INCOME TAXES

The variations between the statutory federal rate and the effective rate for continuing operations are summarized as follows:



	Fiscal Year
	2013		2012		2011
	(percentage of pretax earnings)
Statutory U.S. Federal income tax	34.0		34.0		34.0
Tax credits	(13.2	)	(15.2	)	(8.4	)
State and municipal income taxes - current and deferred (net of federal tax benefit)	5.1		0.3		2.0
Other	0.6		(1.8	)	0.1
Effective rate	26.5		17.3		27.7

Deferred tax assets and liabilities result from timing differences in the recognition of revenue and expense between financial reporting and tax statutes. The components of the deferred tax (liability) for continuing operations are shown in the table that follows:



	Fiscal Year
	2013			2012
	(in thousands)
Deferred compensation	$	771		$	880
Compensated absences	830			850
Stock-based compensation	155			445
Self insurance	460			742
Pension	2,978			5,098
Lease transactions	267			244
Impairment of long-lived assets	1,145			1,131
Other	731			1,657
Net operating loss carryforward - state	222			199
	7,559			11,246
Less valuation allowance	(222		)	(87		)
Total deferred income tax assets	7,337			11,159

Depreciation	(6,084		)	(6,527		)
Other	(309		)	(298		)
Total deferred income tax liabilities	(6,393		)	(6,825		)

Net deferred income tax assets	$	944		$	4,334

Net current deferred income tax assets	$	1,198		$	1,185
Net long term deferred income tax (liabilities) assets	(254		)	3,149
	$	944		$	4,334

Prepaid and deferred income taxes reported as current assets in the consolidated balance sheet include prepaid income taxes of $1,219,000 and $1,116,000 respectively as of May 28, 2013 and May 29, 2012.

Income tax returns are filed in the U.S. federal jurisdiction and in various state and local jurisdictions. Tax returns that the Company files in Indiana and Kentucky have net operating losses (NOL's) from prior periods that total approximately $8,058,000 ($1,635,000 in Indiana and $6,423,000 in Kentucky) as of May 28, 2013. These NOL's are set to expire in periods ranging from 2021 through 2033. The statutory tax rate has been applied to these NOL's resulting in a total tax benefit of approximately $222,000 ($87,000 in Indiana and $135,000 in Kentucky). A valuation Allowance (VA) has been applied at 100 percent to these NOL's since management believes that it is more likely than not that the total tax benefit will not be realized. The VA at May 28, 2013 is $135,000 higher than May 29, 2012, when the Indiana NOL amounted to $1,028,000 to which the statutory tax rate was applied, resulting in a tax benefit of approximately $87,000 on which a 100 percent VA was applied. The Kentucky NOL was $4,508,000 as of May 29, 2012, which had yielded a deferred tax asset of $112,000 as applied using the statutory rate, to which a VA was not applied. NOL's in Kentucky were first generated for the tax return for the year ended May 29, 2012 when the Company began reporting taxable income using the mandatory nexus consolidated filing method.

Management periodically assesses the realization of net deferred tax assets based on historical, current and future (expected) operating results. A VA is recorded if management believes the Company's net deferred tax assets will not be realized. In addition, management monitors the realization of VA's, which may be released in the future based on any positive evidence that may become available.

Including income tax expense applied to results of discontinued operations (see NOTE B - DISCONTINUED OPERATIONS), the Company's total income tax expense amounted to $2,671,000 in Fiscal Year 2013. An income tax benefit of $1,494,000 was recorded in Fiscal Year 2012, which was the result of applying available tax credits (principally federal credits allowed for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips and the Work Opportunity Tax Credit that were realized on the tax return for Fiscal Year 2012) against a very low level of pretax earnings for the year. Total income tax expense in Fiscal Year 2011 was $3,717,000.

Including taxes paid on results of discontinued operations (see NOTE B - DISCONTINUED OPERATIONS), the Company's total income taxes paid (net of refunds) during Fiscal Years 2013, 2012 and 2011 were $1,521,000, $632,000 and $1,239,000, respectively. Income taxes paid in fiscal year 2011 reflect the savings derived from two automatic Change in Accounting Method applications filed with the Internal Revenue Service (IRS). The Changes in Accounting Methods yielded a combined tax deduction in fiscal year 2011 of approximately $10,165,000. The Change in Accounting Method for depreciation and amortization was filed to segregate certain restaurant building costs to their proper category for depreciation purposes. The Change in Accounting Method for incidental repairs and maintenance was filed to allow the immediate deduction of certain repairs and maintenance costs, replacing the previous accounting that capitalized these costs with recovery periods of 31.5 or 39 or 15 years. In December 2011, the IRS issued new temporary and proposed regulations on tangible property that departs significantly from the prior proposed regulations on which the Company's Change in Accounting Method was based. In November 2012, the IRS alerted taxpayers that final regulations regarding repairs and maintenance would be released in 2013, which would be effective for tax years beginning on or after January 1, 2014 (Fiscal Year 2015 for the Company). Management is awaiting the issuance of the final regulations before it can determine the effect upon the Company's 2011 Change in Accounting Method.

The Company believes it has no material uncertain tax positions taken in any tax returns that have been filed or that are expected to be taken on a future tax return. The impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more likely than not to not be sustained upon audit by the relevant taxing authority. An uncertain income tax position will be recognized in the financial statements if it is more likely of not being sustained.

An examination by the IRS of the Company’s tax return for the year ended June 2, 2009 (Fiscal Year 2009) was completed in November 2010. The examination resulted in no changes. The IRS is currently examining the Company's tax return for Fiscal Year 2011, which was filed in February 2012.