INCOME TAXES

In prior years, the state of New Jersey issued two separate tax assessments related to nexus beginning in fiscal 2000 and the deductibility of certain payments between subsidiaries beginning in fiscal 2002. Village contested both of these assessments through the state’s conference and appeals process and was subsequently denied. The Company then filed two complaints in Tax Court against the New Jersey Division of Taxation contesting these assessments and a trial limited to the nexus dispute was conducted in June 2013. On October 23, 2013, the Tax Court issued their opinion on the matter in favor of the New Jersey Division of Taxation. The Company is currently in the process of appealing the court’s decision. No payments with respect to these matters are required until the dispute is definitively resolved.

The Company recorded a $10,052 charge to income tax expense in the fiscal quarter ended October 26, 2013, which includes a $4,933 (net of federal benefit of $2,656) increase in unrecognized tax benefits and $5,119 (net of federal benefit of $2,078) of related interest and penalties for tax positions taken in prior years. This charge increased our fiscal 2014 beginning of year accrued tax liability to reflect the estimated total tax, interest and penalties due if the Company is unable to overturn the Court’s decision upon appeal. It is reasonably possible that this matter will be resolved within the next twelve months. A favorable resolution could result in a reduction in gross unrecognized tax benefits of up to $29,756.

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



	13 Weeks Ended
	October 25, 2014		October 26, 2013
Balance at beginning of year	$	28,993	$	17,640
Additions based on tax positions related to prior periods	—		7,589
Additions based on tax positions related to the current period	763		651
Balance at end of period	$	29,756	$	25,880

Unrecognized tax benefits at October 25, 2014 and July 26, 2014 include tax positions of $18,472 and $18,100 (net of federal benefit), respectively, that would reduce the Company’s effective income tax rate, if recognized in future periods.

The Company recognizes interest and penalties on income taxes in income tax expense. The Company recognized $694 and $8,387 related to interest and penalties on income taxes in the fiscal quarters ended October 25, 2014 and October 26, 2013, respectively. The amount of accrued interest and penalties included within income taxes payable was $16,801 and $16,107 at October 25, 2014 and July 26, 2014, respectively.