NOTE 9. INCOME TAXES

A summary of the components of the provision for income taxes is as follows (in thousands):

	Fiscal Year Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Federal:
Current	$	37,313		$	39,511		$	30,529
Deferred		312			(1,418	)		26
		37,625			38,093			30,555
State:
Current		5,205			5,355			3,820
Deferred		(4	)		(217	)		(121	)
		5,201			5,138			3,699
Provision for income taxes	$	42,826		$	43,231		$	34,254

A reconciliation of the statutory federal income tax rate to the effective tax rate as a percentage of income before provision for income taxes follows:

	Fiscal Year Ended
	February 1, 2014	February 2, 2013	January 28, 2012
Tax provision computed at the federal statutory rate	35.00%	35.00%	35.00%
Effect of state income taxes, net of federal benefits	2.81	2.76	2.61
Other, net	(0.15)	(0.43)	(0.90)
	37.66%	37.33%	36.71%

In accordance with ASC Topic 740, Income Taxes, deferred income taxes on the consolidated balance sheets result from temporary differences between the amount of assets and liabilities recognized for financial reporting and income tax purposes. The components of the deferred income taxes, net, are as follows (in thousands):

	February 1, 2014						February 2, 2013
	Current			Non-current			Current			Non-current
Deferred rent	$	1,452		$	5,193		$	1,406		$	4,834
Inventories		4,649			-			4,439			-
Accruals		3,068			1,605			2,980			1,672
Stock-based compensation		1,267			4,118			1,308			4,148
Other		17			2			17			1
Total deferred tax assets		10,453			10,918			10,150			10,655

Accumulated depreciation and amortization		-			(7,289	)		-			(6,414	)
Prepaid expenses		(927	)		-			(901	)		-
Accruals		(42	)		-			(58	)		-
State taxes		(436	)		(132	)		(423	)		(156	)
Total deferred tax liabilities		(1,405	)		(7,421	)		(1,382	)		(6,570	)
Deferred income taxes, net	$	9,048		$	3,497		$	8,768		$	4,085

Deferred tax assets represent items that will be used as a tax deduction or credit in future tax returns or are items of income that have not been recognized for financial statement purposes but were included in the current or prior tax returns for which we have already properly recorded the tax benefit in the consolidated statements of operations. At least quarterly, we assess the likelihood that the deferred tax assets balance will be recovered. We take into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods and tax strategies that could potentially enhance the likelihood of a realization of a deferred tax asset. To the extent recovery is not more likely than not, a valuation allowance is established against the deferred tax asset, increasing our income tax expense in the year such determination is made. We have determined that no such allowance is required.

We apply the provisions of ASC Subtopic 740-10 in accounting for uncertainty in income taxes. In accordance with ASC Subtopic 740-10, we recognize a tax benefit associated with an uncertain tax position when, in our judgment based on technical merits, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management.

We file income tax returns in the U.S. federal and various state jurisdictions. A number of years may elapse before a particular matter for which we have recorded a liability related to an unrecognized tax benefit is audited and finally resolved. Generally, we are not subject to changes in income taxes by the U.S. federal taxing jurisdiction for years prior to Fiscal 2011 or by most state taxing jurisdictions for years prior to Fiscal 2010. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is adequate. Favorable settlement of an unrecognized tax benefit could be recognized as a reduction in our effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax benefit could increase the effective tax rate and may require the use of cash in the period of resolution. Our liability for unrecognized tax benefits is generally presented as non-current. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current.

A reconciliation of the unrecognized tax benefit under ASC Topic 740 follows (in thousands):

	Fiscal Year Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Unrecognized tax benefits - beginning of year	$	2,708		$	2,604		$	3,887
Gross increases - tax positions in prior period		245			55			31
Gross decreases - tax positions in prior period		(964	)		(42	)		(1,412	)
Gross increases - tax positions in current period		277			278			496
Settlements		(517	)		-			(230	)
Lapse of statute of limitations		(210	)		(187	)		(168	)
Unrecognized tax benefits - end of year	$	1,539		$	2,708		$	2,604

We classify interest and penalties recognized on unrecognized tax benefits as income tax expense. We have accrued interest and penalties in the amount of $0.2 million, $0.3 million and $0.3 million as of February 1, 2014, February 2, 2013 and January 28, 2012, respectively. During Fiscal 2014, Fiscal 2013 and Fiscal 2012, we recorded ($43,000), $0.1 million and $0.1 million, respectively, for the accrual of interest and penalties in the consolidated statement of operations

Of the unrecognized tax benefits as of February 1, 2014, February 2, 2013 and January 28, 2012, $1.0 million, $1.1 million and $1.1 million, respectively, if recognized, would affect our effective income tax rate.

On September 13, 2013, the U.S. Treasury Department and the Internal Revenue Service issued final Tangible Property Regulations (TPR) under Internal Revenue Code (IRC) Section 162 and IRC Section 263(a). The regulations are not effective until tax years beginning on or after January 1, 2014; however, certain portions may require an accounting method change on a retroactive basis, thus requiring an IRC Section 481(a) adjustment related to fixed and real asset deferred taxes.

The accounting rules under ASC 740 treat the release of the regulations as a change in tax law as of the date of issuance and required us to determine the impact on our financial statements for the period ended February 1, 2014. Any such impact of the final tangible property regulations would affect temporary deferred taxes only and result in a balance sheet reclassification between current and deferred taxes. We have analyzed the impact of the TPR and concluded that the impact is not material. We will continue to monitor the impact of any future changes to the TPR on us prospectively.