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These shares are subject to a put right by the holders, some of which became exercisable in the first quarter of 2010 and others of which
become exercisable annually thereafter, and a call right by HSNi, which was not exercisable until the first quarter of 2012 and annually
thereafter. The value of these shares upon exercise of the put or call is equal to their fair value, determined by negotiation or arbitration, reduced
by the accreted value of the preferred interest that was taken by IAC upon the purchase of Cornerstone Brands. The initial value of the preferred
interest was equal to the acquisition price of Cornerstone Brands. The preferred interest accretes value at a 15%
annual rate. Upon exercise of the
put or call the consideration is payable in HSNi shares or cash or a combination thereof at HSNi's option. As of December 31, 2012, these
awards were significantly out of the money and are not expected to result in any cost should HSNi exercise its call right.
NOTE 12—INCOME TAXES
The components of the provision for income taxes are as follows (in thousands):
Current income taxes payable has been reduced by $22.7 million , $14.1 million , and $7.2 million
for the years ended December 31, 2012,
2011 and 2010, respectively, for tax deductions attributable to stock-based compensation. The related income tax benefits of this stock-based
compensation were recorded as amounts charged or credited to the income tax provision and additional paid-in capital.
The tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2012 and 2011 are presented below (in thousands). The valuation allowance is related to items for which it is more
likely than not that the tax benefit will not be realized.
At December 31, 2012, HSNi had $4.7 million of net operating loss carryforwards which begin expiring in 2014 . As of December 31,
2012 and 2011, HSNi had a valuation allowance of approximately $5.3 million and $14.3 million , respectively.
Year Ended December 31,
2012 2011 2010
Current income tax provision:
Federal
$
(76,992
)
$
(68,593
)
$
(61,264
)
State
(8,904
)
(9,217
)
(7,650
)
Current income tax provision
(85,896
)
(77,810
)
(68,914
)
Deferred income tax benefit (provision):
Federal
1,814
(1,900
)
5,082
State
709
(396
)
(2,345
)
Deferred income tax (provision) benefit
2,523
(2,296
)
2,737
Income tax provision
$
(83,373
)
$
(80,106
)
$
(66,177
)
December 31,
2012 2011
Deferred tax assets:
Provision for accrued expenses
$
38,548
$
39,346
Inventories
11,927
11,964
Foreign investment
—
6,467
Stock-based compensation
16,036
13,618
Net operating losses
1,369
3,857
Other
2,024
2,294
Total deferred tax assets
69,904
77,546
Less valuation allowance
(5,293
)
(14,274
)
Net deferred tax assets
64,611
63,272
Deferred tax liabilities:
Intangible and other assets
(91,783
)
(92,746
)
Prepaid expenses
(11,692
)
(12,022
)
Property and equipment
(12,535
)
(12,333
)
Total deferred tax liabilities
(116,010
)
(117,101
)
Net deferred tax liability
$
(51,399
)
$
(53,829
)