INCOME TAXES

Pretax income (loss) was generated from the following sources for each of the three fiscal years in the period ended September 28, 2014 (amounts in thousands):



	2014			2013			2012
Domestic	$	(62,702	)	$	(38,709	)	$	(88,964	)
Foreign	86,618			94,772			74,239
Total	$	23,916		$	56,063		$	(14,725	)

The provision for income taxes consisted of the following components for each of the three fiscal years in the period ended September 28, 2014 (amounts in thousands):



	2014			2013		2012
Current:
Federal	$	—		$	812	$	(16	)
State	264			806		228
Foreign	3,914			3,115		3,458
Deferred:
Federal	(6,534		)	2,306		5,061
State	(155		)	1,385		2,255
Foreign	3,304			3,965		3,964
	$	793		$	12,389	$	14,950

We recorded a provision for income taxes of $0.8 million on pretax income of $23.9 million in 2014 compared to a provision for income taxes of $12.4 million on pre-tax income of $56.1 million in 2013, and a provision for income taxes of $15.0 million on pretax loss of $14.7 million in 2012. These provisions for income taxes were primarily due to the tax provision on profitable entities in foreign jurisdictions, U.S. tax provision relating to deferred tax liabilities that will not provide future sources of income to realize deferred tax assets, and release of valuation allowance due to additional deferred tax liabilities acquired through purchase accounting. We had cumulative operating losses for the three years ended in 2014 for our U.S. operations and several foreign operations and accordingly, have provided a full valuation allowance on certain of our U.S. and foreign net deferred tax assets as we have determined that it is more likely than not that the tax benefits will not be realized in the future.

During 2014 and 2013 we increased the valuation allowance by $8.9 million and $13.9 million, respectively, which primarily related to deductions for intangible (non-goodwill) amortization, partially offset by the release of valuation allowance due to the deferred tax liabilities acquired. During 2012 we increased the valuation allowance by $179.3 million, which primarily related to the acquisition of Microsemi - CMPG during the quarter ended January 1, 2012, and the recording of the deferred tax assets related to the acquisition.

We have federal and state net operating losses ("NOLs") of approximately $308.7 million and $170.0 million, respectively, that begin expiring in 2021 and 2014, respectively. Of the total NOL carryforward, $34.6 million related to the excess tax benefit from employee stock compensation and stockholders' equity will increase by $34.6 million if and when such excess tax benefits are ultimately realized. We have foreign NOLs of approximately $259.2 million that begin expiring in 2032. We have federal and state research and experimentation credits of approximately $45.7 million and $66.1 million, respectively. We have foreign research and experimentation credits of approximately $81.5 million that begin expiring in 2017 and incentive deductions of approximately $29.0 million. that carry forward indefinitely. We have federal foreign tax credits of approximately $4.7 million. We have federal and state enterprise zone credits, federal and state investment tax credits, and alternative minimum tax credits totaling $9.0 million that begin expiring in 2015. The utilization of NOLs and credits acquired through an acquisition may be subject to limitations due to change in control.

No provision has been made for future income taxes on undistributed earnings of foreign operations (except for insignificant jurisdictions) since they have been indefinitely reinvested in these operations. Determination of the amount of unrecognized deferred tax liability for temporary differences related to these undistributed earnings is not practicable, as such liability is dependent upon a number of factors, including foreign tax credit position that would exist at the time any remittance would occur. At the end of 2014 and 2013, these undistributed earnings aggregated approximately $430.4 million and $357.4 million, respectively.

The following is a reconciliation of income tax computed at the federal statutory rate to our actual tax expense for each of the three fiscal years in the period ended September 28, 2014 (amounts in thousands):



	2014			2013			2012
Tax computed at federal statutory rate	$	8,372		$	19,622		$	(5,153	)
State taxes, net of federal impact	(1,064		)	(1,468		)	(3,244		)
Foreign income taxed at different rates	(24,667		)	(20,523		)	(18,207		)
Tax credits and incentives	(2,757		)	(5,418		)	(1,096		)
Stock award compensation	1,157			197			295
Unrecognized tax benefits	1,410			(392		)	1,981
U.S. tax on foreign income	4,061			1,374			18,150
Income tax return to provision	(189		)	(875		)	(3,153		)
Non-deductible permanent items	869			167			1,682
Pre-acquisition loss carry forwards	(11,414		)	—			(4,043		)
Expiration of tax attributes	2,931			—			—
Foreign declared dividend	3,642			—			—
Withholding taxes	300			700			—
Other differences, net	493			164			9
Valuation allowance	17,649			18,841			27,729
	$	793		$	12,389		$	14,950

The tax effected deferred tax assets (liabilities) are comprised of the following components (amounts in thousands):



	September 28, 2014			September 29, 2013
Accounts receivable, net	$	1,173		$	945
Inventories	14,501			9,264
Accrued employee benefit expenses	8,806			4,230
Net operating losses	149,571			140,555
Tax credits and incentives	144,219			140,069
Accrued other expenses	11,397			6,287
Deferred equity compensation	16,725			14,845
Property and equipment, net	3,115			3,242
Other assets	11,753			9,797
Total deferred tax assets	361,260			329,234
Intangible assets	(127,213		)	(100,050		)
Foreign declared dividend	(3,642		)	—
Total deferred tax liabilities	(130,855		)	(100,050		)
Less valuation allowance	(218,946		)	(210,073		)
	$	11,459		$	19,111

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (amounts in thousands):



	September 28, 2014			September 29, 2013			September 30, 2012
Beginning gross unrecognized tax benefits	$	69,571		$	58,016		$	32,370
Additions based on tax positions related to the current year	2,389			3,238			12,786
Additions based on current year acquisitions	28,861			—			10,615
Additions based on tax positions of prior years	459			12,845			2,605
Reductions based on tax positions of prior years	—			(2,805		)	(169		)
Reductions for lapses and settlements	(3,609		)	(1,723		)	(191		)
Ending gross unrecognized tax benefit	$	97,671		$	69,571		$	58,016

We recognize interest and penalties accrued related to unrecognized tax benefits in tax expense. During the years ended September 28, 2014, September 29, 2013, and September 30, 2012, we recognized approximately $0.7 million, $0.0 million, and $2.0 million, respectively, in interest and penalties. The cumulative interest and penalties at September 28, 2014 and September 29, 2013 were $6.6 million and $5.9 million, respectively.

Unrecognized tax benefits of $59.8 million (including interest) at September 28, 2014 would impact the effective tax rate if recognized after the valuation allowance has been released. We anticipate a decrease in gross unrecognized tax benefits of approximately $19.7 million within the next twelve months based on federal, state, and foreign expirations in various jurisdictions.

We file U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Fiscal years 2007 to 2013 generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2010 to 2013 tax years generally remain subject to examination by tax authorities. We establish liabilities for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, international tax issues and certain tax credits. We are currently undergoing an Internal Revenue Service examination as well as certain state examinations. There have been no significant proposed adjustments to date. As of September 28, 2014, the IRS has raised questions primarily related to transfer pricing. Management believes that the Company's position is appropriate and that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company would be required to adjust its provision for income tax in the period such resolution occurs. While the Company believes its reported results are accurate, any significant adjustments could have a material adverse effect on the Company's results of operations, cash flows and financial position if not resolved within expectations.