INCOME TAXES

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



	Fiscal Year
	2014		2013		2012
	(percentage of pretax earnings)
Statutory U.S. Federal income tax	34.0		34.0		34.0
Tax credits	(11.6	)	(13.2	)	(15.2	)
Domestic Production Activities Deduction (DPAD) refunds received or expected	(10.3	)	—		—
State and municipal income taxes - current and deferred (net of federal tax benefit)	0.7		5.1		0.3
Release of valuation allowances of state deferred tax assets	(2.2	)	—		—
Other	(2.5	)	0.6		(1.8	)
Effective rate	8.1		26.5		17.3

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 asset (liability) for continuing operations are shown in the table that follows:



	Fiscal Year
	2014			2013
	(in thousands)
Deferred compensation	$	857		$	771
Compensated absences	845			830
Stock-based compensation	123			155
Self insurance	384			460
Pension	728			2,978
Lease transactions	288			267
Impairment of long-lived assets	685			1,145
State income taxes	222			338
Net operating loss (NOL) carryforward - state	214			222
Other	628			393
	4,974			7,559
Less valuation allowance - state NOL	—			(222		)
Total deferred income tax assets	4,974			7,337

Depreciation	(5,839		)	(6,084		)
Other	(309		)	(309		)
Total deferred income tax liabilities	(6,148		)	(6,393		)

Net deferred income tax (liabilities) assets	$	(1,174	)	$	944

Net current deferred income tax assets	$	1,165		$	1,198
Net long term deferred income tax liabilities	(2,339		)	(254		)
	$	(1,174	)	$	944

Deferred income taxes and other tax receivables reported as current assets in the consolidated balance sheet include prepaid income taxes of $908 and $1,219 respectively as of June 3, 2014 and May 28, 2013. In addition, expected refunds associated with Domestic Production Activities Deductions (DPAD - see further discussion below) totaling $714 are included in current "Deferred income taxes and other tax receivables" as of June 3, 2014.

Provision for Income Taxes

The provision for income taxes for continuing operations in all periods presented is summarized in the table below:



	Fiscal Year
Income Tax Expense (Benefit)	2014			2013			2012
	(in thousands)
Current
Federal	$	2,717		$	3,384		$	1,580
Less tax credits	(1,802		)	(1,895		)	(1,065		)
State and local	143			217			567
Deferred	(226		)	807			132
Total income taxes	$	832		$	2,513		$	1,214

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 $4,979 ($1,663 in Indiana and $3,316 in Kentucky) as of June 3, 2014. 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 $214 ($83 in Indiana and $131 in Kentucky), which are included in deferred income tax assets in the Consolidated Balance Sheet (see discussion about valuation allowances below).

Valuation Allowances

Management periodically assesses the realization of net deferred tax assets based on historical, current and future (expected) operating results. A valuation allowance is recorded if management believes the Company's net deferred tax assets will not be realized ultimately. In addition, all valuation allowances are monitored closely by management, which may consider releasing such allowances in the future based on any positive evidence that may become available that would indicate that the deferred tax asset may be realized ultimately.

During Fiscal Year 2014, management developed a plan to restructure the Company's consolidated subsidiaries from corporations to single member limited liability companies. By implementing this plan, management believes future taxable income will be generated in amounts sufficient to realize certain state deferred tax assets, including certain Net Operating Loss (NOL) carryforwards (see the above discussion). As a result, the valuation allowances that had been previously placed on these deferred tax assets were released during Fiscal Year 2014, the effect of which was to record an income tax benefit of $222 . The release of $222 includes $135 and $87 respectively, that had been placed on certain deferred state income tax assets and included in the tax provisions for Fiscal Years 2013 and 2012.

Domestic Production Activities Deductions (DPAD)

During Fiscal Year 2014, management undertook a project to identify, quantify and document tax benefits associated with the Domestic Production Activities Deduction (DPAD) that are available under the Internal Revenue Code (IRC). Prior to this project, management had not elected to claim DPAD benefits. In February 2014, the Company filed an amended federal income tax return for its 2010 fiscal year to take advantage of DPAD. A refund totaling $347 is included as an income tax benefit during Fiscal Year 2014. Amended federal income tax returns for Fiscal Years 2011, 2012 and 2013 were filed in April 2014, which resulted in the recording of additional tax benefits for DPAD in Fiscal Year 2014 that totaled $693.

DPAD tax benefits associated with domestic production activities that actually occurred in Fiscal Year 2014 have been incorporated as part of the normal tax provision for the year.

Repair Regulations

An automatic Change in Accounting Method (Form 3115) was filed with the Internal Revenue Service (IRS) in Fiscal Year 2011, to allow for immediate deduction of certain repairs and maintenance costs, replacing the previous treatment that had capitalized these costs. Final Repair Regulations were issued by the IRS in September 2013 to replace temporary and proposed repair regulations that had been issued in December 2011. The temporary and proposed repair regulations had departed in some ways from the earlier regulations on which the Company's Change in Accounting Method had been based. The Final Repair Regulations are less of a departure from the earlier regulations than were the temporary and proposed regulations that had been issued in December 2011. The Final Repair Regulations, which specify when costs incurred to acquire, produce or improve tangible property must be capitalized or may be deducted as incurred, must be applied to taxable years beginning on or after January 1, 2014 (the Company's fiscal year 2015). The effect of the Final Repair Regulations on the Company's Change in Accounting Method (filed in Fiscal Year 2011) is estimated to be an unfavorable, immaterial timing difference of under $50, which will be paid prospectively over a four year period. Once the exact amount is determined, the appropriate Forms 3115 will be filed with the IRS to conform the previous Change in Accounting Method to the Final Repair Regulations.

Other Information

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 in Fiscal Year 2013. Income tax expense was a net tax benefit of $1,494 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.

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 2014, 2013 and 2012 were $1,454, $1,521 and $632, respectively.

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 May 31, 2011 (Fiscal Year 2011) was completed in November 2013. The examination resulted in no changes.