14.

Income Taxes

Earnings (Loss) before income taxes are as follows for Fiscal 2012, Fiscal 2011 and Fiscal 2010:


	*(in thousands)*
	Years Ended
	February 2, 2013			January 28, 2012			January 29, 2011
Domestic	$	33,625		$	(7,618	)	$	52,796
Foreign		(4,460	)		(2,802	)		332

Total Earnings (Loss) before income taxes	$	29,165		$	(10,420	)	$	53,128

Income tax expense (benefit) is as follows for Fiscal 2012, Fiscal 2011 and Fiscal 2010:


	*(in thousands)*
	Years Ended
	February 2, 2013			January 28, 2012			January 29, 2011
Current:
Federal	$	13,813		$	(11,847	)	$	11,229
State		(3,704	)		5,901			9,159
Foreign		291			2,499			856


Subtotal		10,400			(3,447	)		21,244


Deferred:

Federal		(3,386	)		903			3,241

State		(3,519	)		(1,235	)		(1,622	)
Foreign		369			(369	)		(733	)

Subtotal		(6,536	)		(701	)		886

Total income tax expense (benefit)	$	3,864		$	(4,148	)	$	22,130

The tax rate reconciliations are as follows for Fiscal 2012, Fiscal 2011 and Fiscal 2010:


	Years Ended
	February 2, 2013			January 28, 2012			January 29, 2011

Tax at statutory rate (%)		35.0	%		(35.0	)%		35.0	%

State income taxes, net of federal		5.8			(9.5	)		8.9
Change in valuation allowance		1.8			14.8			(2.3	)
Permanent Items		(1.4	)		13.3			0.5
Tax credits		(11.7	)		(30.5	)		(2.6	)
Tax reserves		(14.1	)		(11.6	)		2.2
Impact of Change in State Tax Laws and Rates		(2.1	)		9.0			—
Foreign Taxes		(1.2	)		9.7			—
Other		1.2			—			—

Effective tax rate (%)		13.3	%		(39.8	)%		41.7	%

The tax effects of temporary differences are included in deferred tax accounts as follows:


	*(in thousands)*
	February 2, 2013					January 28, 2012
Period Ended	Tax Assets			Tax Liabilities		Tax Assets			Tax Liabilities

Current deferred tax assets and liabilities:

Allowance for doubtful accounts	$	32		$	—	$	33		$	—
Compensated absences		743			—		659			—
Inventory costs and reserves capitalized for tax purposes		6,977			—		9,845			—
Insurance reserves		6,985			—		6,863			—
Prepaid items and other items deductible for tax purposes		—			17,355		—			10,152

Sales return reserves		2,890			—		3,031			—
Reserves		331			—		2,383			—
Accrued interest		19			—		1,044			—
Prepaid items taxable for tax purposes		1,546			—		1,539			—
Deferred revenue		1,062			—		811			—
Employee benefit accrual		4,641			—		6,115			—
Deferred gain		—			1,203		—			—
Other		268			—		2,135			—
Valuation allowance		(803	)		—		(1,063	)		—


Total Current deferred tax assets and liabilities	$	24,691		$	18,558	$	33,395		$	10,152

Non-Current deferred tax assets and liabilities:

Property and equipment basis adjustments	$	—		$	130,793	$	—		$	136,663
Deferred rent		28,266			—		25,761			—
Intangibles – Long-Lived		—			124,129		—			138,557
Intangibles – Indefinite-Lived		—			93,368		—			93,614
Insurance reserves		12,253			—		11,994			—
Employee benefit compensation		4,373			—		4,816			—

State net operating losses (net of federal benefit)		9,206			—		9,845			—
Prepaid items taxable for tax purposes		5,341			—		6,698			—
Landlord allowances		29,673			—		28,640			—
Accrued interest		2,991			—		2,456			—
Other		553			—		5,267			—
State Credits		2,366			—		—			—
Federal and Puerto Rico Tax Credits		7,008			—		2,658			—
Valuation allowance		(7,079	)		—		(6,286	)		—


Total non-current deferred tax assets and liabilities	$	94,951		$	348,290	$	91,849		$	368,834


Net Deferred Tax Liability				$	247,206				$	253,742

The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Based on this evaluation, the Company believes no valuation allowances for federal income taxes are necessary.

The Company also determined that it is more likely than not that the benefit from certain state net operating loss carry forwards will not be realized. Therefore, as of February 2, 2013 and January 28, 2012, valuation allowances of $5.8 million and $6.1 million were recorded. In addition, management also determined that a valuation allowance of $2.0 million and $1.2 million was required against the tax benefit associated with Puerto Rico as of February 2, 2013 and January 28, 2012, respectively. If or when recognized, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be recorded to the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

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


*(in thousands)*
	Gross Unrecognized Tax Benefits, Exclusive of Interest and Penalties
Ending balance at January 30, 2010	$	23,205
Additions for tax positions of the current year		—
Additions for tax positions of prior years		1,590
Reduction for tax positions of prior years		(1,524	)
Settlements		—
Lapse of statute of limitations		—

Ending balance at January 29, 2011	$	23,271
Additions for tax positions of the current year		—
Additions for tax positions of prior years		6,383
Reduction for tax positions of prior years		(7,505	)
Settlements		—
Lapse of statute of limitations		—

Ending balance at January 28, 2012	$	22,149

Additions for tax positions of the current year		0
Additions for tax positions of prior years		0
Reduction for tax positions of prior years		(5,225	)
Settlements		0
Lapse of statute of limitations		0

Ending balance at February 2, 2013	$	16,924

As of February 2, 2013, the Company reported total unrecognized benefits of $16.9 million, of which $6.1 million would affect the Company’s effective tax rate if recognized. As a result of previous positions taken, the Company recorded a reduction of $2.1 million of interest and penalties during Fiscal 2012 in the line item “Income Tax Expense (Benefit)” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). Cumulative interest and penalties of $10.4 million have been recorded in the line item “Other Liabilities” in the Company’s Consolidated Balance Sheet as of February 2, 2013. The Company recognizes interest and penalties related to unrecognized tax benefits as part of income taxes. Within the next twelve months, the Company does not expect any significant changes in its unrecognized tax benefits.

As of January 28, 2012, the Company reported total unrecognized benefits of $22.1 million, of which $8.5 million would affect the Company’s effective tax rate if recognized. As a result of previous positions taken, the Company recorded $0.1 million of interest and penalties during Fiscal 2011 in the line item “Income Tax (Benefit) Expense” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). Cumulative interest and penalties of $12.5 million have been recorded in the line item “Other Liabilities” in the Company’s Consolidated Balance Sheet as of January 28, 2012.

As of January 29, 2011, the Company reported total unrecognized benefits of $23.3 million, of which $9.1 million would affect the Company’s effective tax rate if recognized. As a result of previous positions taken, the Company recorded $1.8 million of interest and penalties during the Transition Period in the line item “Income Tax Expense (Benefit)” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). Cumulative interest and penalties of $12.6 million have been recorded in the line item “Other Liabilities” in the Company’s Consolidated Balance Sheet as of January 29, 2011.

The Company files tax returns in the U.S. federal jurisdiction, Puerto Rico and various state jurisdictions. The Company is open to examination by the IRS under the applicable statutes of limitations for fiscal years 2009 through 2012. The Company or its subsidiaries’ state income tax returns are open to audit for the fiscal years 2008 through 2012, which includes the Transition Period, under the applicable statutes of limitations. There are ongoing state audits in several jurisdictions and the Company has accrued for possible exposures as required under Topic No. 740.