17. INCOME TAXES

Income tax expense (benefit) for fiscal years 2013, 2012 and 2011 (effective rate of -400% in fiscal 2013, 20.4% in fiscal 2012 and 30.6% in fiscal 2011) differs from the amount that would otherwise have been calculated by applying the federal corporate tax rate (35% in fiscal years 2013, 2012 and 2011) to loss before income tax expense (benefit) and is comprised of the following (in thousands):



	2013	2012	2011
Income tax benefit at the statutory rate	$ (2,341)	$ (2,079)	$ (11,709)
Tax exempt interest	(998)	(872)	(892)
Tax exempt expense (income) from company-owned
life insurance ("COLI")	(377)	74	(483)
State income taxes, net of federal tax benefit	(419)	284	272
Non-deductible meals and entertainment	195	189	160
Non-deductible compensation	1,017	1,234	1,050
Valuation allowance	29,998	28	844
Other, net	(320)	(69)	507
	$ 26,755	$ (1,211)	$ (10,251)

Income taxes as set forth in the Consolidated Statements of Comprehensive Loss consisted of the following components (in thousands):



	2013	2012	2011
Current
Federal	$ (76)	$ (10,402)	$ (7,979)
State	(571)	140	921
	$ (647)	$ (10,262)	$ (7,058)

Deferred
Federal	$ 27,159	$ 8,777	$ (2,923)
State	243	274	(270)
	27,402	9,051	(3,193)
Total income tax expense (benefit)	$ 26,755	$ (1,211)	$ (10,251)

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of June 30, 2013 and June 29, 2012 are presented below (in thousands):



	2013	2012
Deferred tax assets:
Employee compensation plans	$ 11,378	$ 12,704
Net operating loss carryforward	10,507	-
Allowance for probable loan losses	3,400	7,131
Securities available for sale	3,589	-
Bad debt reserve	2,177	2,078
Deferred rent	1,631	1,608
State taxes	909	1,152
Investment in unconsolidated ventures	909	915
Deferred income on loans	810	582
REO	139	-
Long-term debt	-	1,262
Other	513	645
Gross deferred tax assets	35,962	28,077
Valuation allowance	(30,870)	(872)
Net deferred tax assets	5,092	27,205

Deferred tax liabilities:
Securities available for sale	$ -	$ (1,462)
Interest rate swaps in cash flow hedging relationships	(626)	-
Fixed assets, net	(426)	(668)
Extraordinary gain related to the M.L. Stern & Co.,
LLC acquisition	-	(239)
Investment in unconsolidated ventures	(120)	(742)
Long-term debt	(82)	-
REO	-	(387)
Other	(249)	(56)
Total gross deferred tax liabilities	(1,503)	(3,554)
Net deferred tax assets – included in other assets on the
Consolidated Statements of Financial Condition	$ 3,589	$ 23,651

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management considers all available evidence, both positive and negative from the following expected sources of income: expected future reversals of deferred tax assets and liabilities, projected future taxable income, cumulative losses in recent years and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. ASC 740, “Income Taxes” provides that a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable and also restricts the reliance on projections of future taxable income to support the recovery of deferred tax assets. Although the Company’s current financial forecasts indicate that sufficient taxable income should be generated in the future to ultimately realize the existing deferred tax benefits, these forecasts are subject to a number of assumptions and there can be no assurance that these forecasts will be achieved. These forecasts were not considered to constitute sufficient positive evidence, as required by GAAP, to overcome the observable negative evidence associated with the cumulative loss positions. The Company previously had an allowance for deferred tax assets associated with its capital losses from investments. Based on an evaluation of the positive and negative evidence, management determined that it was appropriate to increase the valuation allowance for its remaining deferred tax assets, except for the Bank’s securities available for sale. Accordingly, the Company increased its allowance $29,998,000 from $872,000 at June 29, 2012 to $30,870,000 at June 30, 2013.

Management did not establish a valuation allowance for the deferred tax asset generated on the Bank’s unrealized losses of its securities available for sale of $3,589,000, because the Bank currently has the intent and ability to hold these securities until they recover in value. Despite the valuation allowance, these assets remain available to offset future taxable income.

The Company had a deferred tax asset for net operating losses for federal income tax purposes of approximately $10,507,000 at June 30, 2013. In order to utilize the operating loss carryforwards, the Company must generate sufficient taxable income within the applicable carryforward period. If certain substantial changes in the Company’s ownership occur, there would be an annual limitation on the amount of the carryforwards that could be utilized.

A reconciliation of the beginning and ending amounts of the net liability for uncertain tax positions is as follows (in thousands):



	June 30, 2013	June 29, 2012	June 24, 2011
Balance at the beginning of the year	$ 1,125	$ 1,394	$ 1,121
Increases as a result of tax positions taken during prior years	-	551	168
Increases as a result of tax positions taken during the current period	20	71	32
Decreases as a result of tax positions taken during prior years	(381)	(558)	(47)
Decreases as a result of tax positions taken during the current period	(10)	-	(45)
Lapse of applicable statute of limitations	(361)	(99)	399
Settlements	(98)	(234)	(234)
Balance at the end of the year	$ 295	$ 1,125	$ 1,394

While the Company expects that the net liability for uncertain tax positions will change during fiscal 2014, the Company does not believe that the change will have a significant impact on its consolidated financial position or results of operations.

The Company recognizes interest and penalties on income taxes in income tax expense. Included in the net liability is accrued interest and penalties of $9,000 and $280,000, net of federal benefit for the fiscal years ended June 30, 2013 and June 29, 2012, respectively. During the fiscal years ended June 30, 2013, June 29, 2012 and June 24, 2011, the Company recognized approximately $(271,000), $(42,000) and $54,000, net of federal benefit, respectively, in interest and penalties in income tax expense. The total amount of unrecognized income tax benefits that, if recognized, would reduce income tax expense was approximately $286,000, $845,000 and $1,072,000 as of June 30, 2013, June 29, 2012 and June 24, 2011, respectively.

With limited exception, SWS is no longer subject to U.S. federal, state or local tax audits by taxing authorities for years preceding 2009. The examination of the Company’s federal tax returns for 2008 through 2011 has concluded with no material adjustments. The exam is still in Joint Committee review, but no material adjustments are expected from the review process.