INCOME TAXES

The provision for income taxes from continuing operations was comprised of the following:



	2011		2010			2009
(In thousands)
Current:
U.S. Federal	$	107,410	$	95,124		$	91,083
U.S. State and local	16,791		17,326			11,890
Non-U.S.	—		—			—
Total current tax expense	124,201		112,450			102,973
Deferred:
U.S. Federal	9,203		20,876			15,176
U.S. State and local	1,253		(489		)	3,826
Non-U.S.	—		—			—
Total deferred tax expense	10,456		20,387			19,002
Income tax provision	$	134,657	$	132,837		$	121,975

Net deferred tax assets fluctuated by items that are not reflected in deferred expense above. The fluctuations in net deferred tax assets related to discontinued operations deferred income tax expense were $0.1 million decrease and $0.5 million increase for 2010 and 2009, respectively. There were no fluctuations in deferred tax assets related to discontinued operations in 2011. Fluctuations related principally to pension-related charges recorded in accumulated other comprehensive income were $2.6 million increase, $1.7 million decrease, and $1.4 million decrease for 2011, 2010, and 2009, respectively. Additionally, net deferred tax assets increased by $0.2 million as a result of the establishment of goodwill associated with the acquisition of the U.S. subsidiaries of Liquidation World Inc.

Reconciliation between the statutory federal income tax rate and the effective income tax rate for continuing operations was as follows:



	2011		2010		2009
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Effect of:
State and local income taxes, net of federal tax benefit	3.4		3.1		3.2
Non-U.S. income tax rate differential	0.4		—		—
Work opportunity tax and other employment tax credits	(0.4	)	(0.3	)	(0.5	)
Net benefit recognized for prior year tax uncertainties	—		(0.3	)	—
Valuation allowance	1.0		—		(0.4	)
Other, net	—		(0.1	)	0.4
Effective income tax rate	39.4	%	37.4	%	37.7	%

In 2011, the valuation allowance was associated with the non-U.S. deferred tax expense from our Canadian segment.

Income tax payments and refunds were as follows:



	2011			2010			2009
(In thousands)
Income taxes paid	$	114,406		$	100,973		$	105,961
Income taxes refunded	(983		)	(837		)	(694		)
Net income taxes paid	$	113,423		$	100,136		$	105,267

Deferred taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax, including income tax uncertainties. Significant components of our deferred tax assets and liabilities were as follows:



	January 28, 2012			January 29, 2011
(In thousands)
Deferred tax assets:
Workers’ compensation and other insurance reserves	$	28,998		$	28,437
Compensation related	28,788			29,663
Accrued rent	26,516			17,755
Uniform inventory capitalization	20,289			21,702
Non-U.S. net operating losses	19,019			—
Depreciation and fixed asset basis differences	10,695			19,862
Accrued state taxes	7,779			8,327
Pension plans	4,467			1,049
State tax credits, net of federal tax benefit	3,390			2,830
Accrued operating liabilities	3,023			1,721
State tax net operating losses, net of federal tax benefit	710			1,171
KB store lease and other discontinued operations contingencies	1,474			1,409
Other	24,366			23,008
Valuation allowances - primarily related to Non-U.S. operations	(20,392		)	(1,382		)
Total deferred tax assets	159,122			155,552
Deferred tax liabilities:
Accelerated depreciation and fixed asset basis differences	70,569			58,693
Lease construction reimbursements	13,584			12,701
Compensation related	5,401			8,101
Prepaid expenses	5,695			5,699
Other	14,540			13,440
Total deferred tax liabilities	109,789			98,634
Net deferred tax assets	$	49,333		$	56,918

Net deferred tax assets are shown separately on our consolidated balance sheets as current and non-current deferred income taxes. The following table summarizes net deferred income tax assets from the consolidated balance sheets:



	January 28, 2012		January 29, 2011
(In thousands)
Current deferred income taxes	$	42,784	$	50,252
Noncurrent deferred income taxes	6,549		6,666
Net deferred tax assets	$	49,333	$	56,918

Based on the weight of currently available evidence, we have fully reduced the provisional amount of net deferred income tax assets (including a net operating loss carryforward) of Big Lots Canada (see note 11), as well as the deferred tax benefit of the loss generated by our Canadian segment since the acquisition, by a valuation allowance.

