Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

INCOME TAXES

NOTE 9—INCOME TAXES

Income tax (benefit) expense from continuing operations is summarized as follows:

	Year Ended December 31,
	2012			2011		2010
Current:
Federal	$	6,524		$	9,503	$	(876	)
State		1,173			976		386
Deferred:
Federal		(70,873	)		—		—
State		(17,614	)		—		—
Total income tax expense (benefit)	$	(80,790	)	$	10,479	$	(490	)

The consolidated income tax provision was different from the amount computed using the U.S. statutory income tax rate for the following reasons:

	Year Ended December 31,
	2012			2011		2010
Pre-tax income (loss) from continuing operations	$	13,747		$	1,355	$	(13,950	)
Federal tax expense (benefit), at statutory rates		4,813			474		(4,883	)
State tax expense (benefit), net of federal tax effects		(249	)		232		(487	)
Permanent non-deductible expenses		97			65		136
Increase (reduction) in prior year tax		58			324		(2,421	)
Tax effect of uncertain tax position		152			55		2,471
Impact of equity investment income at statutory tax rate		476			697		455
Reduction in gross deferred tax assets due to IRC Section 382 limitations		396			—		—
(Decrease) increase in valuation allowance		(86,533	)		8,632		4,239
Total tax (benefit) expense from continuing operations	$	(80,790	)	$	10,479	$	(490	)

The Company’s effective tax rate was (540.0)%, 332.5% and 3.8% for the years ended December 31, 2012, 2011 and 2010, respectively. The Company’s tax rate for 2012 was different from the statutory tax rate primarily due to the release of the valuation allowance on its deferred tax assets during 2012. Prior to 2012, the Company’s effective tax rate has generally has been significantly impacted by the limitations on its net operating losses due to the ownership change and the effect of a full valuation allowance against its deferred tax assets.

Components of the Company’s deferred tax assets (liabilities) are as follows:

	December 31,
	2012		2011
Net operating loss carryforwards	$	14,694	$	12,505
Alternative minimum tax credit carryforwards		779		779
Tax basis of goodwill and intangible property over book		1,608		—
Tax basis of property, equipment and other assets over book basis		61,810		48,907
Deferred income		10,418		10,421
Deferred compensation		2,938		1,342
Deferred rent		5,585		5,848
Compensation accruals		2,613		2,925
Basis difference in investee		2,463		2,236
Total deferred tax asset	$	102,908	$	84,963
Valuation allowance		—		(84,963	)
Net deferred tax asset	$	102,908	$	—

The balance sheet presentation of the Company’s deferred income taxes is as follows:

	December 31,
	2012			2011
Current deferred tax assets	$	3,187		$	1,659
Current deferred tax liabilities		(291	)		(290	)
Net current deferred tax assets before valuation allowance		2,896			1,369
Valuation allowance against current deferred tax assets		—			(1,369	)
Net current deferred tax assets	$	2,896		$	—
Non-current deferred tax assets	$	100,200		$	83,835
Non-current deferred tax liabilities		(188	)		(241	)
Net non-current deferred tax assets before valuation allowance		100,012			83,594
Valuation allowance against non-current deferred tax assets		—			(83,594	)
Net non-current deferred tax assets		100,012			—
Net deferred tax assets	$	102,908		$	—

The Company experienced an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during the fourth quarter of 2008. The ownership change has and will continue to subject the Company’s pre-ownership change net operating loss carryforwards to an annual limitation, which will significantly restrict its ability to use them to offset taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of the Company’s stock at the time of the ownership change multiplied by a specified tax-exempt interest rate.

The Company determined that at the date of the ownership change, it had a net unrealized built-in loss (“NUBIL”). The NUBIL is determined based on the difference between the fair market value of the Company’s assets and their tax basis at the ownership change. Because of the NUBIL, certain deductions recognized during the five-year period beginning on the date of the IRC Section 382 ownership change (the “recognition period”) are subjected to the same limitation as the net operating loss carryforwards. Because the annual limitation is applied first against the realized built-in losses (“RBILs”), the Company does not expect to utilize any of its net operating carryforwards during the five year recognition period. The amount of the disallowed RBILs could increase if the Company disposes of assets with built-in losses at the date of the ownership change during the recognition period.

An ownership change was also deemed to have occurred during the second quarter of 2012. The Company does not believe this change will further limit its ability to utilize its net operating loss carryforwards or certain other deductions.

