Note5. Income Taxes

Income tax benefit (expense) consisted of the following:

	Year Ended October 31,
	2014			2013			2012
Current (expense) benefit:
Federal	$	(1,864,570	)	$	1,565,286		$	866,679
State		(416,620	)		434,027			131,576
Deferred benefit (expense)		2,281,190			(1,894,167	)		(12,725,350	)
Income tax benefit (expense) continuing operations		-			105,146			(11,727,095	)
Intra-period tax allocation benefit (expense) discontinued operations		-			(105,146	)		-
Total income tax benefit (expense)	$	-		$	-		$	(11,727,095	)

Deferred tax assets and liabilities are as follows:

	October 31,
	2014			2013
Deferred tax assets:
Allowance for doubtful accounts	$	238,975		$	373,477
Net operating loss carry forward		1,656,051			3,590,643
Accrued vacation		174,543			187,322
Accrued bonuses		23,507			-
Other accrued assets		186,240			-
Other accrued liabilities		122,586			222,316
Intangible assets		-			885,775
Gross deferred tax assets		2,401,902			5,259,533

Deferred tax liabilities:
Accounts receivable insolvency attribute		-			(1,612,376	)
Property and equipment		(1,336,905	)		(1,643,717	)
Intangible assets		(507,009	)
Gross deferred tax liability		(1,843,914	)		(3,256,093	)
Net deferred tax asset before valuation allowance		557,988			2,003,440

Valuation allowance:
Beginning balance		2,003,440			16,553,520
Change during the period		(1,445,452	)		(14,550,080	)
Ending balance		557,988			2,003,440
Net deferred tax asset	$	-		$	-

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,
	2014		2013		2012

Statutory federal income tax rate	(34.0	)%	(34.0	)%	34.0	%
State taxes, net of federal benefit	(7.6	)	(1.8	)	12.2
Change in valuation allowance	42.8		265.8		(452.5	)
Disallowed deferred tax asset-related party	-		(220.1	)	-
Selling expenses	(1.2	)	(1.4	)	(2.7	)
CODI, Insolvency Exemption debt basis	-		3.1		-
Goodwill	-		(10.3	)	-
Other	-		0.6		1.5
Effective tax rate, benefit (expense)	-	%	1.9	%	(407.5	)%

The Company excluded debt cancellation from cancellation of debt income (“CODI”) from the income tax liability in 2013 in accordance with applicable Internal Revenue Service guidelines regarding insolvency where the amount of debt cancellation excluded from gross ordinary income is applied to attribute reductions. The insolvency calculation is based on IRS guidelines associated with liabilities in excess of the fair market value of assets immediately prior to the debt cancellation. The attribute reductions are ordered and reduce net operating losses, various credits, capital losses, and asset basis among other attribute reductions if applicable and necessary. As a result of the CODI exception provided in Internal Revenue Code Section 108 the Company reduced its net operating losses, applicable credits and asset basis in accordance with the applicable ordering rules.

In 2014, as a result of the attribute reductions to exclude the Company’s CODI from taxable income in 2013, the company incurred $6.4 million of attribute recapture income for tax purposes. As such, the Company used net operating loss carry forwards to offset this attribute recapture income. A decrease in the Company’s deferred tax asset valuation allowance in a like amount of the tax liability arising from the Company's taxable income was used to offset any income tax liability.

The Company had previously fully reserved its net deferred tax assets which included assets associated with The Herald-Dispatch. As a result of the sale of The Herald-Dispatch, and associated Internal Revenue Service Code Regulations associated with losses with respect to transactions between related taxpayers, the Company has deemed aggregate gross losses associated with this sale of $32.0 million to be disallowed for federal and state tax purposes. Accordingly, due to the permanent disallowance of these losses the Company has deemed this to be a worthless tax benefit and wrote-off the deferred tax asset and valuation allowance accordingly. (See disallowed deferred tax assets-related party in rate reconciliation above)

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 Previous 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 indicated that a full valuation was warranted at October 31, 2012. As a result of the October 2013 Credit Agreement entered into on October 7, 2013 the Company reassessed its previous determination regarding its valuation allowance and determined that a full valuation was warranted. 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. 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 reassessment of our credit position, and such adjustments may be material to the Consolidated Financial Statements.

The Company’s effective tax rate for continuing operations for 2014 was 0.0% compared to a benefit of 1.9% in 2013 and an expense of (407.5)% for 2012. The primary difference in tax rates between 2013 and 2012 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 $0.8 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 2013 resulting from the application of certain provisions of ASC 740 regarding implications of intra-period tax allocations for discontinued operations to maintain financial statement neutrality and to recognize the tax components between continuing operations and discontinued operations on a discrete basis.

The Company did not pay or was not refunded any income taxes for the years ended October 31, 2014, 2013 or 2012.

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 $1.7 million but net to zero dollars after valuation allowance consideration. 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, 2013, the Company is subject to U.S. Federal income tax examination for returns filed after October 31, 2011. 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, 2014 and 2013. The Company is currently unable to assess whether any significant increase to the unrecognized tax benefit will be recorded during the next 12 months.