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TAXES | 12 Months Ended
--- | ---
Dec. 31, 2012
TAXES |
TAXES | NOTE 7. TAXES Income Taxes Income tax provision (benefit) consists of the following:
|  | Years ended December 31, |
|  | 2012 |  | 2011 |  | 2010 |
Federal |  | $ | 4,611,978 |  | $ | 4,683,711 |  | $ | 4,443,536 |
State |  | 196,073 |  | — |  | — |
Current tax provision |  | 4,808,051 |  | 4,683,711 |  | 4,443,536 |
Federal |  | 208,812 |  | (1,503,638 | ) | (104,612 | )
State |  | 31,490 |  | — |  | — |
Deferred tax expense (benefit) |  | 240,302 |  | (1,503,638 | ) | (104,612 | )
Total tax provision |  | $ | 5,048,353 |  | $ | 3,180,073 |  | $ | 4,338,924 |
The difference between the Company’s provision for income taxes as presented in the accompanying consolidated statements of income, and the provision for income taxes computed at the statutory rate is comprised of the items shown in the following table as a percentage of pre-tax earnings.
|  | Years ended December 31, |
|  | 2012 |  | 2011 |  | 2010 |
Federal tax at the statutory rate |  | 35.00 | % | 35.00 | % | 35.00 | %
State tax (net of federal benefit) |  | 0.98 | % | — |  | — |
Permanent items |  | 3.03 | % | 0.96 | % | 0.62 | %
Tax credits |  | (1.44 | )% | (2.24 | )% | (1.52 | )%
Adjustment to base jackpot liability |  | — |  | 2.09 | % | — |
Other |  | (1.41 | )% | 0.10 | % | 0.39 | %
|  | 36.16 | % | 35.91 | % | 34.49 | %
The components of the deferred income tax assets and liabilities at December 31, 2012 and 2011, as presented in the consolidated balance sheets, are as follows:
|  | 2012 |  | 2011 |
DEFERRED TAX ASSETS |  |  |  |  |
Share based compensation |  | $ | 4,595,100 |  | $ | 4,126,452 |
Compensation and benefits |  | 700,194 |  | 440,268 |
Bad debt reserves |  | 255,053 |  | 459,496 |
Accrued expenses |  | 1,372,645 |  | 1,080,620 |
Fixed assets and depreciation |  | 50,428 |  | — |
Base stock |  | 787 |  | — |
NOLs & credit carry-forwards |  | 5,207,805 |  | — |
Deferred income tax asset |  | $ | 12,182,012 |  | $ | 6,106,836 |
DEFERRED TAX LIABILITIES |  |  |  |  |
Fixed assets and depreciation |  | $ | — |  | $ | (5,537,132 | )
Intangibles and amortization |  | (4,044,119 | ) | — |
Prepaid expenses |  | (922,736 | ) | (785,328 | )
Real estate taxes |  | (285,038 | ) | (280,513 | )
Federal deduction on deferred state taxes |  | (290,158 | ) | — |
Deferred income tax liability |  | $ | (5,542,051 | ) | $ | (6,602,973 | )
NET DEFERRED INCOME TAX ASSET (LIABILITY) |  | $ | 6,639,961 |  | $ | (496,137 | )
Tax years 2006 forward were subject to examination by the Internal Revenue Service (the “IRS”). During 2009, the IRS began its field examination (the “Examination”) of the Company’s 2006, 2007 and 2008 tax returns. The issues for consideration in the Examination were temporary differences related to the appropriate recovery periods applicable to certain assets. In 2010, the Company received the results of the Examination of its 2006 through 2008 U.S. federal income tax returns and subsequently filed an appeal of the Examination findings with the Appellate Division of the IRS. In connection with that appeal, the Company agreed to extend the statute of limitations for its 2006, 2007 and 2008 tax returns to December 31, 2012 to allow the IRS adequate time to consider its response in the appeals process. During the third quarter of 2012, the Company settled with the IRS and paid $1.1 million related to the Examination. Accounting standards require that tax positions be assessed for recognition using a two-step process. A tax position is recognized if it meets a “more likely than not” threshold, and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized. Uncertain tax positions must be reviewed at each balance sheet date. Liabilities recorded as a result of this analysis must generally be recorded separately from any current or deferred income tax accounts. The Company’s policy regarding interest and penalties associated with any uncertain tax positions is to classify such amounts as income tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|  | 2012 |  | 2011 |  | 2010 |
Balance — Beginning of year |  | $ | 1,501,206 |  | $ | 1,501,206 |  | $ | — |
Additions based on tax positions of the current year |  | — |  | — |  | — |
Additions based on tax positions of prior years |  | — |  | — |  | 1,501,206 |
Reductions for settlements |  | (1,501,206 | ) | — |  | — |
Decreases due to lapses in statutes of limitations |  | — |  | — |  | — |
Balance — End of year |  | $ | — |  | $ | 1,501,206 |  | $ | 1,501,206 |
As of December 31, 2011 and 2010, the Company recorded a liability related to uncertain tax positions of $1,501,206. With the conclusion of the Examination, this liability has been eliminated as of December 31, 2012. The Company had accrued interest related to unrecognized tax benefits of $335,659, composed of $165,871 in 2011 and $169,788 in 2010. When the IRS audit was finalized, it was concluded that interest had been over-accrued by $133,348, resulting in a tax benefit on the income statement of $86,676. During 2012, tax of $937,935 and interest of $181,824 were paid related to the closing of the IRS audit noted above. Tax of $273,960 and interest of $20,505 related to tax returns to be amended for the years 2009 and 2010 are included in taxes payable. Nevada Use Tax Refund Claims On March 27, 2008, the Nevada Supreme Court issued a decision in Sparks Nugget, Inc. vs. The State of Nevada Department of Taxation (the “Department”), holding that food purchased for subsequent use in the provision of complimentary and/or employee meals were exempt from use tax. As a result of this decision, refund claims were filed for use taxes paid, over the period April 1997 through March 2000 and the period February 2005 through June 2008, on food purchased for subsequent use in complimentary and employee meals at our Nevada casino property. We estimate the requested refund to be approximately $1.5 million, excluding interest. We have not recognized any of these refund amounts. In February 2012, the Department issued a policy directive, requesting that affected taxpayers begin collecting and remitting sales tax on complimentary meals and employee meals effective February 2012 and on June 25, 2012, the Nevada Tax Commission adopted regulations providing for a similar requirement, which regulations have not yet been made effective. As such we have accrued the resultant tax of $410 thousand as of December 31, 2012. We believe this policy directive, and possibly, the new regulations, contradict the March 27, 2008 Nevada Supreme Court decision, and we believe each are being challenged by several affected parties.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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