate	34.0	%	34.0	%	34.0	%
State and local income tax, net	2.6	%	2.6	%	0.2	%
Nondeductible expenses	(0.2	)%	5.7	%	(35.1	)%
Foreign rate differential	0.5	%	2.0	%	2.7	%
Income tax credits	(2.5	)%	(3.6	)%	83.3	%
Change in tax laws	1.1	%	—	%	—	%
Change in state nexus position	—	%	—	%	(24.0	)%
Other	(0.2	)%	(1.4	)%	4.7	%
Effective income tax rate	35.3	%	39.3	%	65.8	%

The principal types of differences between assets and liabilities for financial statement and tax return purposes are accruals, reserves, impairment of intangibles, accumulated amortization, accumulated depreciation and share-based compensation expense. A deferred tax asset is recorded for the future benefits created by the timing of accruals and reserves and the application of different amortization lives for financial statement and tax return purposes. A deferred tax asset valuation allowance is established if it is more likely than not that the Company will be unable to realize certain of the deferred tax assets. A deferred tax liability is recorded for the future liability created by different depreciation methods for financial statement and tax return purposes.

As of June 30, 2013 and 2012, temporary differences which give rise to deferred tax assets and liabilities were as follows:

(In thousands)	2013			2012
Deferred tax assets:
Accrued expenses	$	61		$	74
Share-based compensation expense	1,022			1,088
Reserve for returns	2,431			2,049
Reserves for accounts receivable and inventory	2,995			3,259
Intangible impairment	6,702			7,956
State net operating loss	—			100
Federal net operating loss	904			967
Impairment on Cody note receivable	1,964			1,998
Accumulated amortization on intangible asset	2,316			2,238
Foreign net operating loss	176			114
Other	80			133
Total deferred tax asset	18,651			19,976
Valuation allowance	(2,140		)	(2,112		)
Total deferred tax asset less valuation allowance	16,511			17,864
Deferred tax liabilities:
Prepaid expenses	66			63
Property, plant and equipment	3,512			3,899
Other	54			—
Total deferred tax liability	3,632			3,962
Net deferred tax asset	$	12,879		$	13,902

On April 10, 2007, the Company entered into a Stock Purchase Agreement to acquire Cody by purchasing all of the remaining shares of common stock of Cody. As a result of the acquisition, the Company recorded deferred tax assets related to Cody’s federal net operation loss (NOL) carry forwards totaling approximately $3.8 million at the date of acquisition with $1.9 million expiring in 2026 and $1.9 million in 2027. At June 30, 2013 and 2012, the remaining gross deferred tax asset was $2.7 million and $2.8 million, respectively. The income tax benefit associated with the NOL carry forwards has been recognized in accordance with Section 382 of the Internal Revenue Code of 1986.

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative standards issued by the FASB also provide guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (exclusive of interest and penalties) was as follows:

(In thousands)	Balance
Balance at June 30, 2011	$	209
Additions for tax positions of the current year	24
Additions for tax positions of prior years	47
Reductions for tax positions of prior years	—
Settlements	—
Lapse of statute of limitations	—
Balance at June 30, 2012	$	280
Additions for tax positions of the current year	62
Additions for tax positions of prior years	18
Reductions for tax positions of prior years	—
Settlements	—
Lapse of statute of limitations	—
Balance at June 30, 2013	$	360

As of June 30, 2013 and 2012, the Company reported total unrecognized benefits of $360 thousand and $280 thousand, respectively. As a result of the positions taken during the period, the Company has not recorded any interest and penalties for the period ended June 30, 2013 in the statement of operations and no cumulative interest and penalties have been recorded either in the Company’s statement of financial position as of June 30, 2013 and 2012. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses. The Company does not believe that the total unrecognized tax benefits will significantly increase or decrease in the next twelve months.

The Company files income tax returns in the United States federal jurisdiction, Pennsylvania, New Jersey and California. The Company’s tax returns for Fiscal 2008 and prior generally are no longer subject to review as such years generally are closed. The Company believes that an unfavorable resolution for open tax years would not be material to the financial position of the Company.