12. Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740. Under ASC Topic 740, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company’s business. Based upon management’s assessment of all available evidence, including the Company’s completed transition into a licensing business, estimates of future profitability based on projected royalty revenues from its licensees, and the overall prospects of the Company’s business, management is of the opinion that the Company will be able to utilize the deferred tax assets in the foreseeable future, and as such do not anticipate requiring a further valuation allowance. At December 31, 2013, the Company has a valuation allowance of approximately $11.2 million to offset state and local tax net operating loss carryforwards (“NOL”) which the Company believes are unlikely to be utilized in the foreseeable future. The valuation allowance increased by approximately $0.4 million during FY 2013 and decreased $1.6 million during FY 2012 for the State NOLs.

At December 31, 2013 the Company had utilized all available federal NOL’s. As of December 31, 2013, the Company has approximately $5.8 million in state NOL’s and approximately $5.4 million in local NOL’s.

Pre-tax book income for FY 2013, FY 2012 and FY 2011 were as follows:


	FY 2013		FY 2012		FY 2011
Domestic	$	149,988	$	178,451	$	212,527
Foreign		50,674		4,021		—

Total pre-tax income	$	200,662	$	182,472	$	212,527

The income tax provision (benefit) for federal, and state and local income taxes in the consolidated income statements consists of the following:


	Year Ended December 31, 2013		Year Ended December 31, 2012			Year Ended December 31, 2011
	(000’s omitted)
Current:
Federal	$	8,817	$	31,109		$	40,315
State and local		1,524		575			512
Foreign		16,318		2,894			2,722

Total current		26,659		34,578			43,549

Deferred:
Federal		30,350		25,040			28,066
State and local		630		(655	)		(329	)
Foreign		436		—			—

Total deferred		31,416		24,385			27,737


Total provision	$	58,075	$	58,963		$	71,286

The Company has not provided U.S. taxes on the undistributed earnings from its foreign subsidiaries as these earnings are considered indefinitely reinvested. As of December 31, 2013, the amount of indefinitely reinvested foreign earnings was $46.2 million. If these earnings were repatriated to the U.S. in the future, an additional tax provision would be required. Due to complexities in the US law and certain assumptions that would be required, determination of the U.S. tax liability on the undistributed earnings is not practicable.

The significant components of net deferred tax assets of the Company consist of the following:


	December 31,
	2013			2012
	(000’s omitted)
State net operating loss carryforwards	$	11,205		$	10,756
Receivable reserves		4,282			3,540
Hedging transaction		34,957			14,047
Intangibles		3,350			2,216
Capital loss		—			817
Equity compensation		14,757			14,983
Accrued compensation and other		—			129

Total deferred tax assets		68,551			46,488
Valuation allowance		(11,205	)		(10,756	)

Net deferred tax assets		57,346			35,732


Trademarks, goodwill and other intangibles		(213,720	)		(163,252	)
Depreciation		(1,404	)		(1,828	)
Difference in cost basis of acquired intangibles		(49,000	)		(49,000	)
Convertible notes		(37,251	)		(16,195	)
Investment in joint ventures		(10,740	)		(7,176	)
Other accruals		(1,676	)		(1,696	)

Total deferred tax liabilities		(313,791	)		(239,147	)

Total net deferred tax liabilities	$	(256,445	)	$	(203,415	)

Balance Sheet detail on total net deferred tax assets (liabilities):
Current portion of net deferred tax assets	$	4,160		$	3,497
Non-current portion of net deferred tax liabilities	$	(260,605	)	$	(206,912	)

The following is a rate reconciliation between the amount of income tax provision at the Federal rate of 35% and provision for (benefit from) taxes on operating profit (loss):


	Year ended December, 31
	2013			2012			2011
	(000’s omitted)
Income tax provision computed at the federal rate of 35%	$	70,232		$	63,865		$	74,384
Increase (reduction) in income taxes resulting from:
State and local income taxes (benefit), net of federal income tax		991			(53	)		113
Increase in valuation allowance		—			—			—
Non-controlling interest		(5,940	)		(4,535	)		(5,048	)
Non-deductible executive compensation		727			266			1,855
Foreign Earnings (rate differential)		(8,209	)		(1,013	)		—
Other, net		274			433			(18	)

Total	$	58,075		$	58,963		$	71,286

With the exception of our Buffalo brand joint venture, the Company is not responsible for the income taxes related to the non-controlling interest’s share of the joint venture’s earnings. Therefore, the tax liability associated with the non-controlling interest share of the joint venture’s earnings is not reported in our income tax expense, even though the joint venture’s entire income is consolidated in our reported income before income tax expense. As such, the joint venture earnings have the effect of lowering our effective tax rate. This effect is more pronounced in periods in which joint venture earnings are higher relative to our other earnings. Since the Buffalo brand joint venture is a taxable entity in Canada, the Company is required to report its tax liability, including taxes attributable to the non-controlling interest, in its income statement.

Effective January 1, 2007, the Company adopted guidance under ASC Topic 740-10 which clarifies the accounting and disclosure for uncertainty in income taxes. The adoption of this interpretation did not have a material impact on our financial statements. The Company files income tax returns in the U.S. federal and various state and local jurisdictions. For federal income tax purposes, the 2011 through 2013 tax years remain open for examination by the tax authorities under the normal three year statute of limitations. For state tax purposes, our 2010 through 2013 tax years remain open for examination by the tax authorities under a four year statute of limitations.

At December 31, 2013, the total unrecognized tax benefit was approximately $1.1 million. However, the liability is not recognized for accounting purposes because the related deferred tax asset has been fully reserved in prior years. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:


	FY 2013		FY 2012		FY 2011
	(000’s omitted)
Uncertain tax positions at January 1	$	1,180	$	1,180	$	1,180
Increases during the year		—		—		—
Decreases during the year		—		—		—

Uncertain tax positions at December 31	$	1,180	$	1,180	$	1,180

The Company is continuing its practice of recognizing interest and penalties to income tax matters in income tax expense. There was no accrual for interest and penalties related to uncertain tax positions for FY 2013, FY 2012 and FY 2011. The Company does not believe there will be a material change in its unrecognized tax positions over the next twelve months. All of the unrecognized tax benefits, if recognized, would be offset by the valuation allowance.