NOTE 8—INCOME TAXES

The components of (loss) income from continuing operations before income tax (benefit) expense are as follows:

	Year Ended
(dollar amounts in thousands)	January 31, 2015			February 1, 2014		February 2, 2013
Domestic	$	(32,878	)	$	8,533	$	14,577
Foreign		1,336			757		7,923

Total	$	(31,542	)	$	9,290	$	22,500

The provision for income tax (benefit) expense includes the following:

	Year Ended
(dollar amounts in thousands)	January 31, 2015			February 1, 2014			February 2, 2013
Current:
Federal	$	—		$	(267	)	$	(338	)
State		689			451			471
Foreign		1,383			2,132			1,636
Deferred:
Federal(a)		(6,716	)		2,765			6,548
State		1,028			840			988
Foreign		(965	)		(3,684	)		40

Total income tax (benefit) expense from continuing operations(a)	$	(4,581	)	$	2,237		$	9,345

(a)	Excludes tax benefit recorded to discontinued operations of $0.2 million, $0.1 million and $0.2 million in fiscal years 2014, 2013 and 2012, respectively.

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

	Year Ended
	January 31, 2015			February 1, 2014			February 2, 2013
Statutory tax rate		(35.0	)%		35.0	%		35.0	%
State income taxes, net of federal tax		3.7			6.0			4.1
Foreign taxes, net of federal tax		1.4			4.4			5.6
Tax credits, net of valuation allowance		(1.8	)		(7.5	)		(3.2	)
Foreign deferred adjustment		—			(8.4	)		—
Foreign tax law change impact		—			(3.8	)		—
Tax uncertainty adjustment		(0.8	)		(3.0	)		(1.5	)
Goodwill impairment charge		17.1			—			—
Non deductible expenses		0.9			3.5			0.5
Stock compensation		—			—			1.8
Other, net		—			(2.1	)		(0.8	)

		(14.5	)%		24.1	%		41.5	%

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

(dollar amounts in thousands)	January 31, 2015			February 1, 2014
Deferred tax assets:
Employee compensation	$	5,608		$	3,544
Store closing reserves		1,179			673
Legal reserve		1,619			182
Benefit accruals		1,655			2,109
Net operating loss carryforwards—Federal		6,253			1,115
Net operating loss carryforwards—State		112,411			111,258
Tax credit carryforwards		28,179			26,605
Accrued leases		13,876			15,215
Deferred gain on sale leaseback		41,385			46,176
Deferred revenue		1,965			2,987
Other		4,226			1,312

Gross deferred tax assets		218,356			211,176
Valuation allowance		(108,845	)		(106,695	)

		109,511			104,481
Deferred tax liabilities:
Depreciation	$	33,610		$	33,059
Inventories		67,420			71,630
Real estate tax		3,495			3,300
Insurance and other		7,176			4,299
Interest rate derivatives		—			274
Debt related liabilities		2,454			3,606

		114,155			116,168
Net deferred tax (liability) asset	$	(4,644	)	$	(11,687	)

As of January 31, 2015, the Company had available tax net operating losses that can be carried forward to future years. The Company has $6.2 million of deferred tax assets related to federal net operating loss carryforwards which begin to expire in 2029. The Company has $2.8 million of deferred tax assets related to state tax net operating loss carryforwards in unitary filing jurisdictions. The balance of $109.6 million of deferred tax assets related to net operating loss carryforwards in separate company state filing jurisdictions will expire in various years beginning in 2015. The Company has recorded a full valuation allowance against these net deferred tax assets.

The tax credit carryforward as of January 31, 2015 consists of $7.9 million of federal alternative minimum tax credits, $7.9 million of federal hiring credits and $12.4 million of various state and foreign credits. The alternative minimum tax credits have an indefinite life, while the other credits are scheduled to expire in various years starting from 2015 and have a $7.4 million valuation allowance 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. In fiscal year 2014, the Company recorded a $2.1 million gross valuation allowance primarily on state net operating loss carryforwards. In fiscal year 2013, the Company recorded a benefit for gross state hiring credits of approximately $6.3 million that were impacted by a state tax law change enacted during the fiscal year that restricted the carryforward period for these credits. The Company recorded $6.7 million of gross valuation allowances on these credits and other state credit carryforwards.

The Company and its subsidiaries' largest jurisdictions subject to income tax are U.S. federal, Puerto Rico (foreign) and various states jurisdictions, in respective order of significance. The Company's U.S. federal returns for tax years 2011 and forward are subject to examination. Foreign, 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.

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

(dollar amounts in thousands)	January 31, 2015			February 1, 2014			February 2, 2013
Unrecognized tax benefit balance at the beginning of the year	$	1,941		$	2,274		$	3,364
Gross increases for tax positions taken in prior years		—			—			—
Gross decreases for tax positions taken in prior years		—			—			(338	)
Gross increases for tax positions taken in current year		2			13			201
Settlements taken in current year		(181	)		—			—
Lapse of statute of limitations		(276	)		(346	)		(953	)

Unrecognized tax benefit balance at the end of the year	$	1,486		$	1,941		$	2,274

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 2014 and 2013 related to potential interest and penalties associated with uncertain tax positions. As of January 31, 2015, February 1, 2014 and February 2, 2013, the Company has recorded $0.2 million, $0.5 million, and $0.5 million, respectively, for the payment of interest and penalties which are excluded from the unrecognized tax benefit noted above.

Unrecognized tax benefits include $0.4 million, $0.7 million, and $0.9 million as of January 31, 2015, February 1, 2014 and February 2, 2013, respectively, that if recognized would affect the Company's annual effective tax rate. The Company does not anticipate material changes to its unrecognized tax benefits within the next twelve months.