NOTE 10. Income Taxes

Provision (Benefit) for Income Taxes The composition of the provision (benefit) for income taxes for fiscal 2012, 2011 and 2010 is as follows (in thousands):

	Fiscal Year
	2012			2011			2010

Current:
Federal	$	13,333		$	(1,575	)	$	(4,040	)
State		2,298			831			(372	)

		15,631			(744	)		(4,412	)

Deferred:
Federal		(3,385	)		153			(814	)
State		(739	)		(736	)		35

		(4,124	)		(583	)		(779	)

Total income tax expense (benefit)	$	11,507		$	(1,327	)	$	(5,191	)

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

	Fiscal Year
	2012			2011

Current deferred tax assets (liabilities):
Inventory	$	725		$	647
Other assets, net		189			642
State taxes		(295	)		(560	)
Vacation accrual		1,288			1,029
Deferred compensation		2,106			1,694
Accrued expense and other		6,651			2,501

Net current deferred tax assets		10,664			5,953

Long-term deferred tax assets (liabilities):
Depreciation		(5,100	)		(4,594	)
Deferred rent		3,264			3,575
Stock-based compensation expense		4,231			3,695
Other assets, net		219			428

Total long-term deferred tax assets		2,614			3,104

Net deferred tax assets	$	13,278		$	9,057

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

	Fiscal Year
	2012			2011			2010

Statutory federal rate		35.0	%		35.0	%		35.0	%
State and local taxes, net of federal benefit and other		2.6			(2.3	)		1.6
Stock-based compensation expense		0.2			(1.3	)		(0.5	)
FIN 48 reserve		0.0			9.1			(0.8	)
Other permanent differences, net		(0.7	)		1.7			3.4

Effective income tax rate		37.1	%		42.2	%		38.7	%

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 2012, the total liability for income tax associated with unrecognized tax benefits was $1.9 million ($0.8 million net of federal benefit), of which $0.1 million ($0.1 million net of federal benefit) related to interest and $0.2 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 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.

We believe that it is reasonably possible that $1.2 million ($0.6 million net of federal benefit) of our liability for unrecognized tax benefits of which $0.1 million ($0.1 million 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 2012 and 2011 (in thousands):


	Fiscal Year
	2012			2011
Unrecognized tax benefits - beginning of year	$	1,596		$	2,017
Additions:
Tax positions related to prior period		44			87
Tax positions related to current period		138			26
Reductions:
Tax positions related to prior period		-			(79	)
Settlements		(62	)		(21	)
Lapse of statute of limitations		(156	)		(434	)

Unrecognized tax benefits - end of year	$	1,560		$	1,596

Our continuing practice is to recognize interest and penalties related to unrecognized tax benefits as a tax expense. Tax expense for fiscal 2012 related to interest and penalties was not material. As of the end of fiscal 2012, we had accrued $0.3 million of interest and penalties related to uncertain tax positions. Tax expense for fiscal 2011 related to interest and penalties was $0.1 million. As of the end of fiscal 2011, we had accrued $0.4 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 2007. 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.