Destination Maternity Corp

15.	INCOME TAXES

Income tax (benefit) provision was comprised of the following (in thousands):

	Year Ended					Four Months Ended			Year Ended
	January 28, 2017		January 30, 2016			January 31, 2015			September 30, 2014

Current provision (benefit)	$	436	$	(4,826	)	$	(3,890	)	$	6,581
Deferred provision (benefit)		24,614		2,020			(6,636	)		(2,975	)
Income tax provision (benefit)	$	25,050	$	(2,806	)	$	(10,526	)	$	3,606

Federal provision (benefit)	$	19,202	$	(1,962	)	$	(9,296	)	$	5,109
State provision (benefit)		5,679		(575	)		(1,165	)		(1,674	)
Foreign provision (benefit)		169		(269	)		(65	)		171
Income tax provision (benefit)	$	25,050	$	(2,806	)	$	(10,526	)	$	3,606

A reconciliation of the statutory federal tax rate to the Company’s effective income tax rates follows:

	Year Ended						Four Months Ended				Year Ended
	January 28, 2017			January 30, 2016			January 31, 2015			September 30, 2014

Statutory federal tax rate		(35.0	)%		(35.0	)%		(35.0	)%			35.0	%
State tax rate, net of federal effect		5.4			(2.3	)		(2.3	)			3.2
(Benefit) provision for uncertain income tax positions, net of federal effect		(1.8	)		(2.8	)		(0.4	)			2.1
Settlements of uncertain income tax positions, net of federal effect		—			—			—				(13.0	)
Other		(3.7	)		1.6			—				(1.7	)
Valuation allowance		360.0			—			—				—
Effective income tax rate		324.9	%		(38.5	)%		(37.7	)%			25.6	%

The deferred tax effects of temporary differences giving rise to the Company’s net deferred tax assets were as follows (in thousands):

	January 28, 2017			January 30, 2016

Deferred tax assets:
Net operating loss carryforwards	$	13,201		$	11,296
Deferred rent		9,454			10,004
Employee benefit accruals		3,041			3,836
Grow NJ award benefit, net		2,268			2,493
Inventory reserves		2,131			3,320
Federal tax credit carryforwards		1,247			618
Stock-based compensation		855			1,212
Other accruals		1,905			1,896
Other		1,960			2,062
		36,062			36,737
Valuation allowance		(30,402	)		(2,666	)
		5,660			34,071
Deferred tax liabilities:
Depreciation and amortization		(1,860	)		(4,570	)
Prepaid expenses		(549	)		(503	)
		(2,409	)		(5,073	)

Net deferred tax assets	$	3,251		$	28,998

Accounting Standards Codification Topic 740, Income Taxes, requires that a valuation allowance be recorded to reduce deferred tax assets when it is more likely than not that the tax benefit of the deferred tax assets will not be realized. The evaluation includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. In situations where a three-year cumulative loss condition exists, accounting standards limit the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets. In fiscal 2016 the Company’s financial results reflected a three-year cumulative loss. The three-year cumulative loss constitutes significant negative evidence, limiting the Company’s ability to consider other positive evidence, such as the Company’s projections for future growth. Consequently, in fiscal 2016 the Company recorded a non-cash charge of $27,758,000 as a valuation allowance against substantially all of its deferred tax assets. The establishment of this valuation allowance has no effect on the Company’s ability to utilize the deferred tax assets to offset future taxable income, if generated. As required by GAAP, the Company will continue to assess the likelihood that the deferred tax assets will be realizable in the future and the valuation allowance will be adjusted accordingly. The tax benefits relating to any reversal of the valuation allowance on the net deferred tax assets in a future period will be recognized as a reduction of future income tax expense in that period.

The Company assessed that it was unlikely that sufficient future state specific taxable income will be generated to fully use the available state net operating loss carryforwards, and accordingly, a valuation allowance has been recorded to recognize only the portion of the deferred tax asset that is considered more likely than not to be realized. The Company does not record state tax benefits associated with temporary differences for certain other states in which it has net operating losses, given the continued historical uncertainty related to realizing such state tax benefits. Had the state tax benefits been reflected for these states, the deferred tax assets (excluding state net operating loss carryforwards) as of January 28, 2017 would be approximately $980,000 higher.

The accounting standard for uncertain income tax positions clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements and also contains guidance on the measurement of uncertain tax positions.

A reconciliation of gross unrecognized tax benefits for uncertain tax positions follows (in thousands):

	Year Ended						Four Months Ended			Year Ended
	January 28, 2017			January 30, 2016			January 31, 2015			September 30, 2014

Balance at beginning of period	$	961		$	1,537		$	1,691		$	4,218
Additions for current period tax positions		—			—			—			192
Additions for prior period tax positions		13			48			8			231
Reductions of prior period tax positions		(222	)		(470	)		(162	)		(2,700	)
Payments		—			(154	)		—			(250	)
Balance at end of period	$	752		$	961		$	1,537		$	1,691

As of January 28, 2017 gross unrecognized tax benefits included accrued interest and penalties of $323,000. During fiscal 2016, 2015, 2014 and the four months ended January 31, 2015 interest and penalties of $(28,000), $(83,000), $(1,391,000), and $(29,000), respectively, related to unrecognized tax benefits, were included in income tax provision (benefit). If recognized, the portion of the liability for unrecognized tax benefits that would impact the Company’s effective tax rate was $544,000, net of federal tax benefit.

As of January 28, 2017, January 30, 2016 and January 31, 2015 the Company had income taxes receivable of $4,875,000, $5,859,000 and $6,778,000, respectively, which are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.

During the twelve months subsequent to January 28, 2017 it is reasonably possible that the gross unrecognized tax benefits could potentially decrease by approximately $356,000 (of which approximately $228,000 would affect the effective tax rate, net of federal expense) for uncertain tax positions, primarily from the effect of expiring statutes of limitations, partially offset by the continued effect of interest on unrecognized tax benefits.

The Company’s United States Federal income tax returns for the years ended September 30, 2012 and thereafter remain subject to examination by the United States Internal Revenue Service. The Company also files tax returns in Canada, India, Kuwait and numerous United States state jurisdictions, which have varying statutes of limitations. Generally, Canadian tax returns for tax years ended September 30, 2008 and thereafter, Indian tax returns for tax years ended March 31, 2010 and thereafter, and United States state tax returns for tax years ended September 30, 2012 and thereafter, depending upon the jurisdiction, remain subject to examination. However, the statutes of limitations on certain of the Company’s United States state tax returns remain open for tax years prior to fiscal 2012.