NOTE 8—INCOME TAXES

The components of income from continuing operations before income taxes are as follows:

	Year Ended

(dollar amounts in thousands)	February 2, 2013		January 28, 2012		January 29, 2011
Domestic	$	14,577	$	36,633	$	52,319
Foreign		7,923		4,954		6,125
Total	$	22,500	$	41,588	$	58,444

The provision for income taxes includes the following:

	Year Ended

(dollar amounts in thousands)	February 2, 2013			January 28, 2012			January 29, 2011
Current:
Federal	$	(338	)	$	—		$	—
State		471			602			491
Foreign		1,636			1,557			2,210
Deferred:
Federal(a)		6,548			14,743			20,309
State		988			(3,887	)		(1,818	)
Foreign		40			(555	)		81

Total income tax expense from continuing operations(a)	$	9,345		$	12,460		$	21,273

(a): Excludes tax benefit recorded to discontinued operations of $0.2 million, $0.1 million and $0.3 million in fiscal years 2012, 2011 and 2010, respectively.

A reconciliation of the statutory federal income tax rate to the effective rate for income tax expense follows:

	Year Ended

	February 2, 2013			January 28, 2012			January 29, 2011
Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax		4.1			3.2			2.4
Job credits		(4.9	)		(1.5	)		(0.3	)
Hire credits		—			(2.1	)		—
Tax uncertainty adjustment		(1.5	)		(0.1	)		0.2
Valuation allowance		—			(8.3	)		(3.5	)
Non deductible expenses		2.2			2.0			0.5
Stock compensation		1.8			0.1			0.2
Foreign taxes, net of federal tax		5.6			1.7			2.4
Other, net		(0.8	)		—			(0.5	)

		41.5	%		30.0	%		36.4	%

Items that gave rise to the deferred tax accounts are as follows:

(dollar amounts in thousands)	February 2, 2013			January 28, 2012

Deferred tax assets:
Employee compensation	$	5,274		$	5,008
Store closing reserves		719			1,365
Legal reserve		122			341
Benefit accruals		1,247			5,922
Net operating loss carryforwards—Federal		1,887			16,473
Net operating loss carryforwards—State		111,785			111,588
Tax credit carryforwards		16,291			17,877
Accrued leases		16,032			15,916
Interest rate derivatives		708			5,730
Deferred gain on sale leaseback		51,124			56,325
Deferred revenue		5,194			5,621
Other		1,874			1,951

Gross deferred tax assets		212,257			244,117
Valuation allowance		(102,341	)		(103,915	)

		109,916			140,202
Deferred tax liabilities:
Depreciation	$	42,400		$	54,284
Inventories		65,203			65,886
Real estate tax		3,214			3,307
Insurance and other		6,261			6,159
Debt related liabilities		3,588			3,903

		120,666			133,539

Net deferred tax (liability) asset	$	(10,750	)	$	6,663

At February 2, 2013, the Company had available tax net operating losses that can be carried forward to future years. The Company has $1.9 million of deferred tax assets related to federal net operating loss carryforwards, which begin to expire in 2027. The Company has $2.3 million of deferred tax assets related to state tax net operating loss carryforwards in unitary filing jurisdictions, of which 2.9% will expire in the next five years and a full valuation allowance has been recorded against. The balance of $109.5 million of the Company's net operating loss carryforwards are for separate company state filing jurisdictions that will expire in various years beginning in 2013. $108.1 million of separate company state net operating losses are in the jurisdictions, where the Company has recorded a full valuation allowance against its net deferred tax assets.

The tax credit carryforward at February 2, 2013 consists of $6.8 million of alternative minimum tax credits, $4.2 million of work opportunity credits, $0.9 million of hire tax credits and $4.4 million of various state credits. The alternative minimum tax credits have an indefinite life and the other credits are scheduled to expire in various years starting from 2013. The tax credit carryforward at January 28, 2012 consists of $7.3 million of alternative minimum tax credits, $4.0 million of work opportunity credits, $0.9 million of hire tax credits and $5.7 million of state and Puerto Rico tax credits. The alternative minimum credits have an indefinite life and the other credits are scheduled to expire in various years starting from 2012 of which $0.9 million have full valuation allowances recorded against them.

The temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable, a valuation allowance must be established. To the extent the Company establishes a valuation allowance or changes the allowance in a future period, income tax expense will be impacted. There was no significant change in the Company's valuation allowance position in fiscal year 2012. In fiscal year 2011, the Company released $5.3 million of gross valuation allowances ($3.6 million net of federal benefit) on certain state net operating loss carryforwards and state credits.

The Company and its subsidiaries' largest jurisdictions where they are subject to income tax are U.S. federal, Puerto Rico and various states jurisdictions, in respective order of significance. The Company's U.S. federal returns for tax years 2009 and forward are subject to examination. State and local income tax returns are generally subject to examination for a period of three to five years after filing of the respective returns. The Company is currently under federal examination for fiscal year 2010 and has various state income tax returns in the process of examination.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(dollar amounts in thousands)	February 2, 2013			January 28, 2012			January 29, 2011

Unrecognized tax benefit balance at the beginning of the year	$	3,364		$	4,131		$	2,411
Gross increases for tax positions taken in prior years		—			—			1,331
Gross decreases for tax positions taken in prior years		(338	)		—			—
Gross increases for tax positions taken in current year		201			235			389
Settlements taken in current year		—			—			—
Lapse of statute of limitations		(953	)		(1,002	)		—

Unrecognized tax benefit balance at the end of the year	$	2,274		$	3,364		$	4,131

The Company recognizes potential interest and penalties for unrecognized tax benefits in income tax expense and, accordingly, the Company recognized $0.1 million in fiscal years 2012 and 2011 related to potential interest and penalties associated with uncertain tax positions. At February 2, 2013, January 28, 2012, and January 29, 2011, the Company has recorded $0.5 million, $0.3 million, and $0.2 million, respectively, for the payment of interest and penalties which are excluded from the unrecognized tax benefit noted above.

Unrecognized tax benefits include $0.9 million, $1.3 million, and $1.4 million, at February 2, 2013, January 28, 2012 and January 29, 2011, respectively, of tax benefits that, if recognized, would affect the Company's annual effective tax rate. The Company believes it is reasonably possible that the amount will increase or decrease within the next twelve months; however, it is not currently possible to estimate the impact of the change.