5. Income Taxes

Income tax (expense) benefit consisted of the following:

	Year Ended October 31,
	2012			2011			2010
Current benefit (expense):
Federal	$	1,257,942		$	582,274		$	925,052
State		258,293			279,984			373,839
Deferred (expense) benefit		(12,329,008	)		1,586,527			(1,571,335	)
Income tax (expense) benefit - continuing operations		(10,812,773	)		2,448,785			(272,444	)
Intraperiod tax allocation expense - discontinued operations		(509,520	)		(184,087	)		(211,307	)
Total income tax (expense) benefit	$	(11,322,293	)	$	2,264,698		$	(483,751	)

Deferred tax assets and liabilities are as follows:

	October 31,
	2012			2011
Deferred tax assets:
Allowance for doubtful accounts	$	466,249		$	329,860
Net operating loss carry forward		3,187,375			2,191,478
Accrued vacation		297,014			316,953
Other accrued liabilities		410,822			595,519
Intangible assets		14,201,325			11,873,969
Gross deferred tax assets		18,562,785			15,307,779

Deferred tax liabilities:
Property and equipment		(2,009,265	)		(2,951,801	)
Warrants		(374,693	)		-
Gross deferred tax liability		(2,383,958	)		(2,951,801	)
Net deferred tax asset before valuation allowance		16,178,827			12,355,978

Valuation allowance:
Beginning balance		597,711			552,783
Increase during the period		15,581,116			44,928
Ending balance		16,178,827			597,711
Net deferred tax asset	$	-		$	11,758,267

The above net deferred tax asset is presented on the balance sheet as follows:

	2012		2011
Deferred tax asset - current	$	-	$	864,108
Deferred tax assets -non-current		-		10,894,159
	$	-	$	11,758,267

A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate for continuing operations is as follows:

	Year Ended October 31,
	2012		2011			2010

Statutory federal income tax rate	34.0	%		34.0	%		(34.0)	%
State taxes, net of federal benefit	3.8			5.4			54.5
Change in valuation allowance	(122.4	)		(0.7	)		(15.7	)
Selling expenses	(0.6	)		(1.2	)		(15.0	)
State apportionment and deferred tax adjustments	-			0.2			(48.3	)
Federal and state tax net operating loss adjustments	-			(1.4	)		-
Other	0.3			0.4			0.5
Effective tax rate, (expense) benefit	(84.9	)%		36.7	%		(58.0	)%

The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence was the cumulative loss incurred over the four-year period ended October 31, 2012 and over a seven-year period ended October 31, 2012. However, when these losses are adjusted for certain aberrations, rather than continuing conditions, the Company is able to represent that cumulative losses are not present in either the four year look back period or the seven year look back period.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers a multitude of factors in assessing the utilization of its deferred tax assets including the reversal of deferred tax liabilities, projected future taxable income and other assessments, which may have an impact on financial results. The Company determined in the second quarter of 2012 that, primarily as a result of its inability to enter into an amended credit facility upon the expiration of the Limited Forbearance Agreement on April 30, 2012, as well as the potential for a substantial increase in interest rates and fees coupled with the uncertainty regarding future interest rate increases that the secured lenders may impose on the Company that a full valuation allowance of the Company's deferred tax assets, net of deferred tax liabilities, is necessary to measure the portion of the deferred tax asset that more likely than not will not be realized. As a result of the Restated Credit Agreement entered into on October 19, 2012, the Company reassessed its valuation allowance and determined that the relative short term maturity of the Restated Credit Agreement coupled with the increase in interest rates that a full valuation was warranted at October 31, 2012. This resulted in an increase in the valuation allowance from $0.6 million at October 31, 2011 to approximately $16.2 million at October 31, 2012. The Company currently intends to maintain a full valuation allowance on our deferred tax assets until sufficient positive evidence related to our sources of future taxable income exists and the Company is better able to identify a longer term solution to our current credit situation with our secured lenders. Therefore, the amount of deferred tax asset considered realizable could be adjusted in future periods based on a multitude of factors, including but not limited to a refinancing of the Company's existing credit agreement with its secured lenders, and such adjustments may be material to the Consolidated Financial Statements.

The Company's effective tax rate for continuing operations for 2012 was negative (84.9)% compared to an effective tax rate of 36.7% (benefit) and 58.0% (expense) for 2011 and 2010. The primary difference in tax rates between 2012 and 2011 and for 2012 between the effective tax rate and the statutory tax rate is a result of the valuation allowance taken against our deferred tax assets in the second quarter of 2012 in the amount of $15.2 million and a valuation allowance increase of an incremental $0.4 million in the third and fourth quarters of 2012. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate and may be impacted by increases or decreases in the valuation allowance for deferred tax assets. The Company recorded a tax benefit from continuing operations in 2012, 2011 and 2010 resulting from the application of certain provisions of ASC 740 regarding interim implications of intraperiod tax allocations for discontinued operations when there is a loss from continuing operations to maintain financial statement neutrality and to recognize the tax components between continuing operations and discontinued operations on a discrete basis.

Income taxes (refunded) paid during the years ended October 31, 2012, 2011 and 2010 approximated $0, $(272,000), $(1,675,000). Certain taxable losses for 2010 are carried back to previous years to the extent allowable by applicable tax laws.

The Company's net operating losses are comprised of net operating losses from operations for both Federal and State as well as net operating losses of acquired companies. The tax affected benefit of these are reflected in the Financial Statements at $3.2 million or approximately $0 net of valuation allowance. The Federal net operating losses may be carried forward 20 years and carried back 2 years whereas the State net operating losses generally cannot be carried back for the Company's purpose but can be carried forward 15-20 years. There are certain federal net operating losses which are reflected on a gross basis but which are subject to IRS Code Section 382 limitations and as such a valuation allowance has historically been recorded.

The Company was notified in December of 2011 and the examination commenced in December of 2011 by the IRS covering our fiscal year end 2010 federal income tax return. The Company was notified on December 19, 2012 that the IRS intends to issue a no change letter subject to the IRS Area Directors approval. The Company received an IRS notification dated January 10, 2013 indicating that the 2010 examination was complete with no change to the reported tax. As of October 31, 2012, the Company is subject to U.S. Federal income tax examination for returns filed after October 31, 2009. State Income Tax returns are generally subject to a period of examination for a period of three to five years. Tax interest and penalties are classified as income taxes in the accompanying statements of income and were insignificant for all periods presented. There was no unrecognized tax benefit at October 31, 2012 and 2011. The Company is currently unable to assess whether any significant increase to the unrecognized tax benefit will be recorded during the next 12 months.