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Income Taxes

12 Months Ended

Sep. 30, 2016

Income Tax Disclosure [Abstract]

I. Income Taxes

The provision for income taxes consisted of the following (in thousands):

		Years Ended September 30,
		2016				2015				2014
Current
Federal		$	260			$	894			$	4,613
State and local			970				335				366
Total current income tax expense			1,230				1,229				4,979

Deferred
Federal			1,427				3,935				937
Total deferred income tax expense			1,427				3,935				937

Total income tax expense		$	2,657			$	5,164			$	5,916

Income tax expense differs from the “expected” income tax expense computed by applying the U.S. federal statutory rate of 34% to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):

		Years Ended September 30,
		2016				2015				2014
Computed expected income tax expense		$	4,419			$	4,812			$	5,750
State income taxes, net of federal benefit			970				221				242
Transfer of deferred tax liabilities with subsidiaries sold			(841	)			-				-
Permanent differences			122				131				(76	)
Tax credits			(2,013	)			-				-
Total income tax expense		$	2,657			$	5,164			$	5,916

During the fiscal year ended September 30, 2016 the Company deconsolidated three subsidiaries. Two of these subsidiaries were 100 percent owned subsidiaries, 100 percent of the stock of both of these subsidiaries were sold to third parties. The third subsidiary was a 51 percent owned subsidiary that was accounted for under the consolidated method; 31 percent of the 51 percent ownership of the stock was sold during the year to a third party, and the investment is now accounted for under the cost method. In accordance with US GAAP, the company has elected to account for the deferred taxes on the inside basis differences of all three deconsolidated subsidiaries as a component of the gain or loss on the sale of the shares. All outside basis differences in the investment in subsidiaries stock are accounted for as a component of the tax provision.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):

		September 30,
		2016				2015
Deferred tax assets (liabilities):
Intangibles		$	(19,034	)		$	(21,359	)
Property and equipment			(10,682	)			(10,302	)
Patron tax			2,074				2,712
Other			2,172				862
Net deferred tax liability		$	(25,470	)		$	(28,087	)

The Company has recognized a tax benefit in the amount of $2.0 million during the year ended September 30, 2016, representing the net amount to be realized from the current year and from amending certain prior year federal tax returns to take the available FICA tip tax credits which were not taken in prior years. The Company will continue to utilize FICA tip credits in future tax filings.

Included in the Company’s deferred tax liabilities at September 30, 2016 and 2015 is approximately $16.3 million and $16.4 million, respectively, representing the tax effect of indefinite-lived intangible assets from club acquisitions which are not deductible for tax purposes. These deferred tax liabilities will remain in the Company’s consolidated balance sheet until the related clubs are sold.

The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized tax benefits as a component of interest expense. We recognize penalties related to unrecognized tax benefits as a component of miscellaneous income (expense) in accordance with regulatory requirements.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended September 30, 2016, 2015 and 2014, the Company recognized no interest and penalties for unrecognized tax benefits. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The years ended September 30, 2015 and 2014 remain open to tax examination. The Company’s federal income tax return for the year ended September 30, 2013 was examined by the internal revenue service with no changes.