NOTE 12 — INCOME TAXES

Income tax expense, within continuing operations, was $0.6 million for the year ended December 31, 2012, and income tax benefit, within continuing operations, was $2.6 million for the year ended December 31, 2011.

A reconciliation of the effective tax rates in the consolidated statements of income from continuing operations with the statutory federal income tax rate of 34.0% is summarized in the following table:


	Year Ended December 31,
	2012			2011
Federal statutory rate		34.0	%		34.0
State income taxes, net of federal benefit		2.0			9.0
Deferred tax valuation allowance		(36.7	)		(33.1	)
Fair value adjustments		(6.7	)		12.3
Revisions to prior year taxes		(1.5	)		—
Meals and entertainment		(0.3	)		(0.1	)
Other		0.6			—

Effective tax rate		(8.6	)%		22.1	%

Net payments made for federal and state income taxes were $0.3 million and $0.5 million for the years ended December 31, 2012 and 2011, 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 zero and $0.4 million at December 31, 2012 and 2011, respectively.

In connection with the NABCO business combination, the Company recognized a $0.4 million liability for uncertain tax matters related to the difference between positions taken on tax returns filed prior to the acquisition and the estimated potential tax settlement outcomes associated with inventory costs in those tax returns. The statute of limitations on the uncertain tax matter expired in September 2012 and the accrued liability and the related indemnification asset were reversed.

In December 2012, the Internal Revenue Service (“IRS” or the “Service”), in preparation of its report to the Congressional Joint Committee on Taxation (the “Joint Committee”) related to the Company’s $24.8 million refund request for the 2003, 2004, 2005 and 2008 tax years, notified the Company of a proposed adjustment to the reported 2005 alternative minimum taxable income and associated tax (“AMT”). The Service identified a $2.6 million liability as a result of certain disallowed bad debt deductions identified in the 2006 tax year audit. In connection with this proposed adjustment, in February 2013, the Service notified the Company that it was examining the 2003, 2004, 2005 and 2008 tax years. The IRS has requested, and the Company has provided, documentation that the Company believes reduces the 2005 AMT liability to approximately $0.4 million, including $30 thousand of accrued interest through December 31, 2012. The Company remitted a $0.4 million payment to the IRS on January 31, 2013. The Company believes its proposed adjustments are more likely than not to be allowed under the examination. Although the Company does not have any reason to believe that the Joint Committee will not approve the remainder of the tax refund, there is no assurance that such approval will be given by the Joint Committee or that additional items may come to their attention during the examination.

Deferred income taxes, 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, 2012 and 2011 are summarized in the following table:


	December 31,
(Dollars in thousands)	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	359,055		$	394,742
Alternative minimum tax credits		10,909			10,907
Repurchase reserve		2,854			3,333
Disposal and exit costs		2,024			2,111
Compensation		749			458
Litigation reserves		676			739
Bad debt		193			990
Other		94			—

Total deferred tax assets		376,554			413,280

Deferred tax liabilities:
Intangible assets and liabilities		1,603			2,055
Property and equipment		518			719
State income and franchise taxes		—			187
Other		759			1,435

Total deferred tax liabilities		2,880			4,396

Net deferred tax asset before valuation allowance		373,674			408,884
Deferred tax valuation allowance		(373,681	)		(408,965	)

Net deferred tax liability	$	(7	)	$	(81	)

At December 31, 2012, the Company had estimated federal and California net operating loss carryforwards (“NOLs”) of $886.9 million and $980.0 million, respectively. The federal NOLs have a 20-year life and begin to expire in 2027, while the California 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 generate 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 net deferred tax asset and has placed a valuation allowance of $373.7 million and $409.0 million on its net deferred tax asset at December 31, 2012 and 2011, respectively. Deferred tax liabilities, totaling $7 thousand and $81 thousand at December 31, 2012 and 2011, respectively, relate to timing differences of Industrial Supply and Signature Special Situations in certain states in which the Company does not have NOLs.