INCOME TAXES

As a result of the IPO and Organizational Transactions, we became the sole managing member of SSE Holdings, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings. We are also subject to withholding taxes in foreign jurisdictions.

A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the income tax expense recognized is as follows:



		Thirteen Weeks Ended					Thirty-Nine Weeks Ended
		September 30, 2015		September 24, 2014			September 30, 2015			September 24, 2014
Income before income taxes		$	7,721	$	631		$	2,854		$	3,911
Less: net loss prior to the Organizational Transactions		—		—			(13,049		)	—
Less: net income attributable to non-controlling interests		4,665		—			10,100			—
	Income attributable to Shake Shack Inc. before income taxes	3,056		631			5,803			3,911

Income taxes at U.S. federal statutory rate		1,070		221			2,031			1,369
State and local income taxes, net of federal benefit		357		48			422			128
Foreign withholding taxes		70		78			214			237
Non-deductible expenses		31		—			109			—
LLC flow-through structure		—		(220		)	—			(1,368		)
Income tax expense		$	1,528	$	127		$	2,776		$	366

Pro Forma Financial Information

For periods prior to the IPO and Organizational Transactions, our income taxes represent those of SSE Holdings, our predecessor, and relate solely to foreign withholding taxes and certain LLC entity-level taxes. As a result of the IPO and Organizational Transactions that occurred on February 4, 2015, we are subject to U.S. federal and certain state and local income taxes with respect to our allocable share of any taxable income or loss generated by SSE Holdings. The pro forma financial information presented on the Condensed Consolidated Statements of Income (Loss) for the thirty-nine weeks ended September 30, 2015 has been computed to reflect a benefit from income taxes at an effective tax rate of 61.6%. The amounts were calculated assuming the Organizational Transactions occurred on January 1, 2015 and were based on the statutory rates in effect during the period.

Tax Receivable Agreement

We expect to obtain an increase in our share of the tax basis of our share of the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the Continuing SSE Equity Owners and other qualifying transactions. This increase in tax basis may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

On February 4, 2015, we entered into a tax receivable agreement with the Continuing SSE Equity Owners (the "Tax Receivable Agreement") that provides for the payment by us to the Continuing SSE Equity Owners of 85% of the amount of tax benefits, if any, that Shake Shack actually realizes or in some cases are deemed to realize as a result of (i) increases in the tax basis of the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests or any prior sales of interests in SSE Holdings and (ii) certain other tax benefits related to our making payments under the Tax Receivable Agreement.

During the thirty-nine weeks ended September 30, 2015, SSE Holdings paid a distribution in the amount of $11,125 to certain of the Original SSE Equity Owners. This distribution triggered an increase in the tax basis of the net assets of SSE Holdings subject to the provisions of the Tax Receivable Agreement. We recognized a deferred tax asset in the amount of $6,006 and a corresponding liability of $5,105, representing 85% of the tax benefits due to the Continuing SSE Equity Owners.

In August 2015, in connection with the secondary offering, 3,155,273 LLC Interests were redeemed by the Selling Stockholders for newly-issued shares of Class A common stock, resulting in an increase in the tax basis of the net assets of SSE Holdings subject to the provisions of the Tax Receivable Agreement. We recognized a deferred tax asset in the amount of $102,719 and a corresponding liability of $87,311. As of September 30, 2015, the total amount due to the Continuing SSE Equity Owners under the Tax Receivable Agreement was $92,416.