Note 6 - Income Taxes

12 Months Ended

Feb. 28, 2013

Income Tax Disclosure [Text Block]

NOTE 6 - INCOME TAXES

Income tax expense is comprised of the following for the years ending February 28 or 29:

	2013			2012		2011
Current
Federal	$	2,090,996		$	1,128,049	$	1,650,552
State		287,026			173,822		217,039
Total Current		2,378,022			1,301,871		1,867,591
Deferred
Federal		(1,107,287	)		729,900		223,424
State		(37,275	)		3,975		7,203
Total Deferred		(1,144,562	)		733,875		230,627
Total	$	1,233,460		$	2,035,746	$	2,098,218

A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for the years ending February 28 or 29:

	2013			2012			2011
Statutory rate		34.0	%		34.0	%		34.0	%
State income taxes, net of federal benefit		4.8	%		2.0	%		2.5	%
Domestic production deduction		(3.2	%)		(1.8	%)		(1.7	%)
Other		1.5	%		0.2	%		0.1	%
Acquisition related expenses		6.4	%		-			-
Valuation allowance, U-Swirl, Inc. Consolidated loss		4.2	%		-			-
Effective Rate		47.7	%		34.4	%		34.9	%

The increase in the effective tax rate is primarily due to the tax consequences of acquiring a 60% majority interest in U-Swirl, Inc.  U-Swirl, Inc. and the Company will continue to file separate income tax returns for each entity.  U-Swirl, Inc. has a history of net losses and does not expect to realize the tax benefit of those losses.  The consolidation of U-Swirl net loss into the results of the Company does not reduce the Company’s taxable income for the year. Additionally, the acquisition of 60% U-Swirl, Inc. resulted in non-deductible acquisition related expenses of approximately $268,000 for the fiscal year ended February 28, 2013.  Finally, the Company will recognize a gain of $222,000 for purposes of income tax reporting, the result of the transfer of Aspen Leaf Yogurt franchise rights to U-Swirl, Inc.

The components of deferred income taxes at February 28 or 29 are as follows:

Deferred Tax Assets	2013			2012
Allowance for doubtful accounts and notes	$	280,030		$	216,136
Inventories		93,726			92,315
Accrued compensation		136,406			147,814
Loss provisions and deferred income		166,650			156,738
Self insurance accrual		43,625			52,946
Amortization, design costs		71,868			87,213
Restructuring charges		115,963			-
U-Swirl, Inc. accumulated net loss		380,383			-
Valuation allowance, U-Swirl, Inc. accumulated net loss		(380,383	)		-
Net deferred tax assets		908,268			753,162
Deferred Tax Liabilities
Depreciation and amortization		(1,079,004	)		(2,051,240	)
Prepaid expenses		(82,325	)		(99,605	)
Net deferred tax liability	$	(1,161,329	)	$	(2,150,845	)
Current deferred tax assets	$	628,633		$	487,274
Non-current deferred tax liabilities		(881,694	)		(1,884,957	)
Net deferred tax liability	$	(253,061	)	$	(1,397,683	)

The Company files income tax returns in the U.S. federal and various state taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before FY 2008.

Realization of the Company's deferred tax assets is dependent upon the Company generating sufficient taxable income, in the appropriate tax jurisdictions, in future years to obtain benefit from the reversal of net deductible temporary differences. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. Management believes that it is more likely than not that the Company will realize the benefits of its deferred tax assets as of February 28, 2013.

The Company accounts for uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position 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 Company measures the tax benefits recognized in the financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.  The application of income tax law is inherently complex.  As such, the Company is required to make judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company's judgments which can materially affect amounts recognized in the balance sheets and statements of operations.  The result of the assessment of the Company's tax positions did not have an impact on the financial statements for the years ended February 28 or 29, 2013 or 2012.  The Company's federal tax returns for all years after 2009 and the Company's state tax returns after 2008 are subject to future examination by tax authorities for all of the Company's tax jurisdictions.  The Company does not have any significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts are recognized for income tax related interest and penalties as a component of general and administrative expense in the statement of income and are immaterial for years ended February 28 or 29, 2013 and 2012.

As of February 28, 2013, U-Swirl, Inc. was not consolidated with us for purposes of filing federal income tax.  U-Swirl, Inc. files a separate federal tax return and has its own federal loss carryforward.  As of February 28, 2013 U-Swirl, Inc. had recorded a full valuation allowance related to the realization of its deferred income tax assets.

In accordance with section 382 of the Internal Revenue Code, deductibility of U-Swirl, Inc.’s U.S. net operating loss carryovers may be subject to annual limitation in the event of a change in control.  We have performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses of U-Swirl, Inc. when the Company acquired its 60% ownership interest in January 2013.

We estimate that the potential future tax deductions of U-Swirl, Inc. accumulated net operating losses, limited by section 382, to be approximately $1.0 million with a resulting deferred tax asset of approximately $380,000. We have recorded a valuation allowance for this amount to reflect the likelihood of realization of this deferred tax asset.