(11) Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Text Block]

(11) Income Taxes

Income taxes consist of the following:

	Year Ended December 31,
	2011			2010
	(In thousands)
Current federal tax expense (benefit)	$	-		$	(1,518	)
Current state tax expense (benefit)		-			(28	)
Deferred federal tax (benefit)		(4,873	)		(4,107	)
Deferred state tax expense (benefit)		(233	)		(5,331	)
Change in valuation allowance		5,106			27,966
Income tax expense (benefit)	$	-		$	16,982

Income tax expense/(benefit) for the years ended December 31, 2011 and 2010 differs from the amount determined by applying the statutory federal rate of 35% to income before income taxes as follows:

	Year Ended December 31,
	2011			2010
	(In thousands)
Expense at federal tax rate	$	(5,061	)	$	(5,896	)
State taxes, net of federal income tax benefit		(232	)		734
Other adjustments to tax reserve		(366	)		(1,344	)
Effect of change in state tax rate		1,085			(4,931	)
Valuation allowance		5,106			27,966
Stock-based compensation		520			535
Other		(1,052	)		(82	)
	$	-		$	16,982

The tax effected cumulative temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:

	December 31,
	2011			2010
	(In thousands)
Deferred Tax Assets:
Finance receivables	$	3,073		$	7,562
Accrued liabilities		1,205			1,476
Furniture and equipment		102			281
NOL carryforwards		54,824			49,862
Built in losses		15,098			17,132
Pension Accrual		3,401			2,214
Other		687			-
Total deferred tax assets		78,390			78,527
Valuation allowance		(61,693	)		(56,587	)
		16,697			21,940
Deferred Tax Liabilities:
Other		(1,697	)		(6,940	)
Total deferred tax liabilities		(1,697	)		(6,940	)
Net deferred tax asset	$	15,000		$	15,000

As part of the MFN and TFC Mergers, CPS acquired certain net operating losses and built-in loss assets. Moreover, both MFN and TFC have undergone an ownership change for purposes of Internal Revenue Code (“IRC”) Section 382. In general, IRC Section 382 imposes an annual limitation on the ability of a loss corporation (that is, a corporation with a net operating loss (“NOL”) carryforward, credit carryforward, or certain built-in losses (“BILs”) to utilize its pre-change NOL carryforwards or BILs to offset taxable income arising after an ownership change.

In determining the possible future realization of deferred tax assets, we have considered future taxable income from the following sources: (a) reversal of taxable temporary differences; and (b) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years in which net operating losses might otherwise expire. Our tax planning strategies include the prospective sale of certain assets such as finance receivables, residual interests in securitized finance receivables, charged off receivables and base servicing rights.  The expected proceeds for such asset sales have been estimated based on our expectation of what buyers of the assets would consider to be reasonable assumptions for net cash flows and required rates of return for each of the various asset types.  Our estimates for net cash flows and required rates of return are subjective and inherently subject to future events which may significantly impact actual net proceeds we may receive from executing our tax planning strategies.  A summary of the assets, key assumptions and estimated taxable income is shown in the table below:

Asset Category	Key Assumptions	Estimated Taxable Income
Base servicing rights	Net cash flows discounted at 12%	$	21,899
Residual interests in securitized receivables	Net cash flows discounted at 20%		17,928
Finance receivables	Net cash flows discounted at 25%		12,936
Charged off receivables	Assumed value of 1.5%		5,797
Note receivable	Net cash flows discounted at 11%		2,591
		$	61,151

We believe such asset sales can produce at least $61.2 million in taxable income within the relevant carryforward period. Such strategies could be implemented without significant impact on our core business or our ability to generate future growth. The costs related to the implementation of these tax strategies were considered in evaluating the amount of taxable income that could be generated in order to realize our deferred tax assets.

At December 31, 2011 we have established a $61.7 million valuation allowance against that portion of the deferred tax asset whose utilization in future periods is not more than likely.

As of December 31, 2011, we had net operating loss carryforwards for federal and state income tax purposes of $132.6 million and $215.2 million, respectively.  The federal net operating losses begin to expire in 2022. The state net operating losses begin to expire in 2013.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits including interest and penalties for the year:

	2011			2010
	(In thousands)
Unrecognized tax benefit - opening balance	$	3,022		$	4,319
Gross increases - tax positions in prior period		543			157
Gross decreases - tax positions in prior period		-			-
Gross increases - tax positions in current period		-			-
Settlements		-			-
Lapse of statute of limitations		(1,160	)		(1,454	)
Unrecognized tax benefit - ending balance	$	2,405		$	3,022

Included in the balance of unrecognized tax benefits at December 31, 2011, are $2.0 million of tax benefits that, if recognized, would affect the effective tax rate.

We recognize a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

We recognize potential interest and penalties related to unrecognized tax benefits as income tax expense. Related to the uncertain tax benefits noted above, we reduced penalties by $120,000 and increased gross interest by $2,000 during 2011 and in total, as of December 31, 2011, have recognized a liability for penalties of $160,000 and gross interest of $696,000.  

We do not anticipate a significant change in unrecognized tax positions within the coming year.  In addition, we believe that it is reasonably possible that none of our currently remaining unrecognized tax positions, each of which is individually insignificant, may be recognized by the end of 2011 as a result of a lapse of the statute of limitations.

We are subject to taxation in the US and various states and foreign jurisdictions.  The Company’s tax years for 2007 through 2010 are subject to examination by the tax authorities.  With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2007.