Income Taxes

Income tax benefit for fiscal years

2017,

2016,

and

2015

was allocated as follows (in thousands):

	2017			2016			2015
Current:
Federal	$	(1,912	)	$	(1,138	)	$	1,714
State		154			289			(48	)
Foreign		42			118			118
		(1,716	)		(731	)		1,784
Deferred:
Federal		–			(1,449	)		(3,254	)
State		–			–			(441	)
		–			(1,449	)		(3,695	)
Total benefit for income taxes	$	(1,716	)	$	(2,180	)	$	(1,911	)

Deferred tax assets and liabilities are comprised of the following (in thousands):

	2017			2016
Deferred tax assets:
General business credits carryforward	$	88,087		$	70,424
Employee benefits		21,227			22,420
Deferred escalating minimum rents		17,500			20,803
Federal net operating loss		19,664			–
State net operating losses		13,318			9,807
Insurance reserves		5,253			5,896
Goodwill		4,448			5,033
Deferred gain on sale-leaseback transactions		4,284			4,728
Closed restaurant lease reserves		6,265			2,520
Other		7,423			7,761
Gross deferred tax assets		187,469			149,392
Deferred tax asset valuation allowances		(135,894	)		(89,933	)
Net deferred tax assets		51,575			59,459

Deferred tax liabilities:
Depreciable property and equipment		(43,665	)		(48,367	)
Other		(7,910	)		(11,092	)
Total deferred tax liabilities		(51,575	)		(59,459	)

Net deferred tax liability	$	–		$	–

The above deferred tax assets and liabilities include the income tax effect of temporary differences between financial reporting and tax reporting.

Temporary differences represent the cumulative taxable or deductible amounts recorded in the consolidated financial statements in different years than recognized in the tax returns. General business credits carryforward and federal and state net operating losses

may

be used to offset future taxable income, and their benefit is reflected in the deferred tax assets. Other deferred tax assets, such as employee benefits, escalating minimum rents, and certain others listed, become deductible in the tax return upon payment or funding in qualified trusts. The depreciable property and equipment temporary difference represents generally tax depreciation in excess of financial statement depreciation.

We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than

not

that we will realize the deferred tax assets in the future.

A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction. As of

June 6, 2017,

we have rolling

three

-year historical operating losses and have concluded that the negative evidence outweighs the positive evidence.

In accordance with the applicable accounting standards, we are unable to use future income projections to support the realization of our deferred tax assets as a consequence of the above conclusion.

Instead, in determining the appropriate amount of the valuation allowance, we considered the timing of future reversal of our taxable temporary differences and available tax strategies that, if implemented, would result in the realization of deferred tax assets.

A rollforward of our valuation allowance is as follows (in thousands):

	2017			2016			2015

Beginning of fiscal year	$	(89,933	)	$	(62,799	)	$	(54,582	)
Changes in estimated realization of deferred tax assets:
Continuing operations		(49,219	)		(28,192	)		(9,138	)
Other reductions		3,258			1,058			921
End of fiscal year	$	(135,894	)	$	(89,933	)	$	(62,799	)

As of

June 6, 2017,

we had state net operating loss carryforwards of approximately $

343.3

million which expire at varying times between fiscal years

2018

and

2037.

Our federal net operating loss will expire, if unused, by fiscal year

2037.

The above accounting has

effect on our ability to use our federal or state operating loss carryforwards or general business carryforward credits, which begin to expire in fiscal year

2031,

in the future to reduce cash tax payments.

A reconciliation from the statutory federal income tax benefit to the reported income tax (benefit)/expense is as follows (in thousands):

	2017			2016			2015

Statutory federal income taxes	$	(37,750	)	$	(18,502	)	$	(1,787	)
State income taxes, net of federal income tax benefit		(4,795	)		(2,926	)		(711	)
FICA tip credit		(6,070	)		(7,071	)		(7,280	)
Work opportunity tax credit		(1,833	)		(1,389	)		(1,899	)
Increase in valuation allowance		49,219			28,192			9,138
Permanent differences		(1,123	)		319			528
Other, net		636			(803	)		100
Total benefit for income taxes	$	(1,716	)	$	(2,180	)	$	(1,911	)

We had a gross liability for unrecognized tax benefits, exclusive of accrued interest and penalties, of

$3.9

million and

$4.5

million, respectively, as of

June 6, 2017

and

May 31, 2016,

of which

$3.4

million and

$3.7

million, respectively, was reclassified against our deferred tax assets.

As of

June 6, 2017

and

May 31, 2016,

the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was

$2.5

million and

$2.3

million, respectively. If these benefits were recognized as of

June 6, 2017

and

May 31, 2016,

this would result in adjustments to other tax accounts, primarily deferred taxes and valuation allowance from net operating loss tax benefits of

$2.2

million and

$2.1

million, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal years

2017

and

2016

follows (in thousands):

	2017			2016
Beginning of fiscal year	$	4,548		$	3,870
Additions for tax positions related to the current year		532			725
Reductions for tax positions related to the current year		(127	)		(113	)
Additions for tax positions of prior years		164			868
Reductions for tax positions of prior years		(228	)		(150	)
Reductions for settlements with taxing authorities		(779	)		–
Reductions due to statute settlements		(220	)		(652	)
End of fiscal year	$	3,890		$	4,548

The liability for unrecognized tax benefits as of

June 6, 2017

includes an insignificant amount

related to tax positions for which it is reasonably possible that the total amounts could change within the next

twelve

months based on the outcome of examinations and negotiations with tax authorities.

As discussed in Note

to the Consolidated Financial Statements, our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our tax returns. At both

June 6, 2017

and

May 31, 2016,

we had

0.4

million of accrued interest and penalties related to unrecognized tax benefits.

During fiscal year

2017,

accrued interest and penalties decreased by an insignificant amount. If we were to prevail on all uncertain tax positions, the reversal of this accrual would also be a benefit to our effective tax rate. At

June 6, 2017

and

May 31, 2016,

total liabilities of

$0.9

million and

$1.3

million, respectively, including the above-mentioned amounts for the payment of accrued interest and penalties, are included in Accrued liabilities

– Rent and other and Other deferred liabilities as reported on the Consolidated Balance Sheets.

June 6, 2017,

we are

longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to

2012,

and with few exceptions, we are

longer subject to state and local examinations by tax authorities prior to fiscal year

2014.