15. INCOME TAXES

The provision (benefit) for income taxes from continuing operations consisted of the following (in thousands):



YEAR ENDED
AUGUST 31,		2012		2011		2010
Current:
Federal	$	-	$	-	$	(454)
State		228		204		16
Foreign		2,553		1,643		1,555
		2,781		1,847		1,117

Deferred:
Federal		1,311		(430)		1,254
State		(3)		(149)		(43)
Foreign		(269)		45		(488)
Benefit of foreign tax credit
carryforward		(2,677)		(3,788)		-
Utilization of net loss carryforwards		4,763		6,012		468
Provision resulting from the allocation
of certain tax items directly to
contributed capital		-		102		176
		3,125		1,792		1,367
	$	5,906	$	3,639	$	2,484

The allocation of total income tax provision (benefit) is as follows (in thousands):



YEAR ENDED
AUGUST 31,		2012		2011		2010
Continuing operations	$	5,906	$	3,639	$	2,484
Other comprehensive income		(73)		310		(229)
Discontinued operations		-		-		440
Gain on sale of discontinued		-
operations		-		-		854
	$	5,833	$	3,949	$	3,549

Income from continuing operations before income taxes consisted of the following (in thousands):



YEAR ENDED
AUGUST 31,		2012		2011		2010
United States	$	11,006	$	7,438	$	1,127
Foreign		2,741		1,008		53
	$	13,747	$	8,446	$	1,180

The differences between income taxes at the statutory federal income tax rate and income taxes from continuing operations reported in our consolidated statements of operations were as follows:


YEAR ENDED AUGUST 31,	2012	2011	2010
Federal statutory income tax rate	35.0%	35.0%	35.0%
State income taxes, net of federal effect	2.7	3.7	1.2
Foreign jurisdictions tax differential	1.8	0.3	(4.2)
Tax differential on income subject to both U.S. and foreign taxes	(3.4)	(5.7)	140.6
Uncertain tax positions	3.2	3.7	(21.2)
Tax on management stock loan interest	2.2	3.6	25.9
Non-deductible executive compensation	1.4	1.3	26.8
Non-deductible meals and entertainment	0.9	1.5	7.4
Other	(0.8)	(0.3)	(0.9)
	43.0%	43.1%	210.6%

We paid significant amounts of withholding tax on foreign royalties during fiscal years 2012, 2011, and 2010. We also recognized taxable income on repatriated earnings from foreign income that are taxed in both foreign and domestic jurisdictions. During fiscal 2012 and fiscal 2011, we concluded that domestic foreign tax credits will be available to offset our foreign withholding taxes and U.S. taxes on foreign dividends for those years. However, for fiscal 2010 we concluded that no domestic foreign tax credits were available to offset the foreign withholding taxes and the U.S. taxes on foreign dividends.

We accrue taxable interest income on outstanding management common stock loans (Note 10). Consistent with the accounting treatment for these loans, we are not recognizing interest income for book purposes, thus resulting in a permanent book versus tax difference.

The significant components of our deferred tax assets and liabilities were comprised of the following (in thousands):



YEAR ENDED
AUGUST 31,		2012		2011
Deferred income tax assets:
Sale and financing of corporate
headquarters	$	10,953	$	11,171
Foreign income tax credit
carryforward		6,205		5,946
Deferred compensation		2,296		1,003
Bonus and other accruals		1,399		1,403
Unearned revenue		1,188		784
Inventory and bad debt reserves		746		639
Net operating loss carryforward		289		4,128
Alternative minimum tax carryforward		392		393
Investment in FC Organizational
Products		275		1,466
Sales returns and contingencies		253		248
Impairment of FC Organizational
Products note receivable		-		1,653
Impairment of investment in Franklin
Covey Coaching, LLC		-		46
Other		163		151
Total deferred income tax assets		24,159		29,031
Less: valuation allowance		-		(2,159)
Net deferred income tax assets		24,159		26,872

Deferred income tax liabilities:
Intangibles step-ups – indefinite lived		(8,667)		(8,597)
Intangibles step-ups – definite lived		(8,371)		(8,866)
Property and equipment depreciation		(4,822)		(5,430)
Intangible asset impairment and
amortization		(4,919)		(4,319)
Unremitted earnings of foreign
subsidiaries		(582)		(609)
Other		(142)		(114)
Total deferred income tax liabilities		(27,503)		(27,935)
Net deferred income taxes	$	(3,344)	$	(1,063)

Deferred income tax amounts are recorded as follows in our consolidated balance sheets (in thousands):



YEAR ENDED
AUGUST 31,		2012		2011
Current assets	$	3,634	$	3,005
Long-term assets		23		16
Long-term liabilities		(7,001)		(4,084)
Net deferred income tax liability	$	(3,344)	$	(1,063)

Federal net operating losses of $33.3 million and $21.2 million were generated in fiscal 2003 and 2004, respectively, all of which have been utilized.

