Income Taxes

(Loss) income from continuing operations before income taxes and noncontrolling interests is set forth below:



	Year Ended
	2012			2011		2010
Domestic	$	(23,154	)	$	11,967	$	(2,244	)
Foreign, principally Canada	10,029			12,473		15,800
	$	(13,125	)	$	24,440	$	13,556

The benefit from (provision for) income taxes from continuing operations is set forth below:



	Year Ended
	2012			2011			2010
Current:
U.S. Federal	$	104		$	—		$	—
State	(669		)	(675		)	(5,774		)
Foreign, principally Canada	(8,667		)	(5,540		)	(7,076		)
Current tax provision	(9,232		)	(6,215		)	(12,850		)
Deferred:
U.S. Federal	6,458			1,367			10,982
State	18,026			(2,788		)	4,356
Foreign, principally Canada	5,831			1,108			2,067
Deferred tax benefit (provision)	30,315			(313		)	17,405
Income tax benefit (provision)	$	21,083		$	(6,528	)	$	4,555

Deferred tax assets (liabilities) are set forth below:



	Year End
	2012			2011
Deferred tax assets:
Operating and capital loss carryforwards	$	108,297		$	98,173
Tax credit carryforwards	91,319			83,708
Accrued compensation and related benefits	35,397			38,198
Unfavorable leases	16,581			18,731
Accrued expenses and reserves	32,090			35,338
Other	18,442			20,679
Valuation allowances	(21,052		)	(17,397		)
Total deferred tax assets	281,074			277,430
Deferred tax liabilities:
Intangible assets	(480,790		)	(502,570		)
Owned and leased fixed assets net of related obligations	(121,706		)	(125,788		)
Other	(25,306		)	(26,209		)
Total deferred tax liabilities	(627,802		)	(654,567		)
	$	(346,728	)	$	(377,137	)

Changes in the Company’s deferred tax asset and liability balances were primarily the result of the tax impact of domestic losses, an increase to credit carryforwards, corrections related to prior years and the acquisitions described in Note 3.

The Wendy’s Company’s net operating loss and credit carryforwards have limited carryforward periods and will expire if unused. U.S. Federal net operating loss carryforwards of approximately $306,455 at December 30, 2012, which included the $119,638 of share-based compensation deductions not yet recognized as described below, expire beginning in 2025. State net operating loss carryforwards are subject to various limitations including carryforward periods and begin expiring in 2013. As of December 30, 2012, the Company had a deferred tax asset, net of U.S. Federal taxes, of $44,716 related to state net operating losses. Tax credits of $91,319 at December 30, 2012, principally consisting of foreign tax credits and jobs credits, expire beginning in 2015.

In 2012 and prior years, we deducted $119,638 in excess of cumulative compensation costs relating to the exercise of stock options and vesting of restricted stock. The Company has not recognized the $43,294 tax benefit relating to these deductions because it has no income taxes currently payable against which the benefits can be realized as a result of its net operating loss and credit carryforwards. When such benefits are realized against future income taxes payable, the Company will recognize them in future periods as a reduction of current income taxes payable with an equal offsetting increase in “Additional paid-in capital.”

The Company’s valuation allowances of $21,052, $17,397 and $88,363 as of December 30, 2012, January 1, 2012 and January 2, 2011, respectively, relate to capital loss and state net operating loss carryforwards. Valuation allowances increased $3,655 in 2012 primarily as a result of changes in state net operating losses. Valuation allowances decreased $70,966 in 2011 primarily as a result of a $65,105 reduction related to capital losses utilized to offset 2011 capital gains, primarily as a result of the reorganization of our business entity structure outside of the U.S. and a $4,565 reduction related to expiring capital losses. Valuation allowances increased in 2010 by $1,132 principally related to changes in state net operating losses.

The unremitted earnings of foreign subsidiaries, primarily Canadian, are not essentially permanent in duration. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. As of December 30, 2012, the Company has provided U.S. deferred income tax of $1,934 on these unremitted earnings.

The reconciliation of income tax computed at the U.S. Federal statutory rate to reported income tax is set forth below:



	Year Ended
	2012			2011			2010
Income tax benefit (provision) at the U.S. Federal statutory rate	$	4,594		$	(8,554	)	$	(4,745	)
State income tax benefit (provision), net of U.S. Federal income tax effect	7,709			(2,251		)	(1,122		)
Corrections related to prior years’ tax matters (a)	7,620			—			—
Foreign and U.S. tax effects of foreign operations (b)	347			1,147			7,693
Dividends received deduction (c)	1,133			—			—
Jobs tax credits, net	970			1,914			2,044
Non-deductible expenses	(1,263		)	(622		)	(439		)
Adjustments related to prior year tax matters	(359		)	1,881			983
Other, net (d)	332			(43		)	141
	$	21,083		$	(6,528	)	$	4,555

_____________________


(a)	Corrections in 2012 related to tax matters in prior years for the effects of tax depreciation in states that do not follow federal law of $3,300, the effects of a one-time federal employment tax credit in 2011 of $2,220 and a correction to certain deferred tax assets and liabilities of $2,100.


(b)	Includes previously unrecognized benefit in 2010 of foreign tax credits, net of foreign income and withholding taxes on the repatriation of foreign earnings.


(c)	During 2012, we received a dividend of $4,625 from our investment in Arby’s (see Note 8 for further information).


(d)	Includes U.S. Federal uncertain tax positions in 2012.

The Company participates in the Internal Revenue Service (the “IRS”) Compliance Assurance Process (“CAP”). As part of CAP, tax years are examined on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. As such, our January 3, 2010, January 2, 2011 and January 1, 2012 tax returns have been settled. Certain of the Company’s state income tax returns from its 2001 fiscal year and forward remain subject to examination. We believe that adequate provisions have been made for any liabilities, including interest and penalties that may result from the completion of these examinations.

Uncertain Tax Positions

As of December 30, 2012, the Company had unrecognized tax benefits of $28,848, which, if resolved favorably would reduce income tax expense by $20,444. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:



	Year End
	2012			2011			2010
Beginning balance	$	30,614		$	36,434		$	39,118
Additions:
Tax positions related to the current year	—			—			19
Tax positions of prior years	3,410			948			4,921
Reductions:
Tax positions of prior years	(2,964		)	(3,410		)	(4,419		)
Settlements	(1,327		)	(1,922		)	(416		)
Lapse of statute of limitations	(885		)	(1,436		)	(2,789		)
Ending balance	$	28,848		$	30,614		$	36,434

During 2013, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $5,777, primarily as a result of the completion of certain state tax audits.

During 2012, 2011 and 2010, the Company recognized $(584), $501 and $1,004 of interest (credit) expense and $(204), $337 and $425 of penalty (credit) expense, respectively, related to uncertain tax positions. The Company has approximately $3,972 and $4,923 accrued for interest and $1,708 and $1,912 accrued for penalties as of December 30, 2012 and January 1, 2012, respectively.