Note 12: Income Taxes

Our effective tax rate for the third quarter of fiscal 2012 was 15.7%. The effective tax rate for the third quarter of fiscal 2012 was reduced by 19.4 percentage points mainly due to the impact of adjusting the valuation allowance on certain deferred tax assets of $2.8 million and other discrete items of $0.8 million. Absent these discrete adjustments, the effective tax rate for the third quarter of fiscal 2012 would have been 35.1%. Our effective tax rate for the nine month period of fiscal 2012 was (102.2)%. The effective tax rate for the nine month period of fiscal 2012 was impacted by the release of a portion of the valuation allowances of $43.4 million relating to our U.S. federal and state deferred tax assets, and the valuation allowance of $2.8 million mainly relating to our Canadian deferred tax assets, as well as other discrete items of $0.8 million. Absent these discrete adjustments, the effective tax rate for the first nine months of fiscal 2012 would have been 35.5%.

Our effective tax rate was 22.6% for the third quarter of fiscal 2011 and 22.8% for the first nine months of fiscal 2011. The effective tax rates were impacted by changes in the valuation allowance for deferred taxes due to temporary timing differences that resulted in a rate reduction of 16.2 percentage points for the third quarter and first nine months of fiscal 2011. Of particular significance was the valuation allowance attributable to the tax benefits associated with the acquisition of our southern California VIE, which resulted in a rate reduction of 21.2 percentage points for both the third quarter and first nine months of fiscal 2011.

The valuation allowance against our net deferred tax assets was originally established in fiscal year 2009 based on our cumulative U.S. and foreign pretax losses at that time and uncertainty as to when those losses would reverse. In the first quarter of fiscal 2012, we moved from a three year cumulative loss position to a three year cumulative income position in the U.S. by generating sufficient positive pretax income to recover the preexisting cumulative losses. In the third quarter of fiscal 2012, we moved from a three year cumulative loss position to a three year cumulative income position in Canada.

Realization of our deferred tax assets is dependent on (among other things) generating sufficient future taxable income. Based upon (i) our cumulative pretax income position (ii) our most recent operating results, including pretax income amounts in our first fiscal quarter which exceeded both our operating plan and prior year first quarter results and (iii) our current forecasts, all of which caused us to reconsider certain of our concerns regarding the fiscal 2012 economic environment, we concluded that certain valuation allowances totaling $46.2 million associated with certain U.S. federal, state and foreign deferred tax assets should be reversed because we believed that it had become more likely than not that the value of those deferred tax assets would be realized. In the first quarter, we reduced the valuation allowance by $43.4 million, primarily related to U.S. deferred tax assets, with the remaining $2.8 million occurring in the third quarter, $2.4 million of which related to foreign deferred taxes and $0.4 million of which related to an adjustment of the amount we recorded in the first quarter.

In connection with our analysis of the total amounts of the valuation allowance to be reduced, we conducted an updated analysis of our deferred tax asset position as of April 30, 2011. As a result of this analysis, we determined that our total gross U.S. deferred tax assets at April 30, 2011, should be reduced by $8.0 million, with a corresponding decrease to the related valuation allowance. The adjustments to reduce our gross deferred tax balances were primarily related to unrealized gains on our investments, employee benefit plan arrangements and state income taxes. Changes in our valuation allowance in the first nine months of fiscal 2012 were as follows:

(Unaudited, amounts in thousands)	1/28/12
Beginning balance	$	65,748
Reduction to beginning U.S. gross deferred tax asset balances		(8,041	)
Valuation allowance reversals		(46,202	)
Other		(134	)
Ending balance	$	11,371

The remaining valuation allowance of $11.4 million primarily related to certain U.S. federal and state deferred tax assets as well as certain foreign deferred tax assets. The U.S. federal deferred tax assets primarily represent capital losses which expire in 2013, and we believe it is more likely than not that they will not be realized. The state deferred taxes are primarily related to certain state net operating losses. Foreign deferred tax assets relate primarily to capital losses.