16. Income Taxes

The income tax (benefit) expense for the years ended March 31 is as follows:

	Years Ended March 31,
	2013			2012			2011
Current tax expense
Federal	$	3,987,000		$	4,476,000		$	4,797,000
State		256,000			379,000			718,000
Foreign		480,000			448,000			267,000

Total current tax expense		4,723,000			5,303,000			5,782,000

Deferred tax expense (benefit)
Federal		(24,119,000	)		1,039,000			1,206,000
State		(2,535,000	)		494,000			821,000
Foreign		211,000			(64,000	)		-

Total deferred tax expense (benefit)		(26,443,000	)		1,469,000			2,027,000

Total income tax (benefit) expense	$	(21,720,000	)	$	6,772,000		$	7,809,000

Deferred income taxes consist of the following at March 31:

	2013			2012
Assets
Accounts receivable valuation	$	4,690,000		$	4,465,000
Allowance for customer incentives		1,216,000			626,000
Inventory obsolescence reserve		962,000			839,000
Stock options		1,551,000			1,239,000
Property and equipment, net		468,000			492,000
Intangibles, net		701,000			-
Estimate for returns		10,831,000			-
Deferred core revenue		10,255,000			14,524,000
Claims payable		174,000			288,000
Acquisition cost		-			35,000
Accrued compensation		1,820,000			1,310,000
Net operating losses		32,214,000			29,195,000
Other		1,892,000			1,165,000

Total deferred tax assets	$	66,774,000		$	54,178,000

Liabilities
Prepaid expenses	$	(639,000	)	$	(363,000	)
Intangibles, net		-			(3,812,000	)
Cancellation for indebtedness		(1,412,000	)		-
Estimate for returns		-			(3,287,000	)
Other		(2,253,000	)		(496,000	)

Total deferred tax liabilities	$	(4,304,000	)	$	(7,958,000	)

Less valuation allowance	$	(30,296,000	)	$	(40,716,000	)

Net deferred tax assets	$	32,174,000		$	5,504,000

Net current deferred income tax asset	$	34,711,000		$	3,647,000
Net long-term deferred income tax assets		(2,537,000	)		1,857,000

Total	$	32,174,000		$	5,504,000

At March 31, 2013 and 2012, current deferred income tax liabilities of $145,000 and $146,000, respectively, are included in other current liabilities in the consolidated balance sheet.

At March 31, 2013, the Company had federal, state and Canadian net operating loss carryforwards of $63,400,000, $11,500,000, and $119,900,000, respectively. The utilization of these net operating loss carryforwards may be permanently limited due to Internal Revenue Code Section 382 in the Unites States and similar regulations in Canada. Prior to the utilization of such losses, the Company will perform further analysis to determine the amount subject to limitation. Additionally, in certain states the suspension of the usage of the net operating losses may apply. The net operating loss carryforwards expire between 2020 and 2032.

Realization of the Company's deferred tax assets is dependent upon the Company's ability to generate sufficient taxable income. Management reviews the Company's deferred tax assets on a jurisdiction by jurisdiction basis to determine whether it is more likely than not that the deferred tax assets will be realized. As a result of Fenco's cumulative losses in certain jurisdictions, a determination was made to establish a valuation allowance against the related deferred tax assets as it is not more likely than not that such assets will be realized. For all other jurisdictions, management believes that it is more likely than not that future taxable income will be sufficient to realize the recorded deferred tax assets. In evaluating this ability, management considers long-term agreements and Remanufactured Core purchase obligations with the Company's major customers that expire at various dates through March 2019. Management also periodically compares its forecasts to actual results. Even though there can be no assurance that the forecasted results will be achieved, the history of income in all other jurisdictions provides sufficient positive evidence that no valuation allowance is needed.

Fenco is in a net deferred tax asset position. However, realization of the deferred tax assets is dependent on Fenco's ability to generate sufficient taxable income. Based on the Company's history of losses, management believes that it is not more likely than not that future taxable income will be sufficient to realize Fenco's recorded deferred tax assets. As a result, the Company has recorded a full valuation allowance of $30,296,000 on the deferred taxes of Fenco.

For the years ended March 31, 2013, 2012, and 2011, the primary components of the Company's income tax provision were (i) the current liability due to federal, state and foreign income taxes, (ii) foreign income taxed at rates that are different from the federal statutory rate, and (iii) a valuation allowance established against deferred tax assets when it is more likely than not that the asset or any portion thereof will not be realized. Additionally, during fiscal 2013, the Company impaired goodwill that is not deductible for tax purposes.

The difference between the income tax expense at the federal statutory rate and the Company's effective tax rate is as follows:

	Years Ended March 31,
	2013			2012			2011

Statutory federal income tax rate		34	%		34	%		34	%
State income tax rate, net of federal benefit		1	%		(1	) %		3	%
Change in deferred tax rate		-	%		-	%		2	%
Foreign income taxed at different rates		(9	) %		(12	) %		(1	) %
Goodwill impairment		(16	) %		-	%		-	%
Valuation allowance		9	%		(36	) %		-	%
Other income tax		-	%		(1	) %		1	%

		19	%		(16	) %		39	%

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions with varying statutes of limitations. At March 31, 2013, the Company is under examination in the United States by the Internal Revenue Service for fiscal 2012 and by the State of California for the fiscal years 2008 through 2010. The Company is not under examination in any other jurisdiction. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows at March 31:

	2013			2012			2011
Balance at beginning of period	$	3,613,000		$	576,000		$	711,000
Additions based on tax positions related to the current year		227,000			116,000			128,000
Additions for tax positions of prior year		57,000			2,997,000			298,000
Reductions for tax positions of prior year		(440,000	)		(76,000	)		(561,000	)
Settlements		-			-			-

Balance at end of period	$	3,457,000		$	3,613,000		$	576,000

At March 31, 2013, 2012 and 2011, there are $1,780,000, $1,783,000 and $389,000 of unrecognized tax benefits that if recognized would affect the annual effective tax rate.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of income tax expense. During the years ended March 31, 2013, 2012 and 2011, the Company recognized approximately $36,000, $160,000, and $(4,000) in interest and penalties. The Company had approximately $460,000 and $424,000 for the payment of interest and penalties accrued at March 31, 2013 and 2012, respectively.