NOTE 21 — INCOME TAXES

Income tax (benefit) expense consisted of the following:


	Successor						Predecessor
	Fiscal 2012			Twenty-Nine Weeks Ended January 31, 2011			Twenty-Four Weeks Ended July 12, 2010			Fiscal 2010
Current:
Federal	$	(5,252	)	$	(1,480	)	$	(1,042	)	$	534
State		1,763			87			(26	)		1,617
Foreign		1,643			817			599			1,030

		(1,846	)		(576	)		(469	)		3,181

Deferred:
Federal		(287	)		(9,477	)		6,521			26,544
State		(2,946	)		(1,358	)		1,720			(14,747	)

		(3,233	)		(10,835	)		8,241			11,797

Total	$	(5,079	)	$	(11,411	)	$	7,772		$	14,978

The following is a reconciliation of income tax (benefit) expense at the federal statutory rate of 35% to our income tax (benefit) expense:


	Successor						Predecessor
	Fiscal 2012			Twenty-Nine Weeks Ended January 31, 2011			Twenty-Four Weeks Ended July 12, 2010			Fiscal 2010
Income tax (benefit) expense at statutory rate	$	(3,969	)	$	(13,755	)	$	89		$	22,112
State income taxes, net of federal income tax effect		(769	)		(826	)		1,101			(8,535	)
Nondeductible compensation		1,608			4,625			—			1,877
Nondeductible transaction costs		17			1,284			7,091			—
General business credits		(2,787	)		(1,477	)		(948	)		(1,168	)
Other, net		821			(1,262	)		439			692

	$	(5,079	)	$	(11,411	)	$	7,772		$	14,978

As of January 31, 2012 and 2011, temporary differences and carryforwards gave rise to a significant amount of deferred income tax assets and liabilities as follows:


	Successor
	2012			2011
Basis difference in property and equipment	$	(52,446	)	$	(65,834	)
Capital lease assets and obligations		1,248			1,701
Goodwill and other intangible assets		(158,854	)		(154,212	)
Reserves and allowances		26,899			31,281
Net operating loss carryforwards		20,860			33,309
Federal and state tax credits		31,779			22,916
Other		8,303			6,757

		(122,211	)		(124,082	)
Valuation allowance		(9,305	)		(10,667	)

Net deferred income tax liability	$	(131,516	)	$	(134,749	)

For periods subsequent to the Merger, we are included in the consolidated federal income tax returns and combined state income tax returns of Parent. For the purpose of determining the income taxes attributed to CKE and its subsidiaries, we prepare our income tax provision as if we were a separate taxpayer. As a result of this treatment, we make income tax payments to Parent based upon our separate return taxable income.

As of January 31, 2011, we maintained a valuation allowance of $10,667 against a portion of our deferred income tax assets related to state NOL carryforwards and state income tax credits because we had concluded that realization of the tax benefit of such deferred income tax assets was not more likely than not. In evaluating the need for a valuation allowance, we consider all available evidence, positive and negative, including cumulative historical earnings in recent years, future reversals of existing temporary differences, estimated future taxable income exclusive of reversing temporary differences on a jurisdictional basis and statutory expiration dates of NOL and income tax credit carryforwards. During the fiscal year ended January 31, 2012, we decreased our valuation allowance by $1,362.

As of January 31, 2012, the remaining valuation allowance of $9,305 relates to certain state NOL carryforwards and a portion of our state income tax credits. Realization of the tax benefit of such deferred income tax assets may remain uncertain for the foreseeable future, even if we generate consolidated taxable income, since certain deferred income tax assets are subject to various limitations and may only be used to offset income of certain entities and in certain jurisdictions.

As of January 31, 2012, we have federal NOL carryforwards of approximately $16,332, which would expire, if unused, in fiscal 2031. As of January 31, 2012, we have federal alternative minimum tax ("AMT") credit, general business tax credit and foreign tax credit carryforwards of approximately $26,274. Our AMT credits will be carried forward until utilized, and our general business tax credits and foreign tax credits would expire, if unused, in varying amounts in fiscal 2018 through 2032. As of January 31, 2012, we have state tax credit carryforwards of $9,376, which can be carried forward indefinitely but are subject to substantive limitations with regard to utilization. As of January 31, 2012, we have state NOL carryforwards in the amount of approximately $391,305, which expire in varying amounts in fiscal 2013 through 2031. As of January 31, 2012, we have recognized $3,167 of net deferred income tax assets related to our state income tax credit carryforwards and $12,037 of net deferred income tax assets related to our state NOL carryforwards, which represent our expected future tax savings from such carryforwards, after considering the impact of past ownership changes on our ability to utilize such carryforwards. The utilization of our NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of past or future ownership changes.

The federal and state tax credits and the state NOL carryforwards reflected in our income tax returns, as filed, include the impact of uncertain tax positions taken in open years. Accordingly, they are larger than the tax credits and NOL carryforwards for which deferred income tax assets are recognized for financial statement purposes.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:


	Successor						Predecessor
	Fiscal 2012			Twenty-Nine Weeks Ended January 31, 2011			Twenty-Four Weeks Ended July 12, 2010			Fiscal 2010
Unrecognized tax benefits, beginning of period	$	14,176		$	15,592		$	15,905		$	17,194
Gross increases related to tax positions taken in prior periods		56			—			—			13
Gross decreases related to tax positions taken in prior periods		(1,560	)		(65	)		(90	)		(320	)
Gross increases related to tax positions taken in the current period		1,750			149			63			341
Gross decreases related to tax positions taken in the current period		—			—			(286	)		—
Reductions to tax positions due to settlements with taxing authorities and lapses of statutes of limitations		(237	)		(1,500	)		—			(1,323	)

Unrecognized tax benefits, end of period	$	14,185		$	14,176		$	15,592		$	15,905

Included in the balance of unrecognized tax benefits as of January 31, 2012, are $2,977 of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits as of January 31, 2012, are $11,208 of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred income taxes, income taxes payable and valuation allowance. Amounts recorded for interest and penalties in connection with the unrecognized tax benefits noted above were not significant as of January 31, 2012 and 2011.

We believe that it is reasonably possible that decreases in unrecognized tax benefits of up to $1,642 may be necessary within the coming year as a result of statutes closing on such items. In addition, we believe that it is reasonably possible that our unrecognized tax benefits may increase as a result of tax positions that may be taken in fiscal 2013.

We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We have carried forward various federal and state NOL and income tax credits to income tax years that remain open by statute. As a result, such NOL and income tax credit carryforwards remain subject to adjustment by the respective tax authorities. Our federal income tax returns from fiscal 2009 and subsequent years are open for examination. In addition, our state income tax returns generally have statutes of limitations ranging from three to four years from the filing date.