INCOME TAXES

The Company follows ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. ASC 740 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year results than it places on estimates of future taxable income. Therefore the Company has established a valuation allowance of $88.9 million against certain deferred tax assets as of December 31, 2012. In addition, the Company has recorded a net deferred tax liability of $7.1 million which is primarily attributable to differences between the financial statement carrying amounts of past acquisitions of certain indefinite-lived intangible assets and their respective tax bases. The Company intends to maintain a valuation allowance until evidence would support the conclusion that it is more likely than not that the deferred tax asset could be realized. The Company considered all income sources, including other comprehensive income, in determining the amount of tax recorded. During the three years ended December 31, 2012, we did not record a current income tax provision for U.S. Federal income tax purposes since our deferred tax assets are fully reserved by a valuation allowance.

The provision for income taxes consist of the following for 2012, 2011, and 2010:



(in thousands)	2012			2011			2010
Current Income Tax (Expense) Benefit
Federal	$	—		$	—		$	—
State and local	(107		)	29			(236		)
Foreign	(252		)	(262		)	(154		)
Total current income tax expense	(359		)	(233		)	(390		)
Deferred Income Tax Expense
Federal	(1,061		)	(1,149		)	(1,133		)
State and local	(182		)	(198		)	(194		)
Total deferred income tax expense	(1,243		)	(1,347		)	(1,327		)
Income tax provision	$	(1,602	)	$	(1,580	)	$	(1,717	)

A reconciliation of the federal income tax provision at the statutory rate to the effective rate for 2012, 2011, and 2010 is as follows:



(in thousands)	2012			2011			2010
Computed tax benefit at the federal statutory rate of 35%	$	19,069		$	4,879		$	2,757
State income taxes, net of federal benefit	(57		)	(50		)	(130		)
Non-deductible compensation	(537		)	(30		)	(532		)
Non-deductible expense	(131		)	(132		)	(156		)
Non-deductible goodwill impairment	(15,490		)	—			—
Tax on foreign income	(252		)	(262		)	(154		)
Valuation allowance	(4,186		)	(6,090		)	(3,681		)
Other	(18		)	105			179
Income tax provision	$	(1,602	)	$	(1,580	)	$	(1,717	)
Effective tax rate	2.9		%	11.3		%	21.8		%

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2012 and 2011 were as follows:



(in thousands)	2012			2011
Deferred Tax Assets
Provision for doubtful accounts	$	1,020		$	955
Accrued rent	1,748			1,688
Reserve for newsstand returns	139			52
Accrued compensation	11,161			9,620
Deferred revenue	1,165			131
NOL/credit carryforwards	59,868			56,777
Depreciation	6,071			5,778
Amortization of intangible assets	7,756			8,987
Other	242			482
Total deferred tax assets	89,170			84,470
Deferred Tax Liabilities
Prepaid expenses	(293		)	(624		)
Amortization of intangible assets	(7,117		)	(5,874		)
Total deferred tax liabilities	(7,410		)	(6,498		)
Valuation allowance	(88,877		)	(83,846		)
Net Deferred Tax Liability	$	(7,117	)	$	(5,874	)

At December 31, 2012, the Company had aggregate federal net operating loss carryforwards of $124.5 million (before-tax), which will be available to reduce future taxable income through 2032, with the majority expiring in years 2024 and 2025. The Company had federal and state tax credit carryforwards of $3.2 million which begin to expire in 2014. To the extent the Company achieves positive net income in the future, the net operating loss and credits carryforwards may be utilized and the Company’s valuation allowance will be adjusted accordingly.

ASC 740 further establishes guidance on the accounting for uncertain tax positions. As of December 31, 2012, the Company had an ASC 740 liability balance of $0.07 million. Of this amount, $0.05 million represented unrecognized tax benefits, which if recognized at some point in the future would favorably impact the effective tax rate, and $0.02 million is interest. The Company treats interest and penalties due to a taxing authority on unrecognized tax positions as interest and penalty expense. For both years, December 31, 2012 and December 31, 2011, the Company recorded $0.02 million of accrued interest and penalties in the consolidated balance sheets. Following is a reconciliation of the Company’s total gross unrecognized tax benefits for 2012 and 2011.



(in thousands)	2012		2011
Gross balance at January 1	$	50	$	213
Additions based on tax positions related to the current year	—		—
Additions for tax positions of prior years	—		16
Reductions for tax positions of prior years	—		—
Settlements	—		(179		)
Reductions due to lapse of applicable statute of limitations	—		—
Gross balance at December 31	50		50
Interest and penalties	22		22
Balance including interest and penalties at December 31	$	72	$	72

The Company is no longer subject to U.S. federal income tax examinations by tax authorities for the years before 2005 and state examinations for the years before 2003. The Company does not anticipate that the liability will change significantly over the next 12 months.