NOTE 10. Income Taxes

(Benefit) Provision for Income Taxes The composition of the (benefit) provision for income taxes for fiscal 2011, 2010 and 2009 is as follows (in thousands):

	Fiscal Year
	2011			2010			2009

Current:
Federal	$	(1,575	)	$	(4,040	)	$	4,198
State		831			(372	)		834
		(744	)		(4,412	)		5,032

Deferred:
Federal		153			(814	)		2,663
State		(736	)		35			191
		(583	)		(779	)		2,854
Total income tax (benefit) expense	$	(1,327	)	$	(5,191	)	$	7,886

Significant components of our deferred tax assets and liabilities are as follows (in thousands):

	Fiscal Year
	2011			2010

Current deferred tax assets (liabilities):
Inventory	$	647		$	675
Accrued expense and other		642			4,482
State taxes		(560	)		(409	)
Vacation accrual		1,029			1,193
Deferred compensation		1,694			1,625
Other assets, net		2,501			(1,516	)
Net current deferred tax assets		5,953			6,050

Long-term deferred tax assets (liabilities):
Depreciation		(4,594	)		(4,687	)
Deferred rent		3,575			4,147
Stock-based compensation expense		3,695			5,470
Other assets, net		428			338
Total long-term deferred tax assets		3,104			5,268

A reconciliation of the benefit / provision for income taxes to the statutory tax rate is as follows:

	Fiscal Year
	2011			2010			2009

Statutory federal rate		35.0	%		35.0	%		35.0	%
State and local taxes, net of federal benefit and other		(2.3	)		1.6			3.3
Stock-based compensation expense		(1.3	)		(0.5	)		0.3
FIN 48 reserve		9.1			(0.8	)		2.4
Other permanent differences, net		1.7			3.4			(1.1	)
Effective income tax rate		42.2	%		38.7	%		39.9	%

We operate in numerous tax jurisdictions and are subject to routine tax examinations. Future tax examinations could involve difficult issues and multiple years. Although we cannot predict the outcome of future examinations, amounts that could be owed in excess of amounts accrued would impact future tax expense but would not be expected to have a material impact on our financial condition.

Uncertain Tax Positions As of the end of fiscal 2011, the total liability for income tax associated with unrecognized tax benefits was $2.0 million ($0.9 million net of federal benefit), of which $0.3 million ($0.2 million net of federal benefit) related to interest and $0.1 million related to penalties. Our effective tax rate will be affected by any portion of this liability we may recognize. As of the end of fiscal 2010, the total liability for income tax associated with unrecognized tax benefits was $2.6 million ($2.2 million net of federal benefit), of which $0.4 million ($0.2 million net of federal benefit) related to interest and $0.2 million related to penalties.

We believe that it is reasonably possible that $0.2 million ($0.1 million net of federal benefit) of our liability for unrecognized tax benefits of which $0.1 million ($37,000 net of federal benefit) of associated interest may be recognized in the next 12 months due to the settlement of audits and the expiration of statutes of limitations. As such, we have classified this amount as a current liability.

The following table reconciles the amount recorded for the liability for income tax associated with unrecognized tax benefits as of the end of fiscal 2011 and 2010 (in thousands):


	Fiscal Year
	2011			2010
Unrecognized tax benefits - beginning of year	$	2,017		$	2,177
Additions:
Tax positions related to prior period		87			59
Tax positions related to current period		26			45
Reductions:
Tax positions related to prior period		(79	)		(162	)
Settlements		(21	)		(9	)
Lapse of statute of limitations		(434	)		(93	)
Unrecognized tax benefits - end of year	$	1,596		$	2,017

Our continuing practice is to recognize interest and penalties related to unrecognized tax benefits as a tax expense. Tax expense for fiscal 2011 related to interest and penalties was $0.1 million and as of the end of fiscal 2011, we had accrued $0.4 million of interest and penalties related to uncertain tax positions. Tax expense for fiscal 2010 related to interest and penalties was $0.1 million and as of the end of fiscal 2010, we had accrued $0.6 million of interest and penalties related to uncertain tax positions.

We operate stores throughout the United States, Puerto Rico and Canada, and as a result, we file income tax returns in the United States federal jurisdiction and various state, local and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. With few exceptions, we are no longer subject to United States federal, state, local or foreign income tax examinations for years before fiscal 2006. While it is often difficult to predict the final outcome or the timing or resolution of any particular uncertain tax position, we believe our reserves for income taxes represent the most probable outcome. We adjust these reserves, as well as the related interest and penalties, in light of changing facts and circumstances.