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Income Taxes
12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  
Income Taxes

7. Income Taxes

The following table presents the components of income tax expense (benefit) (dollars in thousands):

 

     Years Ended December 31,  
     2011      2010     2009  

Current tax expense (benefit):

       

Federal

   $ 26       $ (463   $ (11,679

U.S. State and local

     104         113        (213
  

 

 

    

 

 

   

 

 

 

Total current

     130         (350     (11,892
  

 

 

    

 

 

   

 

 

 

Deferred tax expense (benefit):

       

Federal

   $ —         $ 418      $ 9,356   

U.S. State and local

     —           (25     1,587   
  

 

 

    

 

 

   

 

 

 

Total deferred

     —           393        10,943   
  

 

 

    

 

 

   

 

 

 

Total income tax expense (benefit)

   $ 130       $ 43      $ (949
  

 

 

    

 

 

   

 

 

 

The following table presents loss before income taxes (dollars in thousands):

 

     Years Ended December 31,  
     2011     2010     2009  

United States

   $ (6,092   $ (20,546   $ (34,184

Canada

     24        12        (9
  

 

 

   

 

 

   

 

 

 

Total

   $ (6,068   $ (20,534   $ (34,193
  

 

 

   

 

 

   

 

 

 

The following table reconciles the U.S. statutory federal income tax rate and the tax (benefit) expense shown in our Consolidated Statements of Operations (dollars in thousands):

 

     Years Ended December 31,  
     2011     2010     2009  

Tax at statutory U.S. federal income tax rate of 35%

   $ (2,124   $ (7,187   $ (11,968

State and local income taxes, net of federal benefit

     (148     (699     (1,286

Permanent differences

     171        19        69   

Other

     (56     136        52   

Valuation allowance

     2,287        7,774        12,184   
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

   $ 130      $ 43      $ (949
  

 

 

   

 

 

   

 

 

 

We have made no provision for U.S. income taxes on undistributed earnings of approximately $4.6 million from our Canadian subsidiary because it is our intention to reinvest those earnings in that operation. If those earnings are distributed in the form of dividends, we may be subject to both foreign withholding taxes and U.S. income taxes net of allowable foreign tax credits. The amount of additional tax that might be payable upon repatriation of these foreign earnings is approximately $331,000.

U.S. GAAP requires a company to establish a valuation allowance for deferred tax assets when it is more-likely-than-not that the deferred tax asset will not be realized. Deferred tax assets may be realized through future reversals of existing taxable temporary differences, future taxable income, taxable income in prior carryback year(s) if carryback is permitted, and tax planning strategies.

 

In 2009, we considered all positive and negative evidence in determining whether or not the net deferred tax assets were more-likely-than-not to be realized, including the current economic conditions and our 2010 operating projections completed during 2009. After considering all of the evidence, we concluded that reliance on future projections of income was no longer sufficient to support realization of our deferred tax assets. Accordingly, in 2009 we established a valuation allowance against all of our net deferred tax assets in the amount of $12.2 million as we believed it was not more-likely-than-not that our net deferred tax assets would be utilized. After undertaking a similar analysis again in 2010 and 2011, we still believe that we cannot support the realization of our deferred tax assets.

As of December 31, 2011, we had net operating loss carryforwards for federal and state income taxes of approximately $29.6 million and $60.2 million, respectively, which will be available to offset future taxable income. Approximately $8.6 million of state net operating loss is subject to an annual IRC Section 382 limitation of $5.3 million. If not used, these carryforwards will expire between 2013 and 2031. To the extent net operating loss carryforwards, when realized, relate to non-qualified stock option deductions, the resulting benefits will be credited to stockholders' investment.

Deferred taxes arise because of temporary differences in the book and tax basis of certain assets and liabilities. The following table shows the significant components of our deferred taxes (dollars in thousands):

 

     As of December 31,  
     2011     2010  

Deferred tax assets:

    

Deferred revenue

   $ 1,217      $ 2,749   

Allowance for doubtful accounts

     765        782   

Accrued enhancement expense

     1,349        1,219   

Insurance reserves

     1,281        1,292   

Deferred lease credits

     441        473   

Share-based compensation

     929        737   

Vendor rebates

     1,192        1,722   

Investments

     72        152   

Property and equipment

     778        453   

Net operating and capital loss carryforward

     13,749        9,395   

Other

     2,245        2,658   

Valuation allowance

     (23,405     (21,118
  

 

 

   

 

 

 

Total deferred tax assets

   $ 613      $ 514   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Deferred lease incentives

   $ 486      $ 424   

Prepaid service

     124        83   

Other

     3        7   
  

 

 

   

 

 

 

Total deferred tax liabilities

   $ 613      $ 514   
  

 

 

   

 

 

 

Net deferred tax assets

   $ —        $ —     
  

 

 

   

 

 

 

 

Changes in unrecognized tax benefits were as follows (dollars in thousands):

 

     2011     2010  

Balance, beginning of year

   $ 539      $ 555   

Additions based on tax positions related to the current year

     50        —     

Additions for tax positions of prior years

     49        32   

Reductions for tax positions of prior years

     —          —     

Reductions due to statute expiration

     (24     (20

Settlements

     —          (28
  

 

 

   

 

 

 

Balance, end of year

   $ 614      $ 539   
  

 

 

   

 

 

 

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $614,000. It is reasonably possible that the amount of the unrecognized tax benefits may increase or decrease within the next 12 months. However, we do not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the Consolidated Financial Statements. We record unrecognized tax benefits as a component of "Accrued liabilities and other" in our Consolidated Balance Sheets.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense in the Consolidated Statements of Operations. During the year ended December 31, 2011, we recognized tax expense of approximately $26,000 in interest and penalties. We have accrued approximately $171,000 and $145,000 in interest and penalties related to unrecognized tax benefits as of December 31, 2011 and 2010, respectively, recorded as a component of "Accrued liabilities and other" in our Consolidated Balance Sheets.

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and Canada. With the exception of our 2008 federal income tax return which was audited without adjustment, we are subject to audit by taxing authorities for fiscal years ending after 2007. Our federal and state income tax return filings generally are subject to a three-year statute of limitations from date of filing. In January 2011, the Internal Revenue Service initiated a review of the 2009 tax year, which is now complete, and the Joint Committee on Taxation has accepted our 2009 tax return.