5. Income Taxes

The provision for income tax expense (benefit) was as follows:

	Year Ended

	March 1, 2014 (52 Weeks)			March 2, 2013 (52 Weeks)			March 3, 2012 (53 Weeks)
Current tax:
Federal	$	—		$	(6,305	)	$	—
State		4,748			7,928			3,654


		4,748			1,623			3,654
Deferred tax and other:
Federal		—			(61,544	)		1,729
State		(30,609	)		(50,679	)		(29,069	)
Tax expense recorded as an increase of additional paid-in-capital		26,665			—			—


		(3,944	)		(112,223	)		(27,340	)


Total income tax expense (benefit)	$	804		$	(110,600	)	$	(23,686	)

A reconciliation of the expected statutory federal tax and the total income tax expense (benefit) was as follows:

	Year Ended

	March 1, 2014 (52 Weeks)			March 2, 2013 (52 Weeks)			March 3, 2012 (53 Weeks)
Expected federal statutory expense at 35%	$	87,576		$	2,626		$	(137,279	)
Nondeductible expenses		857			1,897			2,408
State income taxes, net		44,366			39,470			11,492
Decrease of previously recorded liabilities		(21,101	)		(91,881	)		(17,771	)
Nondeductible compensation		44,244			—			—
Recoverable federal tax due to special 5-year NOL carryback		—			(6,305	)		—
Release of indemnification asset		5,941			37,324			—
Indemnification receipt		—			587			—
Valuation allowance		(161,079	)		(94,318	)		117,464


Total income tax expense (benefit)	$	804		$	(110,600	)	$	(23,686	)

Net Income for fiscal 2014 included income tax expense of $804 resulting from an increase in the deferred tax valuation allowance for the windfall tax benefits recorded in additional paid-in capital ("APIC") pursuant to the tax law ordering approach offset by adjustments to unrecognized tax benefits due to the lapse of statute of limitations. ASC 740, "Income Taxes" requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, ASC 740 precludes relying on projections of future taxable income to support the recognition of deferred tax assets.

Net Income for fiscal 2013 included income tax benefit of $110,600 primarily comprised of adjustments to unrecognized tax benefits for the appellate settlements of the Brooks Eckerd IRS Audit for the fiscal years 2004 - 2007 and the Commonwealth of Massachusetts Audit for fiscal years 2005 - 2007 as well as for the lapse of statute of limitations. The appellate settlements were offset by a reversal of the related tax indemnification asset which was recorded in selling, general and administrative expenses as these audits were related to pre-acquisition periods. Net loss for fiscal 2012 included income tax benefit of $23,686 and was primarily comprised of adjustments to unrecognized tax benefits due to the lapse of statute of limitations.

The tax effect of temporary differences that gave rise to significant components of deferred tax assets and liabilities consisted of the following at March 1, 2014 and March 2, 2013:

	2014			2013

Deferred tax assets:
Accounts receivable	$	62,973		$	62,745
Accrued expenses		204,346			214,110
Liability for lease exit costs		116,803			142,456
Pension, retirement and other benefits		174,917			219,515
Long-lived assets		424,290			374,101
Other		1,989			2,079
Credits		60,951			62,121
Net operating losses		1,428,751			1,558,694


Total gross deferred tax assets		2,475,020			2,635,821
Valuation allowance		(2,060,811	)		(2,223,675	)


Total deferred tax assets		414,209			412,146
Deferred tax liabilities:
Inventory		414,209			412,146


Total gross deferred tax liabilities		414,209			412,146


Net deferred tax assets	$	—		$	—

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

	2014			2013			2012

Unrecognized tax benefits	$	30,020		$	247,722		$	286,952
Increases to prior year tax positions		—			6,305			—
Decreases to tax positions in prior periods		(3,215	)		(196,214	)		(11,125	)
Increases to current year tax positions		—			—			—
Settlements		—			(3,655	)		—
Lapse of statute of limitations		(16,662	)		(24,138	)		(28,105	)


Unrecognized tax benefits balance	$	10,143		$	30,020		$	247,722

The amount of the above unrecognized tax benefits at March 1, 2014, March 2, 2013 and March 3, 2012 which would impact the Company's effective tax rate, if recognized, was $876, $14,651 and $83,804, respectively. Additionally, any impact on the effective rate may be mitigated by the valuation allowance that is maintained against the Company's net deferred tax assets.

The Company is indemnified by Jean Coutu Group for certain tax liabilities incurred for all years ended up to and including the acquisition date of June 4, 2007, related to the Brooks Eckerd acquisition. Although the Company is indemnified by Jean Coutu Group, the Company remains the primary obligor to the tax authorities with respect to any tax liability arising for the years prior to the acquisition. Accordingly, as of March 1, 2014, March 2, 2013 and March 3, 2012, the Company had a corresponding recoverable indemnification asset of $195, $30,710 and $156,797 from Jean Coutu Group, included in the "Other Assets" line of the Consolidated Balance Sheets, to reflect the indemnification for such liabilities.

While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, management does not expect the change to have a significant impact on the results of operations or the financial position of the company.

The Company recognizes interest and penalties related to tax contingencies as income tax expense. Prior to the adoption of ASC 740, "Income Taxes," the Company included interest as income tax expense and penalties as an operating expense. The Company recognized (benefit) for interest and penalties in connection with tax matters of ($16,833), ($43,069) and ($2,113) for fiscal years 2014, 2013 and 2012, respectively. As of March 1, 2014 and March 2, 2013 the total amount of accrued income tax-related interest and penalties was $5,364 and $22,197, respectively.

The Company files U.S. federal income tax returns as well as income tax returns in those states where it does business. The consolidated federal income tax returns have been subject to examination by the IRS through fiscal 2008, including the Brooks Eckerd pre-acquisition periods. However, any net operating losses that were generated in these prior closed years may be subject to examination by the IRS upon utilization. Tax examinations by various state taxing authorities could generally be conducted for a period of three to five years after filing of the respective return. However, as a result of filing amended returns, the Company has statutes open in some states from fiscal year 2005.

Net Operating Losses and Tax Credits

At March 1, 2014, the Company had federal net operating loss (NOL) carryforwards of approximately $3,507,186. Of these, $1,906,013 will expire, if not utilized, between fiscal 2020 and 2022. An additional $1,519,062 will expire, if not utilized, between fiscal 2028 and 2032.

At March 1, 2014, the Company had state NOL carryforwards of approximately $4,476,975, the majority of which will expire between fiscal 2019 and 2027.

The Company's federal and state net operating loss carryforwards include deductions of $18,365 for windfall tax benefits that have not yet been recognized in the financial statements at March 1, 2014. These tax benefits will be credited to additional paid-in capital when they reduce current taxable income consistent with the tax law ordering approach.

At March 1, 2014, the Company had federal business tax credit carryforwards of $50,595, the majority of which will expire between 2019 and 2021. In addition to these credits, the Company had alternative minimum tax credit carryforwards of $3,221.

Valuation Allowances

The valuation allowances as of March 1, 2014 and March 2, 2013 apply to the net deferred tax assets of the Company. The Company maintained a full valuation allowance of $2,060,811 and $2,223,675 against net deferred tax assets as a result of a three year cumulative loss at March 1, 2014 and March 2, 2013, respectively.