NOTE 8—INCOME TAXES

The components of income from continuing operations before income taxes are as follows:

	Year Ended

(dollar amounts in thousands)	February 1, 2014		February 2, 2013		January 28, 2012
Domestic	$	8,533	$	14,577	$	36,634
Foreign		757		7,923		4,954


Total	$	9,290	$	22,500	$	41,588

The provision for income taxes includes the following:

	Year Ended

(dollar amounts in thousands)	February 1, 2014			February 2, 2013			January 28, 2012
Current:
Federal	$	(267	)	$	(338	)	$	—
State		451			471			602
Foreign		2,132			1,636			1,557
Deferred:
Federal^(a)		2,765			6,548			14,743
State		840			988			(3,887	)
Foreign		(3,684	)		40			(555	)


Total income tax expense from continuing operations^(a)	$	2,237		$	9,345		$	12,460

^(a): Excludes tax benefit recorded to discontinued operations of $0.1 million, $0.2 million and $0.1 million in fiscal years 2013, 2012 and 2011, respectively.

A reconciliation of the statutory federal income tax rate to the effective rate for income tax expense follows:

	Year Ended

	February 1, 2014			February 2, 2013			January 28, 2012
Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax		6.0			4.1			3.2
Foreign taxes, net of federal tax		4.4			5.6			1.7
Tax credits, net of valuation allowance		(7.5	)		(3.2	)		(2.3	)
Foreign deferred adjustment		(8.4	)		—			—
Foreign tax law change impact		(3.8	)		—			—
Tax uncertainty adjustment		(3.0	)		(1.5	)		(0.1	)
Release of valuation allowance		—			—			(8.3	)
Non deductible expenses		3.5			0.5			0.7
Stock compensation		—			1.8			0.1
Other, net		(2.1	)		(0.8	)		—


		24.1	%		41.5	%		30.0	%

Items that gave rise to the deferred tax accounts are as follows:

(dollar amounts in thousands)	February 1, 2014			February 2, 2013

Deferred tax assets:
Employee compensation	$	3,544		$	5,274
Store closing reserves		673			719
Legal reserve		182			122
Benefit accruals		2,109			1,247
Net operating loss carryforwards—Federal		1,115			1,887
Net operating loss carryforwards—State		111,258			111,785
Tax credit carryforwards		26,605			16,291
Accrued leases		15,215			16,032
Interest rate derivatives		—			708
Deferred gain on sale leaseback		46,176			51,124
Deferred revenue		2,987			5,194
Other		1,312			1,874


Gross deferred tax assets		211,176			212,257
Valuation allowance		(106,695	)		(102,341	)


		104,481			109,916
Deferred tax liabilities:
Depreciation	$	33,059		$	42,400
Inventories		71,630			65,203
Real estate tax		3,300			3,214
Insurance and other		4,299			6,261
Interest rate derivatives		274			—
Debt related liabilities		3,606			3,588


		116,168			120,666


Net deferred tax (liability) asset	$	(11,687	)	$	(10,750	)

As of February 1, 2014, the Company had available tax net operating losses that can be carried forward to future years. The Company has $1.1 million of deferred tax assets related to federal net operating loss carryforwards which begin to expire in 2027. The Company has $2.4 million of deferred tax assets related to state tax net operating loss carryforwards in unitary filing jurisdictions, of which 1.6% will expire in the next five years and a full valuation allowance has been recorded against. The balance of $108.9 million of the Company's net operating loss carryforwards are for separate company state filing jurisdictions that will expire in various years beginning in 2014. Separate company state net operating losses of $107.1 million are in the jurisdictions where the Company has recorded a full valuation allowance against its net deferred tax assets.

The tax credit carryforward as of February 1, 2014 consists of $7.9 million of alternative minimum tax credits, $7.0 million of hiring credits and $11.7 million of various state and foreign credits. The alternative minimum tax credits have an indefinite life, while the other credits are scheduled to expire in various years starting from 2014, of which $6.7 million have valuation allowances recorded against them.

The temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable, a valuation allowance must be established. To the extent the Company establishes a valuation allowance or changes the allowance in a future period, income tax expense will be impacted. In fiscal year 2013, the Company recorded a benefit for gross state hiring credits of approximately $6.3 million that were impacted by a state tax law change enacted during the fiscal year that restricted the carryforward period for these credits. The Company recorded $6.7 million of gross valuation allowances on these credits and other state credit carryforwards. There was no significant change in the Company's valuation allowance position in fiscal year 2012.

The Company and its subsidiaries' largest jurisdictions subject to income tax are U.S. federal, Puerto Rico (foreign) and various states jurisdictions, in respective order of significance. The Company's U.S. federal returns for tax years 2011 and forward are subject to examination. Foreign, state and local income tax returns are generally subject to examination for a period of three to five years after filing of the respective returns.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(dollar amounts in thousands)	February 1, 2014			February 2, 2013			January 28, 2012

Unrecognized tax benefit balance at the beginning of the year	$	2,274		$	3,364		$	4,131
Gross increases for tax positions taken in prior years		—			—			—
Gross decreases for tax positions taken in prior years		—			(338	)		—
Gross increases for tax positions taken in current year		13			201			235
Settlements taken in current year		—			—			—
Lapse of statute of limitations		(346	)		(953	)		(1,002	)


Unrecognized tax benefit balance at the end of the year	$	1,941		$	2,274		$	3,364

The Company recognizes potential interest and penalties for unrecognized tax benefits in income tax expense and, accordingly, the Company recognized $0.1 million in fiscal years 2013 and 2012 related to potential interest and penalties associated with uncertain tax positions. As of February 1, 2014, February 2, 2013 and January 28, 2012, the Company has recorded $0.5 million, $0.5 million, and $0.3 million, respectively, for the payment of interest and penalties which are excluded from the unrecognized tax benefit noted above.

Unrecognized tax benefits include $0.7 million, $0.9 million, and $1.3 million, as of February 1, 2014, February 2, 2013 and January 28, 2012, respectively, that if recognized would affect the Company's annual effective tax rate. The Company does not anticipate material changes to its unrecognized tax benefits within the next twelve months.