Note 3: Taxes on Income

In 2011 and 2010, the Company's tax provision had an unusual relationship to pretax income from continuing operations primarily due to the existence of a full deferred tax valuation allowance and a deferred tax liability that could not be used to offset deferred tax assets (termed a "naked credit"). A reconciliation of income taxes computed at the federal statutory tax rate to actual income tax expense from continuing operations is as follows:


(In thousands)	2011			2010			2009
Income taxes computed at federal statutory tax rate	$	(22,267	)	$	976		$	(25,701	)
Increase (reduction) in income taxes resulting from:
"Naked credit" related to amortization of intangible assets		24,864			30,025			—
State income taxes, net of federal income tax benefit		(2,428	)		626			(3,102	)
Increase (decrease) in deferred tax valuation allowance		11,548			(4,823	)		6,529
Intraperiod tax allocation		—			—			(1,291	)
Change in reserve for uncertain tax positions		(25	)		(1,667	)		(4,771	)
Interest rate swap maturity		(1,975	)		—			—
Other		985			290			(302	)

Income tax expense (benefit)	$	10,702		$	25,427		$	(28,638	)

The Company evaluates the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. Due to impairment charges, the Company had a cumulative pretax loss (when considering the current and two preceding years) and, therefore, could not consider expectations of future income to utilize the deferred tax assets. Other sources, such as income available in a carryback period, future reversal of existing temporary differences, or tax planning strategies were taken into consideration; however, a valuation allowance was deemed necessary as of the end of each year presented. The Company's deferred tax asset valuation allowance was $116.9 million as of December 25, 2011 and $62.3 million as of December 26, 2010.

In the future, the Company will generate additional deferred tax assets and liabilities related to its amortization of acquired intangible assets for tax purposes (e.g., tax amortization was approximately $63.8 million in 2011 and is expected to be approximately $59.6 million in 2012). Because these long-lived intangible assets are not amortized for financial reporting purposes, the tax amortization in future years will give rise to a temporary difference, and a tax liability ($23.2 million expected in 2012 as compared to $24.9 million in 2011), which will only reverse at the time of ultimate sale or further impairment of the underlying intangible assets. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore, the tax liability cannot be used to offset the deferred tax asset related to the net operating loss (NOL) carryforward for tax purposes that will be generated by the same amortization. This "naked credit" gives rise to the need for additional valuation allowance.

In 2011, tax expense related to the additional valuation allowances required by the "naked credit" was $24.9 million, which was partially offset by the tax benefit related to the impairment charge of approximately $12.2 million and a $2 million tax benefit related to the maturity of the interest rate swaps and the attendant tax effect in Other Comprehensive Income. In 2010, tax expense related to the additional valuation allowances required by the "naked credit" was $30 million, which was partially offset by an additional $2.9 million tax refund related to the Company's 2009 NOL carryback claim and a $1.7 million tax benefit related to favorable adjustments to the Company's reserve for uncertain tax positions. The Company anticipates recording an additional deferred tax valuation allowance of approximately $23 million, $20 million, and $19 million in 2012, 2013, and 2014, respectively. The additional valuation allowance will be recorded as a non-cash charge to income tax expense.

Significant components of income taxes from continuing operations are as follows:


(In thousands)	2011			2010			2009
Federal	$	—		$	(2,931	)	$	(29,982	)
State		—			—			(4,833	)

Current		—			(2,931	)		(34,815	)

Federal		8,831			25,287			4,358
State		1,896			4,738			61

Deferred		10,727			30,025			4,419

Valuation allowance		—			—			6,529
Change in reserve for uncertain tax positions		(25	)		(1,667	)		(4,771	)

Income tax expense (benefit)	$	10,702		$	25,427		$	(28,638	)

Temporary differences, which gave rise to significant components of the Company's deferred tax liabilities and assets at December 25, 2011, and December 26, 2010, are as follows:


(In thousands)	2011			2010
Deferred tax liabilities:
Difference between book and tax bases of intangible assets	$	44,085		$	34,019
Tax over book depreciation		60,255			61,614

Total deferred tax liabilities		104,340			95,633


Deferred tax assets:
Employee benefits		(16,847	)		(21,683	)
Net operating losses		(76,580	)		(40,887	)
Other comprehensive income items		(82,125	)		(61,673	)
Other		(2,596	)		(3,269	)

Total deferred tax assets		(178,148	)		(127,512	)


Net deferred tax assets		(73,808	)		(31,879	)
Valuation allowance		116,906			62,275
Deferred tax assets included in other current assets		2,856			4,333

Deferred tax liabilities	$	45,954		$	34,729

The Company's NOL for tax purposes was approximately $96 million in 2011, bringing the cumulative total to approximately $174 million at December 25, 2011. These NOLs will be carried forward against future taxable income over a maximum carryforward period of 20 years, as allowed under federal income tax law, and therefore, will begin to expire as early as 2027, but largely in 2030 and 2031 if unused. Due to the Company's cumulative book loss position discussed above, the Company is unable to assume future taxable income and has recorded a full valuation allowance against the deferred tax asset related to the NOL.

The Company received net refunds of income taxes of $.4 million and $29.2 million in 2011 and 2010 respectively, and paid income taxes of $.1 million, net of refunds, in 2009.

As of December 25, 2011 and December 26, 2010, the Company had $.1 million and $1.1 million of refundable income taxes, respectively, due to pending state income tax refunds.

A reconciliation of the beginning and ending balances of the gross liability for uncertain tax positions is as follows:


(In thousands)	2011			2010			2009
Uncertain tax position liability at the beginning of the year	$	1,428		$	8,146		$	14,971
Additions for tax positions for prior years		67			381			665
Reductions for tax positions for prior years		(73	)		(1,858	)		(1,658	)
Decreases due to settlements		—			(5,241	)		(5,832	)

Uncertain tax position liability at the end of the year	$	1,422		$	1,428		$	8,146

The entire balance of the liability for uncertain tax positions would impact the effective rate (net of related asset for uncertain tax positions) if underlying tax positions were sustained or favorably settled. The Company recognizes interest and penalties accrued related to uncertain tax positions in the provision for income taxes. As of December 25, 2011, the liability for uncertain tax positions included approximately $.5 million of estimated interest and penalties.

For federal tax purposes, the Company's tax returns have been audited or closed by statute through 2007 and remain subject to audit for years 2008 and beyond. The Company has various state income tax examinations ongoing and at varying stages of completion, but generally its state income tax returns have been audited or closed to audit through 2007.

Health Care Reform legislation passed and signed into law during the first quarter of 2010 repealed employer tax deductions for the cost of providing post-retirement prescription drug coverage to the extent that it is reimbursed by the Medicare Part D ("Part D") drug subsidy. As a result of this law change, the Company wrote-off approximately $1.7 million in deferred tax assets related to the future deductibility of the Part D subsidy in the first quarter of 2010. However, due to the Company's full valuation allowance recorded against its deferred tax asset balance, there was a corresponding reduction in the valuation allowance, and, therefore, the net result of these two adjustments had no impact on net income.