6.	Income Taxes

The components of income taxes from continuing operations are as follows (in thousands):


	2012		2011		2010
Currently payable:
Federal	$	36,211	$	35,047	$	19,440
State		2,962		3,746		2,680

		39,173		38,793		22,120
Deferred:
Federal		9,357		2,294		(1,281	)
State		1,448		190		708

		10,805		2,484		(573	)

Total income tax expense from continuing operations	$	49,978	$	41,277	$	21,547

Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):


	2012			2011
Deferred tax assets:
Deferred credits from landlords	$	11,314		$	13,488
Share-based compensation		3,950			4,979
Compensation accrual		3,745			3,820
Deferred Compensation		1,486			1,035
Other		4,112			5,494

Total deferred tax assets		24,607			28,816
Deferred tax liabilities:
Inventories		(9,245	)		(6,540	)
Property and equipment		(4,990	)		(954	)
Other		(552	)		(697	)

Total deferred tax liabilities		(14,787	)		(8,191	)

Net deferred tax asset	$	9,820		$	20,625

The effective income tax rate related to continuing operations varies from the statutory federal income tax rate for 2012, 2011 and 2010 due to the following:


	2012			2011			2010
Tax at statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit		3.0			2.7			1.9
Tax contingencies		(0.9	)		(0.3	)		0.7
Tax-exempt interest		—			—			(0.1	)
Valuation allowance		—			—			(8.1	)
Other		—			0.1			0.4

		37.1	%		37.5	%		29.8	%

In 2010, the Company finalized a favorable agreement with the Internal Revenue Service regarding the income tax treatment of the terminated merger and litigation expenses which allowed the Company to treat all of the terminated merger and litigation expenses as an ordinary deduction instead of a portion as an ordinary deduction and another portion as a capital loss. The Company determined that its previously classified capital loss carryforward would be recovered through operating income and the valuation allowance of $6,546,000 attributable to the capital loss was no longer necessary and was reversed in 2010.

As of March 3, 2012, the Company had approximately $10,134,000 of net operating loss carryforwards for state tax purposes of which $3,189,000 of net operating loss carryforwards related to excess stock-based compensation deductions and when realized, will be credited to shareholders’ equity. If not used, these carryforwards will expire between 2013 and 2032.

Payments (refunds) of income taxes for 2012, 2011 and 2010, equaled $28,693,000, $42,428,000 and ($10,993,000), respectively.

The Company is subject to U.S. federal income tax as well as income tax by multiple state jurisdictions. The Company has substantially concluded all U.S. federal income tax matters through fiscal 2006 and all state and local income tax matters through fiscal 2001. The Company may resolve some or all of the issues related to tax matters and make payments to settle agreed upon liabilities.

Uncertain Tax Positions

As of March 3, 2012 and February 26, 2011, the Company had $8,854,000 and $10,395,000 of unrecognized tax benefits respectively, $3,248,000 and $4,398,000 respectively, of which, if recognized, would affect the effective income tax rate. Of the total unrecognized tax benefits as of March 3, 2012, it is reasonably possible that the total unrecognized tax benefits could decrease by up to $600,000 during the next twelve months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the tax provision or reclassify amounts on the Consolidated Balance Sheets in the period in which such the matter is effectively settled with the tax authority.

The Company recognizes interest and penalty expense, as well as reversal of expense, related to unrecognized tax benefits as components of income tax expense. In 2012, 2011 and 2010, $(559,000), $76,000 and $398,000, respectively, of interest and penalties were included in “Income tax expense” on the Consolidated Statements of Income. The Company has accrued $2,306,000 and $2,865,000 for the payment of interest and penalties as of March 3, 2012 and February 26, 2011, respectively.

The following table summarizes the activity related to its unrecognized tax benefits for U.S. federal and state tax jurisdictions and excludes accrued interest and penalties (in thousands):


	2012			2011			2010
Unrecognized Tax Benefits at Beginning of Year	$	7,530		$	9,255		$	11,843
Increases in Tax Positions for Prior Years		193			26			3,163
Decreases in Tax Positions for Prior Years		(1,057	)		(1,166	)		(4,106	)
Increases in Unrecognized Tax Benefits as a Result of Current Year Activity		50			106			489
Decreases to Unrecognized Tax Benefits Relating to Settlements with Taxing Authorities		(5	)		(113	)		(1,452	)
Decreases to Unrecognized Tax Benefits as a Result of a Lapse of the Applicable Statute of Limitations		(163	)		(578	)		(682	)

Unrecognized Tax Benefits at End of Year	$	6,548		$	7,530		$	9,255