Note 10. Income Taxes

The provision (benefit) for income taxes consists of the following:


	Fiscal Year Ended
(In thousands)	January 28, 2012		January 29, 2011		January 30, 2010
Current:
Federal	$	562	$	—	$	(12,981	)
State		992		876		243

Total current		1,554		876		(12,738	)

Deferred—Federal		—		—		—

Provision (benefit) for income taxes	$	1,554	$	876	$	(12,738	)

The differences between the U.S. federal statutory tax rate and the Company's effective tax rate are as follows:


	Fiscal Year Ended
	January 28, 2012			January 29, 2011			January 30, 2010
U.S. federal statutory tax rate		35.0	%		35.0	%		(35.0	)%
State income taxes, including valuation allowance (net of U.S. federal income tax benefit)		6.2			33.2			(3.0	)
Wage and other tax credits		(4.1	)		—			—
Non-deductible expenses		0.5			2.5			0.1
Other		0.4			1.2			0.2
Valuation allowance		(29.4	)		(48.8	)		21.0

Effective income tax rate (benefit)		8.6	%		23.1	%		(16.7	)%

Significant components of the Company's deferred tax assets and liabilities are as follows:


(In thousands)	January 28, 2012					January 29, 2011
	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Capitalized inventory costs	$	—		$	2,998	$	—		$	1,852
Trade discounts		—			271		—			1,970
Prepaid expenses		—			535		—			624
Deferred rent		8,541			—		10,374			—
Capital leases and facilities, and land subject to sale and leaseback		47,072			—		47,720			—
Lease rights		—			167		—			185
Depreciation		—			26,201		—			32,536
Credit and net operating loss carryforwards		47,325			—		53,570			—
Deductible reserves and other		11,341			—		12,010			—
State taxes		—			8,512		—			8,259

Subtotal		114,279			38,684		123,674			45,426
Valuation allowance		(75,595	)		—		(78,248	)		—

Total	$	38,684		$	38,684	$	45,426		$	45,426

At January 28, 2012, and at January 29, 2011, the Company had California state enterprise zone credit carryforwards of $9.0 million and $8.1 million, respectively, which have no expiration date but require taxable income in the enterprise zone to be realizable. The Company also had federal net operating loss carryforwards of $73.5 million (or $25.7 million tax effected) and $100.5 million (or $35.2 million tax effected), respectively. The federal net operating loss will begin expiring in 2026. State net operating loss carryforwards of $139.6 million at January 28, 2012 and $143.6 million at January 29, 2011 will expire between 2012 and 2030.

Section 382 of the Internal Revenue Code ("Section 382") imposes limitations on a corporation's ability to utilize its net operating losses ("NOL") if it experiences an "ownership change." In general terms, an ownership change results from transactions increasing the ownership of certain existing stockholders and, or, new stockholders in the stock of a corporation by more than 50 percentage points during a three year testing period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may, under certain circumstances, be increased to reflect both recognized and deemed recognized "built-in gains" that occur during the sixty-month period after the ownership change. Based on our analysis to date, we have undergone an ownership change. The resulting limitation does not affect the Company's ability to utilize its NOL for the year ended January 28, 2012. However, in future years the Company's ability to utilize net operating losses will be limited. The "ownership change" that the Company experienced also imposes limitations on the Company's California state enterprise zone credits ("EZ Credits") carryforwards under Internal Revenue Code Section 383. The resulting limitation did affect the Company's ability to utilize its EZ Credits for fiscal 2010 and the Company expects it will continue to be limited.

Significant management judgment is required to determine the provision for income taxes, deferred tax assets and liabilities and any valuation allowance to be recorded against deferred tax assets. Management evaluates all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is established to reduce the deferred tax assets to the amounts expected to be realized. In fiscal year 2011 the valuation allowance was decreased by $2.7 million, and in fiscal years 2010 and 2009, the valuation allowance was increased by $0.5 million and $16.0 million, respectively. The valuation allowance is subject to adjustment based on the Company's assessment of its future taxable income and may be wholly or partially reversed in future years.

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


	Fiscal Year Ended
(In thousands)	January 28, 2012			January 29, 2011			January 30, 2010
Unrecognized tax benefits—beginning balance	$	1,429		$	1,927		$	2,053
Gross increase/(decrease) for tax positions of prior years		741			(19	)		211
Gross increase/(decrease) for tax positions of current year		—			131			(45	)
Settlements		(1,865	)		(51	)		—
Lapse of statute of limitations		(271	)		(559	)		(292	)

Unrecognized tax benefits—ending balance	$	34		$	1,429		$	1,927

At January 28, 2012, January 29, 2011 and January 30, 2010, the Company had $34,000, $1.4 million and $1.9 million, respectively, in unrecognized tax benefits, the recognition of which would have an impact of $282,000, $282,000 and $316,000, respectively, on the Company's income tax provision. At January 28, 2012, it is reasonably possible that the total amounts of unrecognized tax benefits would decrease by $705,000 within the next 12 months due to the expiration of statutes of limitations.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. At January 28, 2012, the Company had accrued $189,000 and $1,000, at January 29, 2011, the Company had accrued $178,000 and $1,000 and at January 30, 2010 the Company had accrued $177,000 and $6,000 for potential payment of interest and penalties, respectively.

As of January 28, 2012, the Company is subject to U.S. federal income tax examinations for tax years 2003 and forward, and is subject to state and local tax examinations for the tax years 2003 and forward.