Income Taxes

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



	Year Ended
	2013		2012			2011
Domestic	$	49,635	$	(23,154	)	$	11,967
Foreign	9,417		10,029			12,473
	$	59,052	$	(13,125	)	$	24,440

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



	Year Ended
	2013			2012			2011
Current:
U.S. Federal	$	(1,603	)	$	104		$	—
State	7,879			(669		)	(675		)
Foreign	(7,446		)	(8,667		)	(5,540		)
Current tax provision	(1,170		)	(9,232		)	(6,215		)
Deferred:
U.S. Federal	(21,103		)	6,458			1,367
State	6,173			18,026			(2,788		)
Foreign	1,946			5,831			1,108
Deferred tax (provision) benefit	(12,984		)	30,315			(313		)
Income tax (provision) benefit	$	(14,154	)	$	21,083		$	(6,528	)

Deferred tax assets (liabilities) are set forth below:



	Year End
	2013			2012
Deferred tax assets:
Tax credit carryforwards	$	102,783		$	91,319
Accrued compensation and related benefits	40,289			35,397
Accrued expenses and reserves	31,555			32,090
Unfavorable leases	13,913			16,581
Net operating loss carryforwards	13,127			108,297
Deferred rent	13,121			11,215
Other	8,682			7,227
Valuation allowances	(10,548		)	(21,052		)
Total deferred tax assets	212,922			281,074
Deferred tax liabilities:
Intangible assets	(473,011		)	(480,790		)
Owned and leased fixed assets net of related obligations	(83,352		)	(121,706		)
Other	(18,996		)	(25,306		)
Total deferred tax liabilities	(575,359		)	(627,802		)
	$	(362,437	)	$	(346,728	)

Changes in the Company’s deferred tax asset and liability balances were primarily the result of the utilization of net operating loss carryforwards and the impact of the system optimization initiative, as described in Note 2, primarily on properties as offset by an increase in tax credit carryforwards and a reduction in valuation allowances on certain state net operating loss carryforwards.

The amounts and expiration dates of net operating loss and tax credit carryforwards are as follows:



	Amount		Expiration
Tax credit carryforwards:
U.S. federal credits (primarily foreign tax credits and jobs credits)	$	101,208	2015-2033
Foreign tax credits of non-U.S. subsidiaries	1,575		2021-2022
Total	$	102,783

Net operating loss carryforwards:
U.S federal net operating loss carryforwards	$	77,153	2031-2032
State net operating loss carryforwards	986,684		2014-2032
Total	$	1,063,837

As of December 29, 2013, the Company had a deferred tax asset of $61,799 related to the federal and state net operating loss carryforwards before reduction for unrecognized tax benefits related to excess share-based compensation deductions. In 2013 and prior years, we deducted $134,156 in excess of cumulative compensation costs relating to the exercise of stock options and vesting of restricted stock. The Company has not recognized the $48,672 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 $10,548, $21,052 and $17,397 as of December 29, 2013, December 30, 2012 and January 1, 2012, respectively, relate to capital loss and state net operating loss carryforwards. Valuation allowances decreased $10,504 in 2013 primarily as a result of changes to the legal form of certain subsidiaries resulting in changes in expected future state taxable income available to utilize certain 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 by $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.

During the first quarter of 2013, the Company finalized its long-term investment plan with respect to the Company’s non-U.S. earnings. There are no plans to repatriate cash from, and the Company intends to indefinitely reinvest undistributed earnings of, its non-U.S. subsidiaries. As such, the Company has reversed $1,832 of deferred tax liabilities during the year ended December 29, 2013, relating to investments in foreign subsidiaries which the Company now considers permanently invested outside of the U.S.

Consequently, deferred income taxes have not been recorded for temporary differences related to investments in non-U.S. subsidiaries. These temporary differences were approximately $35,200 at December 29, 2013 and consisted primarily of undistributed earnings considered permanently invested in operations outside the U.S. Determination of the incremental income tax liability on these unremitted earnings is dependent on circumstances existing if, and when remittance occurs. However, we estimate that if unremitted earnings were to have been remitted at December 29, 2013, the additional tax liability would have been approximately $4,000.

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



	Year Ended
	2013			2012			2011
Income tax (provision) benefit at the U.S. Federal statutory rate	$	(20,668	)	$	4,594		$	(8,554	)
State income tax (provision) benefit, net of U.S. Federal income tax effect	(1,370		)	11,364			(2,848		)
Valuation allowances (a)	10,504			(3,655		)	597
Jobs tax credits, net	4,384			970			1,914
Foreign and U.S. tax effects of foreign operations (b)	2,886			347			1,147
Dividends received deduction (c)	1,424			1,133			—
Corrections related to prior years’ tax matters (d)	—			7,620			—
Non-deductible goodwill (e)	(9,875		)	—			—
Non-deductible expenses and other, net	(1,439		)	(1,290		)	1,216
	$	(14,154	)	$	21,083		$	(6,528	)

_______________


(a)	Includes changes for deferred tax assets generated or utilized during the current year and changes in our judgment regarding the likelihood of the utilization of deferred tax assets, primarily state net operating loss carryforwards that existed at the beginning of the year.


(b)	2013 includes reversal of deferred taxes on investments in foreign subsidiaries now considered permanently invested outside of the U.S.


(c)	We received dividends of $40,145 and $4,625 during 2013 and 2012, respectively, from our investment in Arby’s. See Note 6 for further information.


(d)	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. See Note 26 for further information.


(e)	Substantially all of the goodwill included in the gain on sales of restaurants, as noted below, and the impairment of international goodwill was non-deductible for tax purposes. See Notes 2 and 8 for further information.

The system optimization initiative described in Note 2 resulted in a tax provision of $5,122 for the effects of changes to the state deferred tax rate and $7,471 related to the goodwill included in the gain on sales of restaurants, substantially all of which was non-deductible for tax purposes. These amounts are included in the 2013 state income tax provision and the non-deductible goodwill amounts presented in the table above.

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 December 30, 2012, January 1, 2012, January 2, 2011 and January 3, 2010 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 29, 2013, the Company had unrecognized tax benefits of $23,897, which, if resolved favorably would reduce income tax expense by $17,664. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:



	Year End
	2013			2012			2011
Beginning balance	$	28,848		$	30,614		$	36,434
Additions:
Tax positions of prior years	3,579			3,410			948
Reductions:
Tax positions of prior years	(4,914		)	(2,964		)	(3,410		)
Settlements	(2,416		)	(1,327		)	(1,922		)
Lapse of statute of limitations	(1,200		)	(885		)	(1,436		)
Ending balance	$	23,897		$	28,848		$	30,614

During 2014, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $5,133, primarily as a result of the completion of certain state tax audits.

During 2013, 2012 and 2011, the Company recognized $(835), $(584) and $501 of interest (credit) expense and $(672), $(204) and $337 of penalty (credit) expense, respectively, related to uncertain tax positions. The Company has approximately $2,634 and $3,972 accrued for interest and $987 and $1,708 accrued for penalties as of December 29, 2013 and December 30, 2012, respectively.