Income Taxes

The components of the provision for income taxes for fiscal 2012, 2011, and 2010 are as follows (in thousands):



	Fiscal 2012			Fiscal 2011			Fiscal 2010
Current:
Federal	$	50		$	532		$	239
State	267			484			192
	317			1,016			431
Deferred:
Federal	(22,577		)	7,880			8,801
State	(5,964		)	1,725			1,194
Change in valuation allowance	71,127			(642		)	(457		)
	42,586			8,963			9,538
	$	42,903		$	9,979		$	9,969

Reconciliations of the provision for income taxes to the amount of the provision that would result from applying the federal statutory rate of 35% to (loss) income before provision for income taxes for fiscal 2012, 2011, and 2010 are as follows:



	Fiscal 2012		Fiscal 2011		Fiscal 2010
Provision for income taxes at federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	4.6		5.4		3.8
Charitable contributions	—		—		4.6
Nondeductible interest on secured convertible notes	—		—		4.6
Other nondeductible expenses	—		0.2		0.7
Valuation allowance	(101.1	)	(2.0	)	(3.0	)
Other	0.5		1.2		(1.5	)
Effective tax rate	(61.0	%)	39.8	%	44.2	%

The major components of the Company’s net deferred income tax assets at February 2, 2013, and January 28, 2012, are as follows (in thousands):



	February 2, 2013			January 28, 2012
Deferred tax assets:
Deferred rent	$	6,604		$	6,142
Merchandise inventories	1,937			1,703
Difference between book and tax bases of fixed assets	7,281			5,355
Supplemental employee retirement plan	842			897
Net operating loss and other tax attribute carryforwards	47,285			23,553
Deferred revenue	5,145			5,055
Legal loss contingencies	2,524			—
Stock-based compensation	499			1,955
Other	3,197			1,384
Total deferred tax assets	75,314			46,044
Valuation allowance	(71,127		)	—
Deferred tax assets, net of valuation allowance	$	4,187		$	46,044

Deferred tax liabilities:
State income taxes	(4,187		)	(2,131		)
Total deferred tax liabilities	(4,187		)	(2,131		)
Net deferred tax assets	$	—		$	43,913

The current year change in net deferred taxes of $43.9 million is comprised of a tax provision increase to establish a valuation allowance of $71.1 million, offset by a current year net deferred tax asset change of $27.2 million in accordance with applicable accounting standards.

The non-cash charge to establish a valuation allowance does not have any impact on the Company’s consolidated cash flows, nor does such an allowance preclude the Company from using loss carry forwards or other deferred tax assets in the future. Until the Company re-establishes a pattern of continuing profitability, in accordance with the applicable accounting guidance, income tax expense or benefit related to the recognition of deferred tax assets in the consolidated statement of operations for future periods will be offset by decreases or increases in the valuation allowance, with no net effect on the consolidated statement of operations.

As a result of recording the valuation allowance against its deferred tax assets, the Company's effective tax rate was negative 61.0% despite its net loss during fiscal 2012. The Company incurred cash payable for income taxes for the fiscal 2012 year of approximately 0.16% of pre-tax loss, representing certain state income taxes.

In addition, we evaluate our charitable contributions carryforward for likelihood of realizability prior to expiration and provide a reserve against any amounts that are deemed more likely than not unrealizable.

During the third quarter of fiscal 2010, we implemented a change in tax method, upon filing our 2009 federal income tax return, which resulted in the reduction of deferred tax assets related to our charitable contribution carry forwards of $0.5 million. This decrease was recorded as a deferred income tax charge and increased our effective income tax rate.

As of February 2, 2013, the Company had federal NOL carryforwards of $121.5 million, of which $13.9 million relates to benefits from stock-based compensation. The Company’s federal NOL carryforwards begin to expire in 2024. As of February 2, 2013, the NOL carryforwards are subject to annual utilization limitations. As of February 2, 2013, the Company also had net federal charitable contribution carryforwards remaining of $0.3 million, alternative minimum tax credits of $2.9 million, which do not expire, and remaining state NOLs of $85.6 million, which are also subject to annual utilization limitations, of which $8.0 million relates to benefits from stock-based compensation.

The Company uses the with and without method to determine when it will recognize and realize excess tax benefits from stock-based compensation. Under this method, the Company will recognize and realize these excess tax benefits only after it realizes the tax benefits of NOLs from operations.

Section 382 of the Internal Revenue Code (“Section 382”) contains provisions that may limit the availability of federal NOL carryforwards to be used to offset taxable income in any given year upon the occurrence of certain events, including significant changes in ownership interests of the Company’s common stock. Under Section 382, an ownership change that triggers potential limitations on NOL carryforwards occurs when there has been a greater than 50% change in ownership interest by shareholders owning 5% or more of a company over a period of three years or less. Based on its analyses, the Company had ownership changes in April 2005 and December 2006, which resulted in Section 382 limitations applying to federal NOLs generated prior to those dates, which were approximately $150.6 million.

Despite these ownership changes, the Company may utilize all of its $121.5 million of remaining federal NOL carryforwards to offset future taxable income. The Company may also experience additional ownership changes in the future, which could further limit the amount of federal NOL carryforwards annually available and increase future cash income tax payments. As of February 2, 2013, there have been no ownership changes since December 2006.

In addition, the Company may determine that varying state laws with respect to NOL carryforward utilization may result in lower limits, or an inability to utilize loss carryforwards in some states altogether, which could result in the Company incurring additional state income taxes. During fiscal 2008, the State of California passed legislation that suspended the Company’s ability to utilize NOL carryforwards to offset taxable income in fiscal 2008 and 2009. In late 2010, the State of California extended such legislation that further suspended use of NOL carryforwards to fiscal 2010 and 2011. As a result, the Company incurred regular cash state income taxes in California.

The Company may also generate income in future periods on a federal alternative minimum tax basis, which would result in alternative minimum taxes payable on a portion of such income.

The Company applies a tax position in a tax return to be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Also, a change in judgment that results in subsequent recognition or derecognition, or a change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) is recognized as a discrete item in the period in which the change occurs. Expanded disclosures are provided, if applicable, including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next 12 months, a description of tax years that remain subject to examination by major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits or expenses that, if recognized, would affect the effective tax rate, and the total amounts of interest and penalties recognized in the statements of operations and financial position.

At February 2, 2013, the Company had no material unrecognized tax benefits or expenses that, if recognized, would affect the Company’s effective income tax rate in future periods. The Company is currently unaware of any issues under review that could result in significant payments, accruals, or material deviations from its recognized tax positions.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits and penalties within its provision for income taxes. The Company had no such interest and penalties accrued at February 2, 2013.

The major jurisdictions in which the Company files income tax returns include the United States federal jurisdiction as well as various state jurisdictions within the United States. The Company’s fiscal 2010 and thereafter tax returns are subject to examination by the United States federal jurisdiction, and, generally, fiscal 2009 and thereafter tax returns are subject to examination by various state tax authorities.