NOTE 14—INCOME TAXES

Federal and state current and deferred income tax benefit, within continuing operations was $2.6 million and zero for the years ended December 31, 2011 and 2010.

A reconciliation of the effective federal tax rates in the consolidated statements of income from continuing operations with the statutory federal income tax rate of 35.0% is summarized in the following table:


	Year Ended December 31,
(Dollars in thousands)	2011			2010
Tax expense at federal statutory rate		35.0	%		35.0	%
Deferred tax valuation reserve		(34.1	)%		(41.3	)%
Fair value adjustments		12.3	%		(0.8	)%
State income taxes, net of federal benefit		9.0	%		7.1	%
Meals and entertainment		(0.1	)%		0.0	%

Income tax expense		22.1	%		0.0	%

Net payments made for federal and state income taxes were $ million and $0.6 million for the years ended December 31, 2011 and 2010, respectively.

The Company has accrued the expected tax and interest exposure for tax matters that are either in the process of resolution or have been identified as having the potential for adjustment. The total reserve for these uncertain tax matters was $0.4 million and zero at December 31, 2011 and 2010, respectively. In connection with the NABCO acquisition, the Company recognized a $0.4 million liability for uncertain tax matters related to difference between positions taken on tax return filings and estimated potential tax settlement outcomes associated with inventory costs. The provision for uncertain tax matters was zero for the years ended December 31, 2011 and 2010.

Deferred income taxes, which is included as a component of continuing operations, includes the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. The components of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010 are summarized in the following table:


	December 31,
(Dollars in thousands)	2011			2010
Deferred tax assets:
Bad debt	$	990		$	3,061
Compensation		458			719
Premises and equipment		—			1,583
Repurchase reserve		3,333			—
Disposal and exit costs		2,111			2,443
Net operating loss carryforwards		394,742			391,313
Alternative minimum tax credits		10,907			10,907
Other		739			424

Total deferred tax assets		413,280			410,450

Deferred tax liabilities:
Repurchase reserve		—			6,637
Intangible assets and liabilities		2,055			—
Premises and equipment		719			—
State income and franchise taxes		187			267
Other		1,435			—

Total deferred tax liabilities		4,396			6,904

Net deferred tax asset before valuation allowance		408,884			403,546
Valuation allowance		(408,965	)		(403,546	)

Net deferred tax liability	$	(81	)	$	—

During the fourth quarter of 2010, the Company received a $24.4 million tax refund, net of approximately $0.4 million of other tax liabilities, from the IRS related to the carryback of the Company’s 2008 NOLs to the taxable year periods 2003, 2004 and 2005. In February 2011, the IRS notified the Company that its $24.8 million refund related to the carryback of its NOLs from the 2008 year to the taxable year periods 2003, 2004, and 2005 was subject to review by the Congressional Joint Committee on Taxation (the “Joint Committee”). The Company provided certain requested information regarding the refund and has not been contacted further in the matter.

One of the prerequisites to receiving the $24.4 million refund was completion by the IRS of its examination of Fremont’s consolidated tax returns for the years ended 2006 and 2007, which have been finalized. Shortly after payment of the tax refund, the IRS withdrew its amended proof of claim filed in the Bankruptcy Court noting the claim had been satisfied. Although the Company does not have any reason to believe that the Joint Committee will not approve the full amount of the tax refund, there is no assurance that such approval will be given by the Joint Committee. The Company has made no adjustment in its financial statements related to such notice.

At December 31, 2011, the Company had estimated federal and California state NOLs of approximately $890 million and $977 million, respectively. The Company’s federal NOLs have a 20-year life and begin to expire in 2027. The Company’s California state NOLs have either a 10-year or 20-year life and begin to expire in 2017.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets depends on the ability to recover previously paid taxes through loss carrybacks and the generation of future taxable income during the periods in which temporary differences become deductible. As a result of generating losses since 2006, among other factors, the Company has determined that sufficient uncertainty exists as to the realizability of its deferred tax asset and as such, has placed a valuation allowance of $409.0 million and $403.5 million on its deferred tax asset at December 31, 2011 and 2010, respectively. Deferred tax liabilities, totaling $81 thousand at December 31, 2011, relate to timing differences of NABCO in certain states in which the Company does not have net operating loss carryforwards.