Note 9 - Income Taxes

9 Months Ended

Feb. 28, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

9.

Income Taxes

C

ompanies are required to apply their estimated annual tax rate on a year-to-date basis in each interim period. Companies should not apply the estimated annual tax rate to interim financial results if the estimated annual tax rate is not reliably predictable. In this situation, the interim tax rate should be based on the actual year-to-date results. Due to changes in our projections, which have fluctuated as we work through our brand repositioning, a reliable projection of our annual effective rate has been difficult to determine. As such, we recorded a tax provision for the

13

and

39

weeks ended

February

28,

2017

and

March

1,

2016

based on the actual year-to-date results.

We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets in the future.

  A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment.  In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction. As of

February

28,

2017,

we have rolling

three

-year historical operating losses and have concluded that the negative evidence outweighs the positive evidence.

In accordance with the applicable accounting standards, we are unable to use future income projections to support the realization of our deferred tax assets as a consequence of the above conclusion.

   Instead, in determining the appropriate amount of the valuation allowance, we considered the timing of future reversal of our taxable temporary differences and available tax strategies that, if implemented, would result in the realization of deferred tax assets. Our valuation allowance for deferred tax assets totaled

$131.3

million and

$89.9

million as of

February

28,

2017

and

May

31,

2016,

respectively.

We

recorded a tax benefit of

$0.1

million and

$1.7

million for the

13

and

39

weeks ended

February

 

28,

2017,

respectively. We recorded a tax benefit of

$0.5

million and

$1.7

million for the

13

and

39

weeks ended

March

1,

2016,

respectively. Netted against our tax benefit for the

13

and

39

weeks ended

February

28,

2017

were charges of

$10.3

million and

$44.1

million, respectively, representing increases in the valuation allowance for deferred tax assets recorded primarily against general business credit carryforwards and federal and state net operating loss carryforwards.

We had a gross liability for unrecognized tax benefits, exclusive of accrued interest and penalties, of

$3.8

million and

$4.5

million, respectively, as of

February

 

28,

2017

and

May

31,

2016,

of which

$3.3

million and

$3.7

million were reclassified against our deferred tax assets, respectively. As of

February

28,

2017

and

May

31,

2016,

the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was

$2.4

million and

$2.3

million, respectively. The liability for unrecognized tax benefits as of

February

28,

2017

does

not

include anything related to tax positions for which it is reasonably possible that the total amounts could change within the next

twelve

months based on the outcome of examinations and negotiations with tax authorities.

Interest and penalties related to unrecognized tax benefits are recognized as components of income tax expense. As of

both

February

28,

2017

and

May

31,

2016,

we had accrued

$0.4

million for the payment of interest and penalties. During the

first

three

quarters of fiscal year

2017,

accrued interest and penalties increased by an insignificant amount.

At

February

 

28,

2017,

we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to

2012,

and with few exceptions, we are no longer subject to state and local examinations by tax authorities prior to fiscal year

2014.