14. INCOME TAXES

The income tax provisions (benefit) attributable to continuing and discontinued operations during the three years ended December 31 is as follows:

	2012		2011		2010

	(in thousands)
Continuing operations	$	3,577	$	4,347	$	(1,361	)
Discontinued operations		—		—		(82	)

	$	3,577	$	4,347	$	(1,443	)

The income tax provision (benefit) attributable to the loss from continuing operations before income taxes during the three years ended December 31 is summarized as follows:

	2012			2011		2010

	(in thousands)
Current Federal	$	(109	)	$	400	$	—
Deferred Federal		2,944			2,636		(1,911	)
Current State		171			—		—
Deferred State		571			1,311		550

Provision (benefit) for income taxes	$	3,577		$	4,347	$	(1,361	)

The Company and its subsidiaries file a US federal income tax return, and various state and local income tax returns. The Company is no longer subject to US Federal or state and local tax examinations by tax authorities for years before 2004. The Internal Revenue Service (the "IRS") finalized its examination of the Company's U.S. income tax return for the year ended December 31, 2007. In connection with their review, the IRS increased the Company's 2007 income tax liability by $0.3 million (plus interest associated with this amount of $39,000), an amount that did not have a material impact on the consolidated financial statements. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2012		2011		2010

	(in thousands)
Balance January 1	$	418	$	418	$	418
Increase related to prior period tax positions		—		—		—
Reductions related to prior period tax positions		—		—		—

Balance December 31	$	418	$	418	$	418

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $0.1 million. We do not expect a significant increase or decrease to the total amounts of unrecognized tax benefits within the next twelve months.

We recognize interest accrued related to unrecognized tax benefits in income tax expense, and penalties in operating expense. We recognized interest and penalties during the three years ended December 31, 2012, 2011 and 2010 of $14,000, $24,000 and $24,000, respectively.

A reconciliation of the expected statutory federal income tax benefit to the provision (benefit) for income taxes for continuing operations during each of the three years ended December 31 was as follows:



Benefit for income taxes at a federal statutory rate	35.0	%	35.0	%	35.0	%
Increase (reduction) in income tax benefit resulting from:
Permanent items not deductible for income tax purposes	(10.8	)	(0.5	)	(6.7	)
Valuation allowance	(196.9	)	(43.2	)	(9.6	)
Other	6.1		(0.6	)	2.8

(Provision) benefit for income taxes	(166.6	)%	(9.3	)%	21.5	%

The permanent items not deductible for income tax purposes resulted primarily from the payment of nondeductible expenses including $0.4 million, $0.5 million and $1.1 million in 2012, 2011 and 2010, respectively, related to our lobbying efforts for gaming in Ohio, as discussed in Note 8.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred taxes related to continuing operations at December 31 were as follows:

	2012			2011

	(in thousands)
Deferred tax assets:
Loss and credit carryforwards	$	27,872		$	24,074
Impairment losses		4,031			4,185
Deferred expenses		3,628			1,759
Stock-based compensation		1,323			821
Other		613			907
Accrued liabilities		1,614			3,429
Interest		—			77

		39,081			35,252
Valuation allowance—federal net operating loss carryforwards, impairment losses and other		(24,512	)		(22,269	)
Valuation allowance—state net operating loss carryforwards		(2,891	)		(2,545	)

Deferred tax assets	$	11,678		$	10,438

Deferred tax liabilities:
Tax depreciation in excess of book	$	(23,878	)	$	(17,592	)
Basis difference in property and equipment		—			(1,932	)
Prepaid expenses		(1,892	)		(1,406	)
Deferred expenses		—			(62	)

Deferred tax liabilities	$	(25,770	)	$	(20,992	)

As of December 31, 2011, management determined that the realization of deferred tax assets for U.S. federal and state income tax purposes was not considered more likely than not, due to the consumption of our net operating loss carryback potential, our prior history of pre-tax losses and uncertainty about the timing of and ability to generate taxable income in the future. As a result, we recorded a full valuation allowance against our net deferred tax assets, excluding deferred tax liabilities related to indefinite-lived assets. The Company has generated additional deferred tax liabilities related to the tax amortization of certain assets because these assets are indefinite lived and are not amortized for book purposes. Specifically, deferred tax liabilities related to indefinite-lived assets include a deferred tax liability recorded in connection with the tax amortization of our Pennsylvania and Ohio gaming licenses of approximately $10.6 million, and a deferred tax liability of approximately $3.5 million recorded in connection with amounts depreciated as land improvements for tax purposes but recorded as land for book purposes. The tax amortization in current and future years gives rise to a deferred tax liability which will only reverse upon ultimate sale or book impairment. Due to the uncertain timing of such reversal, the temporary differences associated with indefinite lived intangibles and certain land improvements cannot be considered a source of future taxable income for purposes of determining a valuation allowance. This resulted in deferred tax expense of $2.8 million for the year ended December 31, 2012.

Valuation allowances of $24.5 million and $22.3 million were provided at December 31, 2012 and 2011, respectively for federal deferred tax assets related to net operating loss carryforwards and certain impairment losses for which we were not able to recognize a tax benefit. In addition, valuation allowances of $2.9 million and $2.5 million were provided at December 31, 2012 and 2011, respectively, for state deferred tax assets. During 2012 and 2011, the aggregate valuation allowances for deferred tax assets increased by $2.6 million and $19.0 million, respectively. The 2012 and 2011 increases relate primarily to federal and state net operating loss carryforwards and impairment losses that are not considered more likely than not realizable.

For federal income tax purposes, we have $0.5 million in alternative minimum tax credit carryforwards, $67.0 million in net operating loss carryforwards, $0.3 million in capital loss carryforwards, and $0.3 million in other federal credit carryforwards at December 31, 2012. The net operating loss carryforwards begin to expire in 2020 and the capital loss carryforwards begin to expire in 2014. A portion of the net operating loss carryforwards (approximately $3.0 million) is limited as to the amount that can be utilized in each tax year by Section 382 of the Internal Revenue Code. The alternative minimum tax credit can be carried forward indefinitely. We have state net operating loss carryforwards of $41.9 million that begin to expire in 2024.