12.          Income Taxes

For fiscal years 2011 and 2010, we recorded a provision for income taxes of $1,367 and $690, respectively.  At January 1, 2011, we recorded a full valuation allowance against our U.S. net deferred tax assets due to the uncertainty of their realization.  We regularly evaluate both positive and negative evidence related to retaining a valuation allowance against our deferred tax assets.  The realization of deferred tax assets is dependent upon sufficient future taxable income during the periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income.  During the second quarter of 2011, we concluded, based on the assessment of all available evidence, including previous three-year cumulative income before infrequent and unusual items, a history of generating income before taxes for six consecutive quarters and estimates of future profitability, that it was more-likely-than-not that we would be able to realize a portion of our deferred tax assets in the future and recorded a $917 non-cash reversal of our deferred tax asset valuation allowance.  During fiscal year 2011, we also adjusted our deferred tax assets and related valuation allowance by $219 primarily to state our remaining federal net operating loss carryforwards at the proper amounts.  This adjustment had no material impact on our recorded income tax provision for the year ended December 31, 2011.  In fiscal year 2011, we recorded $2,025 and $259 tax provisions related to taxable income from our U.S. and Canadian operations, respectively, which were partially offset by the non-cash reversal of a portion of our deferred tax asset valuation allowance.  In fiscal year 2010, we recorded $367 and $323 tax provisions related to taxable income from our U.S. and Canadian operations, respectively.  During fiscal years 2011 and 2010, we recognized $53 and $279, respectively, of windfall tax benefits from share-based compensation, which was recorded to Common Stock on the consolidated balance sheets.

The provision for income taxes for fiscal years 2011 and 2010 consisted of the following:

A reconciliation of our provision for income taxes with the federal statutory tax rate for fiscal years 2011 and 2010 is shown below:

Income before provision for income taxes and noncontrolling interest was derived from the following sources for fiscal years 2011 and 2010 as shown below:

The components of net deferred tax assets as of December 31, 2011 and January 1, 2011 are as follows:

The deferred tax amounts have been classified in the accompanying consolidated balance sheets as follows:

We have not recognized a deferred tax liability relating to cumulative undistributed earnings of controlled foreign subsidiaries that are essentially permanent in duration.  If some or all of the undistributed earnings of the controlled foreign subsidiaries are remitted to us in the future, income taxes, if any, after the application of foreign tax credits will be provided at that time.  During 2011 and 2010, ARCA Canada, our foreign subsidiary, had a receivable from us.  We computed income of $501 and $98 for fiscal years 2011 and 2010, respectively, as result of a deemed dividend and related foreign tax credit.

Future utilization of net operating loss (“NOL”) and tax credit carryforwards is subject to certain limitations under provisions of Section 382 of the Internal Revenue Code.  This section relates to a 50 percent change in control over a three-year period.  We believe that the issuance of Common Stock during 1999 resulted in an “ownership change” under Section 382.  Accordingly, our ability to use NOL and tax credit carryforwards generated prior to February 1999 is limited to approximately $56 per year.

At December 31, 2011, we had federal NOL carryforwards of approximately $3,343 ($2,898 of which is subject to IRC section 382 limitations) and no alternative minimum tax credits carry forwards.  We also had state NOL carryforwards of $3,990 ($1,137 of which is subject to IRC section 382 limitations).  The NOL carryforwards are available to offset future taxable income or reduce taxes payable through 2029.  These loss carryforwards began expiring in 2011.  We previously wrote off NOLs related to IRC section 382 limits against the valuation allowance.  At December 31, 2011, we had $445 of NOL carryforwards not subject to IRC section 382 limitations expiring in 2018.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position.  For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.  As of December 31 2011, we did not have any material uncertain tax positions.

It is our practice to recognize interest related to income tax matters as a component of interest expense and penalties as a component of selling, general and administrative expense.  As of December 31 2011, we had an immaterial amount of accrued interest and penalties.

We are subject to income taxes in the U.S. federal jurisdiction, foreign jurisdictions and various state jurisdictions.  Tax regulations from each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.  With few exceptions, we are no longer subject to U.S. federal, foreign, state or local income tax examinations by tax authorities for the years before 2008.  We are not currently under examination by any taxing jurisdiction.

We had no significant unrecognized tax benefits as of December 31, 2011 that would reasonably be expected to affect our effective tax rate during the next twelve months.