NOTE 14. INCOME TAX

The components of earnings from continuing operations before income taxes (benefit) are as follows:



	Year Ended August 31,
(in thousands)	2014		2013			2012
United States	$	108,882	$	147,204		$	116,400
Foreign	35,929		(14,268		)	48,387
Total	$	144,811	$	132,936		$	164,787

The income taxes (benefit) included in the consolidated statements of operations are as follows:



	Year Ended August 31,
(in thousands)	2014			2013		2012
Current:
United States	$	11,798		$	849	$	1,560
Foreign	2,965			1,970		419
State and local	4,157			1,815		3,411
Current taxes	$	18,920		$	4,634	$	5,390
Deferred:
United States	$	30,427		$	45,908	$	(65,710	)
Foreign	4,457			4,980		7,130
State and local	(2,536		)	3,767		(1,419		)
Deferred taxes (benefit)	$	32,348		$	54,655	$	(59,999	)
Total income taxes (benefit) on income	$	51,268		$	59,289	$	(54,609	)
Income taxes (benefit) on discontinued operations	8,544			1,310		(8,847		)
Income taxes (benefit) on continuing operations	$	42,724		$	57,979	$	(45,762	)

A reconciliation of the federal statutory rate to the Company's effective income tax rate from continuing operations is as follows:



	Year Ended August 31,
(in thousands)	2014			2013			2012
Income tax expense (benefit) at statutory rate of 35%	$	50,684		$	46,528		$	57,675
State and local taxes	88			3,460			4,596
Section 199 manufacturing deduction	(1,199		)	—			—
Foreign rate differential	(5,940		)	(3,295		)	(9,909		)
Change in valuation allowance	22,079			14,264			10,033
Deferred compensation	(4,164		)	(2,890		)	(1,094		)
Nontaxable foreign interest	(16,506		)	(5,445		)	—
Disposition of foreign subsidiaries	—			6,292			(102,104		)
Australian reorganization	—			(7,245		)	—
Research and experimentation tax credits	—			—			(11,500		)
Other	(2,318		)	6,310			6,541
Income tax expense (benefit) on continuing operations	$	42,724		$	57,979		$	(45,762	)
Effective income tax rates from continuing operations	29.5		%	43.6		%	(27.8		)%

The Company's effective income tax rate from discontinued operations for the years ended August 31, 2014, 2013 and 2012 was 38.8%, 35.7% and 74.3%, respectively.

The Company's effective income tax rate from continuing operations was 29.5% for the year ended August 31, 2014. It was lower than the statutory income tax rate of 35% because the Company had income from operations in countries which have lower income tax rates than the United States, notably Poland, which has a statutory income tax rate of 19%. In addition the Company realized a benefit under Section 199 of the Internal Revenue Code related to domestic production activity income and had non-taxable net holding gain on assets segregated to fund the nonqualified benefit restoration plan ("BRP Plan").

For the year ended August 31, 2013, the effective income tax rate from continuing operations was 43.6%; higher than the U.S. statutory income tax rate of 35%. The income tax rate was primarily driven by a $14.3 million increase in the Company's valuation allowances on deferred tax assets in jurisdictions that more likely than not will not be realized. The increase in the valuation allowances was primarily related to unfavorable results reported by the Company's Australian operations during fiscal 2013 that led these operations to a three year cumulative loss position. As a result, the Company determined that is was more likely than not that the deferred tax assets associated with the Australian operations would not be realized.

During the year ended August 31, 2012, the Company recognized an income tax loss in the amount of $291.0 million related to its investments in its Croatian subsidiary. As a result, an income tax benefit of $102.1 million was recorded from these losses in continuing operations for the year ended August 31, 2012. The Company reported and disclosed the investment loss on its U.S. income tax return as ordinary worthless stock and bad debt deductions. This income tax benefit was the primary reason for the variance from the statutory income tax rate of 35%.

