D. INCOME TAXES

The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. Under ASC Topic 740, deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The accounting regulation requires current recognition of net deferred tax assets to the extent it is more likely than not such net assets will be realized. To the extent that the Company believes its net deferred tax assets will not be realized, a valuation allowance must be recorded against those assets.

Realization of the Company’s deferred tax assets, relating principally to federal net operating loss carryforwards, which expire from 2022 through 2032, is dependent on generating sufficient taxable income in the near term. The effect of the weakening economy on the Company’s retail business in fiscal 2008 had a significant impact on the Company’s revenue and profitability. Further, the conditions of the economy also negatively impacted its market value as a result of the deterioration of the capital markets and resulted in substantial impairments which contributed to the operating loss. Accordingly, in the fourth quarter of fiscal 2008, the Company recorded a valuation allowance of $28.6 million against its deferred tax assets.

During the fourth quarter of fiscal 2011, the Company determined that it was more likely than not that it would be able to realize the benefits of substantially all of its deferred tax assets in the United States. In reaching this determination, the Company considered the positive evidence of three years of improved profitability, its expectations regarding the generation of future taxable income, and its current market position and expected growth. As a result, the Company reversed $48.3 million in valuation allowance against its deferred tax assets in the United States offset by an increase of $0.5 million in valuation allowance against its foreign deferred tax assets, resulting in a net change in the valuation allowance of $47.8 million.

As of February 2, 2013, the Company had net operating loss carryforwards of $68.2 million for federal income tax purposes and $38.1 million for state income tax purposes that are available to offset future taxable income through fiscal year 2032. Additionally, the Company has alternative minimum tax credit carryforwards of $2.3 million, which are available to further reduce income taxes over an indefinite period. Additionally, the Company has $8.5 million and $1.9 million of net operating loss for tax purposes related to the Company’s operations in the Netherlands and Canada, respectively, though both are expected to expire unutilized. The Company asserts to permanently reinvest undistributed earnings of the Company’s foreign subsidiaries. As of February 2, 2013, the Company has no foreign earnings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.

The utilization of net operating loss carryforwards and the realization of tax benefits in future years depends predominantly upon having taxable income. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of net operating loss carryforwards and tax credit carryforwards which may be used in future years.

Included in the net operating loss carryforwards for both federal and state income tax is approximately $12.0 million relating to stock compensation deductions, the tax benefit from which, if realized, will be credited to additional paid-in capital.

The components of the net deferred tax assets as of February 2, 2013 and January 28, 2012 are as follows (in thousands):


	February 2, 2013			January 28, 2012
Deferred tax assets -current:
Inventory reserves	$	3,352		$	2,634
Accrued expenses and other		2,807			3,311
Gain on sale-leaseback		579			579
Gain on sale of LPI		—			(89	)
Valuation allowance ⁽¹⁾		(113	)		—

Net deferred tax assets-current		6,625			6,435
Deferred tax assets – noncurrent:
Gain on sale-leaseback		6,946			7,525
Lease accruals		3,637			3,321
Net operating loss carryforward		25,110			22,435
Foreign tax credit carryforward		793			720
Federal wage tax credit carryforward		200			—
State tax credits		73			112
Unrecognized loss on foreign exchange		160			121
Unrecognized loss on pension and pension expense		3,157			3,018
Alternative minimum tax credit carryforward		2,292			2,178
Excess of book over tax depreciation/amortization		(9,647	)		(3,414	)
Goodwill and intangibles		9,417			10,915

Subtotal		42,138			46,931
Valuation allowance ⁽¹⁾		(3,450	)		(2,996	)

Net deferred tax assets – noncurrent	$	38,688		$	43,935

Total deferred tax assets ⁽¹⁾	$	45,313		$	50,370

(1)

For fiscal 2012, the Company had total deferred tax assets of $58.5 million, total deferred tax liabilities of $9.6 million and a valuation allowance of $3.6 million. For fiscal 2011, the Company had total deferred tax assets of $56.8 million, total deferred tax liabilities of $3.4 million and a valuation allowance of $3.0 million.

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


	FISCAL YEARS ENDED
(in thousands)	February 2, 2013		January 28, 2012			January 29, 2011
Current:
Federal and state	$	96	$	659		$	(119	)
Foreign		64		73			70

		160		732			(49	)

Deferred:
Federal and state		5,084		(50,810	)		769
Foreign		—		—			—

		5,084		(50,810	)		769

Total provision ⁽²⁾	$	5,244	$	(50,078	)	$	720

(2)	There was no benefit or provision recognized on the loss from discontinued operations for fiscal 2012, fiscal 2011 or fiscal 2010.

The following is a reconciliation between the statutory and effective income tax rates in dollars for the provision for income tax from continuing operations:


	FISCAL YEARS ENDED
(in thousands)	February 2, 2013			January 28, 2012			January 29, 2011
Federal income tax at the statutory rate	$	4,656		$	(1,846	)	$	6,329
State income and other taxes, net of federal tax benefit		631			(124	)		751
Permanent items		209			52			405
Change in uncertain tax positions ⁽¹⁾		—			—			(799	)
Charge/(income) for valuation allowance ⁽²⁾		(19	)		(48,318	)		(5,714	)
Other, net		(233	)		158			(252	)

Provision for income tax from continuing operations	$	5,244		$	(50,078	)	$	720

(1)	In the third quarter of fiscal 2010, the Company recognized a tax benefit of $0.8 million as a result of the reduction in its liability for uncertain tax positions, due to the expiration of certain statutes of limitation.

(2)	In the fourth quarter of fiscal 2011, the valuation allowance decreased by $48.3 million.

The Company made tax payments of $0.5 million, $1.2 million and $0.9 million for fiscal years 2012, 2011 and 2010, respectively.