We have the following income tax loss and credit carryforwards at January 28, 2012 (amounts are shown net of tax excluding the federal income tax effect of the state and local items):



(In thousands)
Non-U.S.:
Net operating loss carryforwards	$	19,019	Expires fiscal years 2026 through 2031
U.S. State and local:
State net operating loss carryforwards	1,092		Expires fiscal years 2014 through 2025
California enterprise zone credits	4,931		No expiration date
Texas business loss credits	285		Expires fiscal years through 2025
Total income tax loss and credit carryforwards	$	25,327

Income taxes payable on our consolidated balance sheets have been reduced by the tax benefits primarily associated with share-based compensation. We receive an income tax deduction upon the exercise of non-qualified stock options and the vesting of restricted stock. Tax benefits of $2.7 million, $13.8 million, and $0.6 million in 2011, 2010, and 2009, respectively, were credited directly to shareholders' equity related to share-based compensation deductions in excess of expense recognized for these awards.

The Company's Canadian subsidiary has an accumulated retained deficit, thus we have not provided for income taxes in the United States on undistributed earnings.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for 2011, 2010, and 2009:



	2011			2010			2009
(In thousands)
Unrecognized tax benefits - opening balance	$	27,250		$	35,824		$	34,729
Gross increases - tax positions in current year	2,179			1,127			11,757
Gross increases - tax positions in prior period	616			1,237			5,556
Gross decreases - tax positions in prior period	(9,513		)	(1,190		)	(4,101		)
Settlements	(2,581		)	(9,121		)	(11,944		)
Lapse of statute of limitations	(1,196		)	(627		)	(173		)
Unrecognized tax benefits - end of year	$	16,755		$	27,250		$	35,824

At the end of 2011 and 2010, the total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $11.0 million and $20.1 million, respectively, after considering the federal tax benefit of state and local income taxes of $4.9 million and $5.3 million respectively. Unrecognized tax benefits of $0.9 million and $1.9 million, respectively, relate to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The uncertain timing items could result in the acceleration of the payment of cash to the taxing authority to an earlier period.

For 2011, unrecognized tax benefits decreased by approximately $9.1 million related to our claims for welfare to work and work opportunity credits, which claims have either lapsed or are unlikely to be realized due to an unfavorable decision of U.S. Court of Appeals for the Federal Circuit against a similarly situated taxpayer. Our right to file a refund claim with respect to approximately $4.2 million of the credits has lapsed and our right to file a refund claim with respect to approximately $0.7 million of the credits will lapse by December 21, 2012. Our right to file a refund claim with respect to approximately $4.2 million of the credits may never lapse because the IRS has not issued a statutory notice of disallowance with respect to those claims; however, because our claims are unlikely to prevail in a different jurisdiction, we have decided not to pursue them. Therefore, we are reducing our unrecognized tax benefits by the entire amount of the claims. Because these benefits were unrecognized, the decrease will have no effect on income tax expense.

We recognized an expense (benefit) associated with interest and penalties on unrecognized tax benefits of approximately $(0.5) million, $(1.9) million, and $(0.5) million during 2011, 2010, and 2009, respectively, as a component of income tax expense. The amount of accrued interest and penalties recorded in the accompanying consolidated balance sheets at the end of 2011 and 2010 was $5.8 million and $6.4 million, respectively.

We are subject to U.S. federal income tax, income tax of multiple state and local jurisdictions, and Canadian and provincial taxes. The statute of limitations for assessments on our federal income tax returns for periods prior to 2008 has lapsed. In addition, the state income tax returns filed by us are subject to examination generally for periods beginning with 2007, although state income tax carryforward attributes generated prior to 2007 may still be adjusted upon examination. We have various state returns in the process of examination or administrative appeal. Generally, the time limit for reassessing returns for Canadian and provincial income taxes for periods prior to the year ending October 3, 2004 have lapsed.

We have estimated the reasonably possible expected net change in unrecognized tax benefits through February 2, 2013, based on expected cash and noncash settlements or payments of uncertain tax positions and lapses of the applicable statutes of limitations for unrecognized tax benefits. The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $4.0 million. Actual results may differ materially from this estimate.