The Company made net payments of $11.8 million and received net refunds of $7.6 million for income taxes for the years ended August 31, 2014 and 2013, respectively. The Company made net payments of $17.2 million for income taxes for the year ended August 31, 2012.

The income tax effects of significant temporary differences giving rise to deferred tax assets and liabilities are as follows:



	August 31,
(in thousands)	2014			2013
Deferred tax assets:
Deferred compensation and employee benefits	$	51,956		$	56,504
Net operating losses and credits	68,736			99,200
Reserves and other accrued expenses	45,246			34,375
Allowance for doubtful accounts	3,760			5,020
Intangibles	6,707			8,153
Other	8,766			12,879
Total deferred tax assets	185,171			216,131
Valuation allowance for deferred tax assets	(69,762		)	(48,837		)
Deferred tax assets, net	$	115,409		$	167,294
Deferred tax liabilities:
Fixed assets	$	99,016		$	113,547
Inventory	8,320			10,219
Other	4,066			5,354
Total deferred tax liabilities	$	111,402		$	129,120
Deferred tax assets, net of deferred tax liabilities	$	4,007		$	38,174

Net operating losses giving rise to deferred tax assets consist of $307.0 million state net operating losses that expire during the tax years ending from 2015 to 2034 and foreign net operating losses of $178.8 million that expire during the tax years beginning in 2015. These assets will be reduced as income tax expense is recognized in future periods.

The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. During the year ended August 31, 2014, the Company recorded a valuation allowance in the amount of $20.9 million primarily for the benefit of net operating loss carryforwards in both U.S. state and foreign jurisdictions due to the uncertainty of their realization. During the year ended August 31, 2013, the Company recorded a valuation allowance in the amount of $23.1 million primarily for the benefit of net operating loss carryforwards in certain jurisdictions due to the uncertainty of their realization.

In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of August 31, 2014, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $488.3 million of the excess of the amount for financial reporting over the income tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.

The unrecognized income tax benefits as of August 31, 2014, 2013 and 2012 were $27.3 million, $28.6 million and $27.4 million respectively, of which $12.0 million, $13.3 million and $10.1 million, if recognized, would have impacted the Company's effective income tax rate at the end of fiscal years 2014, 2013 and 2012, respectively.

A reconciliation of the beginning and ending amounts of unrecognized income tax benefits is as follows:



	August 31,
(in thousands)	2014			2013			2012
Balance at September 1	$	28,551		$	27,384		$	10,762
Change in tax positions of current year	—			1,255			—
Change for tax positions of prior years	(1,202		)	—			18,006
Reductions due to settlements with taxing authorities	—			(88		)	(600		)
Reductions due to statute of limitations lapse	—			—			(784		)
Balance at August 31	$	27,349		$	28,551		$	27,384

The Company's policy classifies interest recognized on an underpayment of income taxes and any statutory penalties recognized on a tax position as income tax expense, and the balances at the end of a reporting period are recorded as part of the current or noncurrent liability for uncertain income tax positions. At August 31, 2014 and 2013, the Company had accrued interest and penalties related to uncertain tax positions of $3.4 million and $2.8 million, respectively.

During the twelve months ending August 31, 2015, it is reasonably possible that the statute of limitations pertaining to positions of the Company in prior year income tax returns may lapse or that income tax audits in various taxing jurisdictions could be finalized. As a result, the total amount of unrecognized income tax benefits may decrease by approximately $16.9 million, which would reduce the provision for income taxes on earnings by $2.7 million.

The Company files income tax returns in the United States and multiple foreign jurisdictions with varying statutes of limitations. In the normal course of business, the Company and its subsidiaries are subject to examination by various taxing authorities. The following is a summary of tax years subject to examination:

U.S. Federal — 2009 and forward

U.S. States — 2009 and forward

Foreign — 2007 and forward

The Company is under examination by the Internal Revenue Service and state revenue authorities from 2009 to 2011. Management believes the Company's recorded income tax liabilities as of August 31, 2014 sufficiently reflect the anticipated outcome of these examinations.