As discussed in Note 4–Acquisitions, the Company recorded a deferred tax asset of $14,418 in the acquisition of Rave.

At December 31, 2012, the Company had federal and state net operating loss carryforwards of $32,678, net of IRC Section 382 limitations, to offset the Company’s future taxable income. The federal and state net operating loss carryforwards will begin to expire in the year 2020. In addition, the Company’s alternative minimum tax credit carryforward of approximately $779 has an indefinite carryforward life but is subject to the IRC Section 382 limitation.

Valuation Allowance

At December 31, 2012 and December 31, 2011, the Company’s net deferred tax assets, net of IRC Section 382 limitations, were $102,908 and $84,963, respectively, before the effects of any valuation allowance. As of each reporting date, the Company assesses whether it is more likely than not that its deferred tax assets will be recovered from future taxable income, taking into account such factors as earnings history, taxable income in the carryback period, reversing temporary differences, projections of future taxable income, the finite lives of certain deferred tax assets and the impact of IRC 382 limitations. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. When sufficient evidence exists that indicates that recovery is not more likely than not, a valuation allowance is established against the deferred tax assets, increasing the Company’s income tax expense in the period that such conclusion is made.

After reviewing all positive and negative evidence at December 31, 2012, the Company determined that it was more likely than not that its deferred tax asset balance would be recovered from future taxable income and reversed the valuation allowance of $86,533 on its deferred tax assets. The Company identified multiple sources of positive evidence in determining to reverse its valuation allowance. At December 31, 2012, the Company had generated cumulative pre-tax income for the most recent rolling three-year period. Subsequent to the valuation allowance being established, the Company had not achieved cumulative pre-tax income for a rolling three-year period prior to December 31, 2012. The Company believes that the improvement in operating results is primarily related to the Company’s focus on improving its circuit by modernizing existing theatres, closing underperforming theatres and through accretive acquisitions. The Company concluded that this record of cumulative profitability in recent years, the Company’s large amount of taxable income available in the carryback period, the acquisition of Rave in 2012, the Company’s trend of improving earnings and the timing of reversals of the Company’s deferred tax liabilities creating future taxable income outweigh any negative evidence identified. As a result, the Company reversed the valuation allowance of $86,533 on its deferred tax assets. The Company’s determination to reverse the valuation allowance involved significant estimates and judgments. If future results are significantly different from these estimates and judgments, the Company may be required to record a valuation allowance against its deferred tax assets.

In 2011, the valuation allowance increased primarily due to the tax effect of temporary differences attributable to the $30,000 cash payment received from Screenvision, which is being amortized into revenue over the term of the agreement but is included in income in the current period for tax purposes, and an increase in net operating losses, partially offset by a reduction in the tax basis of property and equipment due to bonus depreciation recognized.

Income Tax Uncertainties

The benefits of uncertain tax positions are recorded in our financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities.

As of December 31, 2012 and 2011, the amount of unrecognized tax benefits related to continuing operations was $2,678 and $2,526 respectively, all of which would affect the Company’s annual effective tax rate, if recognized. The unrecognized tax benefit is associated with the Company’s non-forfeitable ownership interest in SV Holdco, LLC (See Note 11- Screenvision Transaction). The Company recognizes a tax basis for these units that is lower than the carrying value for financial statement purposes. However, as this tax position may not be sustained upon examination, the Company has recorded a related liability for this uncertain tax position.

A reconciliation of the beginning and ending uncertain tax positions is as follows:

Gross unrecognized tax benefits at January 1, 2011	$	2,471
Increases in tax positions for prior years		—
Decreases in tax positions for prior years		—
Increases in tax positions for current year		55
Settlements		—
Lapse in statute of limitations		—
Gross unrecognized tax benefits at December 31, 2011		2,526
Increases in tax positions for prior years		152
Decreases in tax positions for prior years		—
Increases in tax positions for current year		—
Settlements		—
Lapse in statute of limitations		—
Gross unrecognized tax benefits at December 31, 2012	$	2,678

The Company files consolidated and separate income tax returns in the United States federal jurisdiction and in many state jurisdictions. The Company is no longer subject to United States federal income tax examinations for years before 2000 and is no longer subject to state and local income tax examinations by tax authorities for years before 1999.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in interest expense and general and administrative expenses, respectively, in the Company’s consolidated statements of operations. Amounts accrued for interest and penalties as of December 31, 2012 and 2011 are not significant to the consolidated financial statements.