Note 7 – Income Taxes

The provision for income taxes consisted of:

(In thousands)	2011		2010			2009

Current:
Federal	$	11,318	$	15,514		$	9,188
State		1,210		1,360			1,683
Total current		12,528		16,874			10,871

Deferred:
Federal		2,918		(1,220	)		(1,134	)
State		122		(183	)		92
Total deferred		3,040		(1,403	)		(1,042	)

Total provision	$	15,568	$	15,471		$	9,829

We realized a tax benefit of $1.6 million, $626,000 and $376,000 in fiscal years 2011, 2010 and 2009, respectively, as a result of the exercise of stock options and the vesting of restricted stock, which is recorded in shareholders' equity.

Reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows:

Fiscal years	2011			2010			2009

U.S. Federal statutory tax rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal tax benefit		3.2			2.8			7.1
Other		(1.1	)		(1.2	)		(2.8	)
Effective income tax rate		37.1	%		36.6	%		39.3	%

We recorded $328,000, $222,000 and $304,000 in federal employment related tax credits in fiscal 2011, 2010 and 2009, respectively. Each of these credits reduced our effective tax rate in the respective years. In both fiscal 2011 and fiscal 2010, we recognized a decrease in our state and local income tax rate due to favorable settlements with certain taxing authorities.

Deferred income taxes are the result of temporary differences in the recognition of revenue and expense for tax and financial reporting purposes. The sources of these differences and the tax effect of each are as follows:

(In thousands)	January 28, 2012			January 29, 2011
Deferred tax assets:
Accrued rent	$	2,301		$	1,956
Accrued compensation		2,849			2,393
Accrued employee benefits		1,092			3,013
Inventory		862			875
Self-insurance reserves		587			551
Lease incentives		4,941			2,892
Unrecognized tax benefits		39			328
State bonus depreciation add-back		426			279
Other		367			296
Total deferred tax assets		13,464			12,583

Deferred tax liabilities:
Depreciation		12,058			8,217
Capitalized costs		840			760
Total deferred tax liabilities		12,898			8,977
Net deferred tax asset		566			3,606
Less current deferred income tax benefit		(2,496	)		(4,275	)
Long-term deferred income taxes	$	(1,930	)	$	(669	)

As of January 28, 2012, we had no available state tax credits that could be carried forward.

Our unrecognized tax liabilities, as discussed below, relate to tax years encompassing our fiscal years 1999 through 2011, the tax years that remain subject to examination by major tax jurisdictions as of January 28, 2012. A reconciliation of the beginning and ending amount for our unrecognized tax positions, which exclude interest and penalties, is as follows:

(In thousands)	2011			2010			2009

Beginning balance	$	693		$	1,357		$	1,135
Increases – tax positions in prior period		0			0			150
Decreases – tax positions in prior period		(339	)		(617	)		0
Gross increases – current period tax positions		0			100			179
Decreases related to settlements with taxing authorities		(285	)		(147	)		(107	)
Ending balance	$	69		$	693		$	1,357

We have recorded $142,000 in unrecognized tax liabilities as of January 28, 2012 in Other liabilities on the Consolidated Balance Sheets. This liability is comprised of $69,000 related to unrecognized tax positions, $38,000 related to accrued interest and $35,000 related to accrued penalties. Our policy is to record interest and penalty expense related to income taxes as a component of income tax expense in the Consolidated Statements of Income. If our uncertain tax positions become recognizable, the amount would affect our effective tax rate.