NOTE 10

Income Taxes

The Company computes income tax expense using the liability method. Under this method, deferred income taxes are provided, to the extent considered realizable by management, for basis differences of assets and liabilities for financial reporting and income tax purposes.

The Company follows guidance issued by the Financial Accounting Standards Board (“FASB”) with respect to accounting for uncertainty in income taxes. A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the state of Florida. The Company is no longer subject to examination by taxing authorities for years before 2008. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next 12 months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not reflect any amounts for interest and penalties in its 2012 or 2011 statements of operations, nor are any amounts accrued for interest and penalties at November 3, 2012 or November 5, 2011.

The provision for income taxes for the years ended consists of the following:


	November 3, 2012			November 5, 2011

Current tax benefit:
Federal	$	—		$	—
State		—			—

		—			—

Deferred tax benefit		10,034			(2,104,915	)
Valuation allowance		(10,034	)		2,104,915


Income tax benefit	$	—		$	—

The following table shows the reconciliation between the statutory federal income tax rate and the actual provision for income taxes for the years ended:


	November 3, 2012			November 5, 2011

Provision - federal statutory tax rate	$	16,918		$	(1,873,902	)
Increase (decrease) resulting from:
State taxes, net of federal tax benefit		1,947			(200,067	)
Permanent differences:
Tax exempt interest		(1,317	)		(26,487	)
Changes in DTA valuation allowance		(10,034	)		2,104,915
Other		(7,514	)		(4,459	)


Income tax benefit	$	—		$	—

The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts and the related deferred tax assets and deferred tax liabilities are as follows:


	November 3, 2012			November 5, 2011

Deferred tax assets:
Allowance for doubtful accounts	$	87,261		$	87,261
Inventories		1,428,743			1,623,018
Carrying value of other investments		1,799,252			1,705,116
Accrued expenses		42,275			251,295
Stock-based compensation		276,087			260,142
Net operating loss carryforwards		552,877			239,607
Valuation allowance		(2,118,135	)		(2,128,169	)

Total deferred tax assets		2,068,360			2,038,270

Deferred tax liabilities:
Depreciation		(30,274	)		(29,314	)
State income tax refunds		(57,605	)		(41,349	)
Amortization		(52,105	)		(45,330	)
Prepaid expenses		(11,376	)		(5,277	)

Net deferred tax assets	$	1,917,000		$	1,917,000

At November 3, 2012, the Company has unused net operating loss carry forwards totaling approximately $1.4 million that may be applied against taxable income. If not used, the net operating loss carry forwards of $.6 and $.8 million will expire in 2031 and 2032 respectively.

These amounts are included in the accompanying consolidated balance sheets under the following captions:


	November 3, 2012			November 5, 2011

Current assets:
Deferred tax assets	$	1,558,278		$	1,961,573
Deferred tax liabilities		(127,468	)		(94,457	)
Valuation allowance		(751,065	)		(982,292	)

Net current deferred taxes		679,745			884,824

Non-current assets:
Deferred tax assets		2,686,703			2,252,694
Deferred tax liabilities		(82,379	)		(74,642	)
Valuation allowance		(1,367,069	)		(1,145,876	)

Net non-current deferred taxes		1,237,255			1,032,176

Net deferred tax asset	$	1,917,000		$	1,917,000

In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In fiscal 2012 and 2011 the Company has determined that, due to significant negative evidence as a result of losses in numerous consecutive years, a valuation reserve is required to reduce the Company’s net deferred taxes to a level supportable by certain tax planning strategies that could be enacted to realize deferred tax assets, if necessary.

The primary tax planning strategy is the potential sale of real estate, primarily land not currently used in the operations of the Company, to generate taxable gains. The Company has assessed that these strategies would result in the realization of approximately $1.9 million of deferred tax assets. The amounts of deferred tax assets above this amount are reserved with a valuation allowance. The valuation allowance is approximately $2.1 million at November 3, 2012 and was nominal at November 5, 2011.

The Company’s tax planning strategies include estimates as to the amount of gains on sales of properties that could be realized. The Company believes these amounts are reasonable and supportable but, if circumstances change, these amounts could be affected which would impact the amount of net deferred taxes which would be supportable. The Company will continue to monitor these matters at each future reporting period.