In fiscal 2009, a federal net operating loss of $9.7 million was generated. During fiscal 2012, a total of $6.5 million of the fiscal 2009 loss carryforward was utilized, leaving a remaining loss carryforward from fiscal 2009 of $3.2 million, which expires on August 31, 2029. The total loss carryforward of $3.2 million includes $1.6 million of deductions applicable to additional paid-in capital that will be credited once the loss carryforward amounts are utilized.

We also have state net operating loss carryforwards generated in various state jurisdictions that expire primarily between August 31, 2013 and August 31, 2029.

Our U.S. foreign income tax credit carryforward of $2.2 million that was generated during fiscal 2002 expired on August 31, 2012. Our U.S. foreign income tax credit carryforwards generated in fiscal 2012 and fiscal 2011 of $2.7 million and $3.5 million expire on August 31, 2022 and 2021, respectively.

Valuation Allowance on Deferred Tax Assets

The foreign tax credit of $2.2 million that was generated in fiscal 2002 expired in fiscal 2012. Accordingly, the corresponding valuation allowance of $2.2 million previously recorded against the foreign tax credit was reversed in fiscal 2012, leaving no remaining valuation allowance against any of our deferred income tax assets at August 31, 2012. We have determined that projected future taxable income is adequate to allow for realization of all domestic deferred tax assets. We considered sources of taxable income, including future reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and reasonable, practical tax-planning strategies to generate additional taxable income. Based on the factors described above, we concluded that realization of all our domestic deferred tax assets is more likely than not at August 31, 2012.

The table below presents the pre-tax book income, significant book versus tax differences, and taxable income for the years ended August 31, 2012, 2011, and 2010 (in thousands).



YEAR ENDED
AUGUST 31,		2012		2011		2010
Domestic pre-tax book income	$	11,006	$	7,438	$	1,745
Share-based compensation		3,405		1,700		359
Actual and deemed foreign dividends		2,484		5,409		2,502
Property and equipment depreciation
and dispositions		1,664		1,766		1,482
Unearned revenue		1,057		37		1,534
Interest on management common
stock loans		870		376		313
Disallowed executive compensation		549		537		755
Changes in accrued liabilities		88		1,091		(724)
Impairment of note receivable from
FC Organizational Products		(4,667)		390		315
Taxable losses from FC Organizational
Products		(2,916)		(748)		(3,073)
Amortization/write-off of intangible
assets		(92)		(1,274)		(617)
Deduction for foreign income taxes		-		-		(1,272)
Sale of corporate headquarters campus		(822)		(683)		(585)
Other book versus tax differences		(30)		281		232
	$	12,596	$	16,320	$	2,966

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



YEAR ENDED
AUGUST 31,		2012		2011		2010
Beginning balance	$	3,703	$	3,940	$	4,225
Additions based on tax positions
related to the current year		297		6		46
Additions for tax positions in
prior years		327		384		173
Reductions for tax positions of prior
years resulting from the lapse of
applicable statute of limitations		-		-		(425)
Other reductions for tax positions of
prior years		(115)		(627)		(79)
Ending balance	$	4,212	$	3,703	$	3,940

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $3.1 million and $2.8 million at August 31, 2012 and 2011. Included in the ending balance of gross unrecognized tax benefits is $3.2 million related to individual states’ net operating loss carryforwards. Interest and penalties related to uncertain tax positions are recognized as components of income tax expense. The net accruals and reversals of interest and penalties increased income tax expense by $0.1 million in fiscal 2012, increased income tax expense by an insignificant amount in fiscal 2011, and decreased income tax expense by $0.1 million in fiscal 2010. The balance of interest and penalties included on our consolidated balance sheets at August 31, 2012 and 2011 was $0.2 million and $0.1 million, respectively. We expect an increase of $0.3 million in our unrecognized tax benefits over the next twelve months, primarily related to the utilization of individual states’ net operating loss carryforwards.

We file United States federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The tax years that remain subject to examinations for our major tax jurisdictions are shown below. Additionally, any net operating losses that were generated in prior years and utilized in these years may be subject to examination.

2005-2012	Canada
2006-2012	Australia
2007-2012	Japan, United Kingdom
2008-2012	United States – state and local income tax
2009-2012	United States – federal income tax