Note 17. Income Taxes

The provision for income taxes consisted of the following for the fiscal years ended June 30:

(In thousands)	June 30, 2014			June 30, 2013		June 30, 2012
Current Income Tax Expense
Federal	$	41,497		$	5,914	$	1,513
State and Local	4,246			606		5
Total Current Income Tax Expense	45,743			6,520		1,518
Deferred Income Tax Expense (Benefit)
Federal	(11,613		)	216		828
State and Local	(1,273		)	567		254
Total Deferred Income Tax Expense (Benefit)	(12,886		)	783		1,082
Total Income Tax Expense	$	32,857		$	7,303	$	2,600

A reconciliation of the differences between the effective rates and federal statutory rates was as follows:

	June 30, 2014		June 30, 2013		June 30, 2012

Federal income tax at statutory rate	35.0	%	34.0	%	34.0	%
State and local income tax, net	2.2	%	2.6	%	2.6	%
Nondeductible expenses	0.4	%	(0.2)	%	5.7	%
Foreign rate differential	0.2	%	0.5	%	2.0	%
Income tax credits	(0.4)	%	(2.5)	%	(3.6)	%
Change in tax laws	—	%	1.1	%	—	%
Other	(0.9)	%	(0.2)	%	(1.4)	%
Effective income tax rate	36.5	%	35.3	%	39.3	%

The principal types of differences between assets and liabilities for financial statement and tax return purposes are accruals, reserves, impairment of intangibles, accumulated amortization, accumulated depreciation and share-based compensation expense. A deferred tax asset is recorded for the future benefits created by the timing of accruals and reserves and the application of different amortization lives for financial statement and tax return purposes. A deferred tax asset valuation allowance is established if it is more likely than not that the Company will be unable to realize certain of the deferred tax assets. A deferred tax liability is recorded for the future liability created by different depreciation methods for financial statement and tax return purposes.

As of June 30, 2014 and 2013, temporary differences which give rise to deferred tax assets and liabilities were as follows:

(In thousands)	June 30, 2014			June 30, 2013
Deferred tax assets:
Accrued expenses	$	85		$	61
Share-based compensation expense	1,261			1,022
Reserve for returns	3,489			2,431
Reserves for accounts receivable and inventory	8,798			2,995
Intangible impairment	5,739			6,702
Federal net operating loss	865			904
Impairment on Cody note receivable	2,018			1,964
Accumulated amortization on intangible asset	9,338			2,316
Foreign net operating loss	271			176
Other	48			80
Total deferred tax asset	31,912			18,651
Valuation allowance	(2,289		)	(2,140		)
Total deferred tax asset less valuation allowance	29,623			16,511
Deferred tax liabilities:
Prepaid expenses	94			66
Property, plant and equipment	3,715			3,512
Other	315			54
Total deferred tax liability	4,124			3,632
Net deferred tax asset	$	25,499		$	12,879

On April 10, 2007, the Company entered into a Stock Purchase Agreement to acquire Cody by purchasing all of the remaining shares of common stock of Cody. As a result of the acquisition, the Company recorded deferred tax assets related to Cody’s federal net operation loss (NOL) carry-forwards totaling $3.8 million at the date of acquisition with $1.9 million expiring in 2026 and $1.9 million in 2027. At June 30, 2014 and 2013, the remaining gross deferred tax asset was $2.5 million and $2.7 million, respectively. The income tax benefit associated with the NOL carry forwards has been recognized in accordance with Section 382 of the Internal Revenue Code of 1986.

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative standards issued by the FASB also provide guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (exclusive of interest and penalties) was as follows:

(In thousands)	Balance
Balance at July 1, 2012	$	280
Additions for tax positions of the current year	62
Additions for tax positions of prior years	18
Reductions for tax positions of prior years	—
Settlements	—
Lapse of statute of limitations	—
Balance at June 30, 2013	$	360
Additions for tax positions of the current year	58
Additions for tax positions of prior years	10
Reductions for tax positions of prior years	—
Settlements	—
Lapse of statute of limitations	—
Balance at June 30, 2014	$	428

The cumulative amount of unrecognized tax benefits above that, if recognized, would impact the Company’s tax expense and effective tax rate is $428 thousand, $360 thousand, and $280 thousand for the fiscal years ended June 30, 2014, 2013, 2012, respectively.

As of June 30, 2014 and 2013, the Company reported total unrecognized benefits of $428 thousand and $360 thousand, respectively. As a result of the positions taken during the period, the Company has not recorded any interest and penalties for the period ended June 30, 2014 in the statement of operations and no cumulative interest and penalties have been recorded either in the Company’s statement of financial position as of June 30, 2014 and 2013. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses. The Company does not believe that the total unrecognized tax benefits will significantly increase or decrease in the next twelve months.

The Company files income tax returns in the United States federal jurisdiction, Pennsylvania, New Jersey and California. The Company’s tax returns for fiscal year 2008 and prior generally are no longer subject to review as such years generally are closed. The Company believes that an unfavorable resolution for open tax years would not be material to the financial position of the Company.