NOTE F – INCOME TAXES

Income tax returns are filed in the U.S. federal jurisdiction and in various state and local jurisdictions. The variations between the statutory federal tax rate and the effective tax rate for continuing operations are summarized as follows:


	Fiscal year
	2015	2014	2013

	(percentage of pretax earnings)

Statutory U.S. Federal income tax	34.0	34.0	34.0
Tax credits	(15.7)	(11.6)	(13.2)
Domestic Production Activities Deduction (DPAD) refunds received or expected	—	(10.3)	—
State and municipal income taxes - current and deferred (net of federal tax benefit)	3.3	0.7	5.1
Release of valuation allowances of state deferred tax assets	—	(2.2)	—
Other	1.8	(2.3)	0.2
Effective rate	23.4	8.3	26.1

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:

NOTE F – INCOME TAXES (continued)


	Fiscal Year
	2015		2014

	(in thousands)

Deferred compensation	$	934	$	857
Compensated absences		848		845
Stock-based compensation		100		123
Self insurance		394		384
Pension		8		728
Lease transactions		306		288
Impairment of long-lived assets		907		685
State income taxes		152		222
Net operating loss (NOL) carry forward - state		46		214
Other		1,367		628
		5,062		4,974
Less valuation allowance - state NOL		—		—
Total deferred income tax assets		5,062		4,974

Depreciation		(6,095)		(5,839)
Other		(306)		(309)
Total deferred income tax liabilities		(6,401)		(6,148)

Net deferred income tax (liabilities) assets	$	(1,339)	$	(1,174)


Net current deferred income tax assets	$	1,967	$	1,165
Net long-term deferred income tax liabilities		(3,306)		(2,339)
	$	(1,339)	$	(1,174)

Deferred income taxes and other tax receivables reported as current assets in the consolidated balance sheet include prepaid income taxes of $3 and $908 respectively as of June 2, 2015 and June 3, 2014. Refunds associated with Domestic Production Activities Deductions (DPAD) (see further discussion below) totaling $293 and $714 were included in current "Deferred income taxes and other tax receivables" as of June 2, 2015 and June 3, 2014. In addition, deferred income taxes and other tax receivables reported in current assets at June 3, 2014 has been revised to included tax benefits associated with the employee embezzlement (see NOTE M – IMMATERIAL REVISION).

Provision for Income Taxes

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

NOTE F – INCOME TAXES (continued)


	Fiscal Year
	2015		2014		2013

Income Tax Expense (Benefit)	(in thousands)

Current
Federal	$	4,652	$	2,738	$	3,259
Less tax credits		(2,035)		(1,802)		(1,895)
State and local		299		143		217
Deferred		131		(226)		807
Total income taxes	$	3,047	$	853	$	2,388

Valuation Allowances

Management periodically assesses the realization of its net deferred tax assets by evaluating all available evidence, both positive and negative, associated with the Company and determining whether, based on the weight of that associated evidence, a valuation allowance for the deferred tax assets is needed. Based on this analysis, management has determined that as of June 2, 2015 it is more likely than not that the Company will realize the deferred income tax benefits of its federal and state deferred tax assets.

Tax returns that the Company files in Indiana and Kentucky have had net operating losses (NOLs) from prior periods, on which valuation allowances had been placed in earlier years. During Fiscal Year 2015, the Company restructured its operations to allow for greater taxable income to be generated in these jurisdictions. In the prior year (Fiscal Year 2014), management released its valuation allowances on its deferred tax assets in Indiana and Kentucky, the result of the impending plan to restructure (Restructuring Plan) the Company’s consolidated subsidiaries from corporations into single member limited liability corporations. 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 included $135 that had been placed on these deferred state income tax assets and included in the tax provision for Fiscal Year 2013. No additional facts have developed that would require a valuation allowance to be placed on these state deferred income tax assets in Fiscal Year 2015. The Company generated sufficient state taxable income during Fiscal Year 2015 to utilize the entire Kentucky NOL and a portion of the Indiana NOL. The Company expects to generate sufficient state taxable income on a go-forward basis to realize its state deferred tax assets, including the remaining Indiana NOL carryforward before its expiration.

While the Restructuring Plan allows state deferred tax assets to be realized, its implementation on June 4, 2014 (the first day of Fiscal Year 2015) required existing state tax assets to be revalued because the tax status change gave rise to lower apportionment factor percentages, which, in turn, lowered the expected tax benefits. The result was a $138 charge to income tax expense in the first quarter of Fiscal Year 2015.

NOTE F – INCOME TAXES (continued)

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), which are available under the Internal Revenue Code (IRC). Prior to undertaking this project, management had not elected to claim DPAD benefits. During Fiscal Year 2014, the Company filed amended income tax returns for its Fiscal Years 2010, 2011, 2012 and 2013 to take advantage of DPAD. Total DPAD tax benefits approximating $1,061 were included in the tax provision for Fiscal Year 2014, $347 of which had been received prior to June 3, 2014, with $418 received during Fiscal Year 2015, and the final $296 was received in June 2015 (Fiscal 2016).

DPAD tax benefits associated with domestic production activities that occurred during Fiscal Years 2014 and 2015 were incorporated as part of the normal tax provision for those years.

Other Information

The federal Tax Increase Prevention Act of 2014 (the Act) was signed into law on December 19, 2014. The Act reinstated retroactively to January 1, 2014 certain federal tax benefits, generally referred to as “tax extenders”, which had expired on December 31, 2013. The provisions of the Act included reinstatement for one year (to December 31, 2014) of the Work Opportunity Tax Credit (WOTC), which is a permanent difference between the recognition of expense between financial reporting and tax statutes, along with bonus depreciation and 15 year straight-line cost recovery for qualified leasehold improvements, both of which are timing differences. The effect of these reinstatements has been recognized in the tax provision for Fiscal Year 2015. Tax benefits associated with WOTC are recognized as certifications are received from state agencies, however, no benefits have been recorded for individuals hired after December 31, 2014. In addition to the WOTC, the Company receives substantial federal income tax benefits through the use of the credit allowed for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (sometimes referred to as the FICA tip credit or the 45(b) credit).

Previously unrecognized tax benefits amounting to approximately $688, which are associated with the December 2014 discovery of a multi-year embezzlement by a former employee (see NOTE M – IMMATERIAL REVISION), are now available to the Company under Section 165 of the IRC. Approximately $606 of the associated tax benefits have been recognized through adjustment to retained earnings as part of the immaterial revision and $82 was recognized during Fiscal Year 2015.

The effect of the Final Repair Regulations (issued by the Internal Revenue Service (IRS)) on the Company's Change in Accounting Method (filed in Fiscal Year 2011) has been determined to be a net unfavorable timing difference of approximately $105 ($36 net tax due). The net adjustment consists of a favorable adjustment of approximately $17 ($6 tax benefit) which is realizable in Fiscal Year 2015, and an unfavorable adjustment of $122 ($42 tax due) which is being paid prospectively over four years. The appropriate Forms 3115 will be filed with the IRS to conform the previous Change in Accounting Method to the Final Repair Regulations.

The Company's total income taxes paid (net of refunds) during Fiscal Years 2015, 2014 and 2013 were $582, $1,454 and $1,521, respectively. (For more information about refunds, refer to the above discussion of Domestic Production Activities Deductions (DPAD.)

NOTE F – INCOME TAXES (continued)

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.

The Company’s federal income tax return for the year ended May 28, 2013 (Fiscal Year 2013, filed in February 2014) was selected for examination by the IRS in the spring of 2014. The examination concluded in May 2015 with no changes proposed by the examiner, other than the allowance of DPAD benefits discussed earlier.