Note G – Income Taxes

Significant components of the Company's income tax (provision) benefit are as follows:


					Years Ended
		January 1			January 2			January 3
		2012			2011			2010
Current:
Federal	$	(141,000	)	$	2,374,000		$	255,000
State		(149,000	)		(22,000	)		(135,000	)
Total		(290,000	)		2,352,000			120,000	)
Deferred:
Federal		0			0			(6,676,000	)
State		0			0			(546,000	)
Total		0			0			(7,222,000	)
Income tax (provision) benefit	$	(290,000	)	$	2,352,000		$	(7,102,000	)

The Company's effective tax rate differs from the federal statutory rate as set forth in the following table:


					Years Ended
		January 1			January 2			January 3
		2012			2011			2010
Tax (provision) benefit computed at federal
statutory rate (34%)	$	(390,000	)	$	(151,000	)	$	2,800,000
State income taxes, net of federal benefit		56,000			(266,000	)		152,000
Reduction in unrecognized tax benefits		255,000			0			0
(Increase) decrease in valuation allowance		(127,000	)		2,938,000			(9,962,000	)
Other, net		(84,000	)		(169,000	)		(92,000	)
Income tax (provision) benefit	$	(290,000	)	$	2,352,000		$	(7,102,000	)

In 2011, 2010, and 2009, the Company paid $472,000, $476,000, and $414,000, respectively, related to federal and state income taxes and received refunds totaling $86,000, $3,273,000, and $184,000, respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of January 1, 2012, and January 2, 2011, are as follows:


		January 1			January 2
		2012			2011
Deferred tax liabilities:
Tax over book depreciation	$	(2,637,000	)	$	(3,314,000	)
Total deferred tax liabilities		(2,637,000	)		(3,314,000	)
Deferred tax assets:
Deferred compensation accruals		1,542,000			1,315,000
Net operating loss carryforwards		705,000			670,000
Tax credit carryforwards		6,176,000			7,358,000
Deferred rent obligations		2,787,000			2,672,000
Other, net		435,000			180,000
Total deferred tax assets		11,645,000			12,195,000
Valuation allowance for deferred tax assets		(8,856,000	)		(8,729,000	)
		2,789,000			3,466,000
Net deferred tax assets	$	152,000		$	152,000

At January 1, 2012, the Company had tax credit carryforwards of $6,176,000 available to reduce future federal income taxes. These carryforwards consist of FICA tip credits which expire in the years 2025 through 2028 and alternative minimum tax credits which may be carried forward indefinitely. In addition, the Company has net operating loss carryforwards in various states totaling $17,387,000 which are available to reduce state income taxes and which expire from 2012 to 2031. The use of these net operating losses is limited to the future taxable earnings of certain of the Company's subsidiaries.

ASC Topic 740, "Income Taxes", establishes procedures to measure deferred tax assets and liabilities and assess whether a valuation allowance relative to existing deferred tax assets is necessary. Management assesses the likelihood of realization of the Company's deferred tax assets and the need for a valuation allowance with respect to those assets based on the weight of available positive and negative evidence. At the end of fiscal 2009, such evidence included particularly future projected taxable income, the expiration dates of tax credit carryforwards and recent pre-tax losses. Because the pre-tax losses, which included a significant loss for 2009 and which also resulted in a three-year cumulative pre-tax loss, are objectively determined, they were considered to be negative evidence which was given more weight than the positive evidence which was considered. Therefore, during the fourth quarter of 2009, in connection with the preparation of the Company's financial statements for fiscal year 2009, management concluded that a valuation allowance for substantially all of the Company's deferred tax assets was necessary in order to reflect the Company's assessment of its ability to realize the benefits of those assets. As a result, in 2009 the Company recorded an increase in the beginning of the year valuation allowance for deferred tax assets which increased the income tax provision for the fourth quarter by $7,405,000. For reasons similar to those discussed above relative to fiscal 2009, the Company has continued to maintain a valuation allowance for substantially all of its net deferred tax assets throughout fiscal years 2010 and 2011. As of January 1, 2012, January 2, 2011, and January 3, 2010, the Company had $152,000 of net deferred tax assets and a valuation allowance of $8,856,000, $8,729,000, and $11,667,000, respectively.

The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. Periods subject to examination for the Company's federal return are the 2008 through 2010 tax years. The periods subject to examination for the Company's state returns are the tax years 2007 through 2010. During the third quarter of 2011, the Internal Revenue Service completed an examination of the Company's federal income tax returns for fiscal years 2008 and 2009 which resulted in additional expense and payment of $132,000. The results of the Internal Revenue Service's audit of the fiscal 2008 and 2009 income tax returns are subject to final approval by the U.S. Congress Joint Committee on Taxation. Also, during the third quarter of 2011, the Internal Revenue Service commenced an employment tax audit related to 2009 and 2010.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended January 1, 2012, and January 2, 2011:


		Years Ended
		January 1			January 2
		2012			2011
Balance at beginning of the year	$	767,000		$	767,000
Additions based on tax positions taken during the current year		0			0
Reductions related to settlements with taxing authorities and lapses of statutes of
limitations		( 321,000	)		0
Balance at the end of the year	$	446,000		$	767,000

The Company's accounting policy with respect to interest expense and penalties arising from income tax settlements is to recognize them as part of the provision for income taxes. Interest expense of $10,000, and $11,000 was recognized during fiscal 2010 and 2009, respectively. No interest expense was recognized during fiscal 2011.