Note 9 - Income Taxes

9 Months Ended

Sep. 30, 2011

Income Tax Disclosure [Text Block]

9.   Income Taxes

Income tax expense was $1,904,000 and $342,000 for the nine and three months ended September 30, 2011, respectively, and was $8,152,000 and $13,993,000 for the nine and three months ended September 30, 2010, respectively.  Income tax expense for the nine and three months ended September 30, 2010 included the recording of a valuation allowance, as discussed below.

The Company evaluates its deferred tax assets, including net operating losses and tax credits, to determine if a valuation allowance is required.  The Company assesses whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard.  In making such judgments, significant weight is given to evidence that can be objectively verified.  A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable.

At September 30, 2011, the Company had a net deferred tax asset after valuation allowance of $3,853,000 which consists of $770,000 for U.S. tax losses that will be carried back to the 2008 tax year and foreign net operating losses which are primarily related to the pre-acquisition losses of Palladium, a French company, which has an unlimited carryforward period.  The U.S. deferred tax asset was classified as an income tax receivable at December 31, 2010.  In March 2011, the Company was informed by the Internal Revenue Service (“IRS”) that the refund for the carryback of the 2010 loss to the 2008 tax year would not be paid until the conclusion of the 2008 IRS tax audit (see below).  The Company has not recorded a valuation allowance against the net deferred tax asset as the Company believes it is more-likely-than-not that the income tax receivable will be recognized and the loss carryforward will be utilized.  The ultimate realization of the loss carryforward is dependent upon the generation of future taxable income outside of the U.S. during the periods in which those temporary differences become deductible.  Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.  The deferred tax assets for which valuation allowances were not established relate to foreign jurisdictions where the Company expects to realize these assets.  The accounting for deferred taxes is based upon an estimate of future operating results.  Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position.

During the second quarter of 2010, the Company moved into a three year pre-tax cumulative loss but had sufficient objectively verifiable evidence to demonstrate that its U.S. deferred tax asset would be realized, such as strong earnings history, no evidence of tax losses expiring unused and the end of its aggressive advertising campaign during 2010.  During the third quarter of 2010, the Company continued to have the significant weight of the three year pre-tax cumulative loss to overcome.  In addition to other significant positive evidence considered in the prior quarter, the Company decided during the third quarter of 2010 to continue with its aggressive advertising campaign into 2011.  As such, the Company could no longer rely on a decrease in advertising expenses during 2011 to support future profitability sufficient enough to realize its U.S. deferred tax assets in the near future.  Therefore, during the third quarter of 2010, the Company recorded a valuation allowance of $20,222,000 against its U.S. deferred tax assets.

At September 30, 2011, gross uncertain tax positions and the related interest, which are included in other liabilities on the Consolidated Balance Sheet, were $6,942,000 and $1,229,000, respectively, all of which would affect the income tax rate if reversed.  During the nine and three months ended September 30, 2011, the Company recognized income tax expense related to uncertain tax positions of $640,000 and $210,000, respectively, and interest expense related to uncertain tax positions of $185,000 and $63,000, respectively.  During the nine and three months ended September 30, 2010, the Company recognized income tax benefit related to uncertain tax positions of $13,000 and $383,000, respectively, and interest expense related to uncertain tax positions of $81,000 for the nine months ended September 30, 2010 and interest income of $53,000 for the three months ended September 30, 2010.

The federal income tax returns for 2006, 2007, 2008 and 2009 and certain state returns for 2007 and 2008 are currently under various stages of audit by the applicable taxing authorities.  The Company received a Notice of Proposed Adjustment from the IRS for tax years 2006 and 2007 of $7,114,000 (which includes $1,186,000 in penalties).  Interest will be assessed, and at this time it is estimated at approximately $1,570,000.  This issue has been sent to the IRS Appeal’s office for further consideration.  The Company does not agree with this adjustment and plans to vigorously defend its position.  The Company does not believe that an additional tax accrual is required at this time.  The amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.  The Company’s material tax jurisdiction is the United States.