NOTE F – INCOME TAXES

The income tax expense (benefit) related to earnings (loss) from operations consisted of the following:


(Dollars in thousands)	2011			2010			2009
Current:
Federal	$	(59,504	)	$	(28,278	)	$	(41,997	)
State		(3,625	)		1,408			2,228
Foreign		15,023			849			1,455
Deferred:
Federal		—			—			233,398
State		33			(64	)		46,845
Foreign		(14,999	)		15,615			45,643

Total income tax expense (benefit)	$	(63,072	)	$	(10,470	)	$	287,572

The components of earnings (loss) before income taxes consisted of the following:


(Dollars in thousands)	2011			2010			2009
North America	$	(4,131	)	$	(114,231	)	$	(271,520	)
International		36,750			57,556			(39,632	)

Total	$	32,619		$	(56,675	)	$	(311,152	)

The components of deferred income tax assets and liabilities consisted of the following:


(Dollars in thousands)	December 31, 2011			December 25, 2010
U.S. and foreign net operating loss carryforwards	$	379,610		$	344,878
Deferred rent credit		101,679			107,673
Vacation pay and other accrued compensation		78,797			71,496
Accruals for facility closings		32,800			41,896
Inventory		13,562			17,165
Self-insurance accruals		20,640			20,622
Deferred revenue		5,893			10,764
State credit carryforwards, net of Federal benefit		13,643			12,739
Allowance for bad debts		2,911			9,005
Accrued rebates		7,978			14,591
Other items, net		46,713			65,768

Gross deferred tax assets		704,226			716,597
Valuation allowance		(621,719	)		(648,869	)

Deferred tax assets		82,507			67,728

Internal software		4,216			1,003
Basis difference in fixed assets		32,055			53,391
Deferred Subpart F income		10,791			—

Deferred tax liabilities		47,062			54,394

Net deferred tax assets	$	35,445		$	13,334

As of December 31, 2011, we had approximately $280 million of U.S. Federal, $822 million of foreign, and $1.2 billion of state net operating loss carryforwards. The U.S. Federal carryforward will expire between 2030 and 2031. Of the foreign carryforwards, $623 million can be carried forward indefinitely, $17 million will expire in 2012, and the balance will expire between 2013 and 2031. Of the state carryforwards, $29 million will expire in 2012, and the balance will expire between 2013 and 2031.

Additionally, as a result of the settlement of an audit with a foreign taxing authority, the company has conceded net operating loss carryfowards of $56 million and the previously disclosed $1.73 billion of foreign capital loss carryforwards ($454 million tax-effected) that resulted from a 2010 internal restructuring transaction. Both of these deferred tax attributes were fully offset by valuation allowance prior to the settlement. Under the tax laws of the jurisdiction, the capital loss carryforward was limited to only offset a future capital gain resulting from an intercompany transaction between the specific subsidiaries of the company involved in the 2010 transaction. Because the company believed that it was remote that the capital loss carryforward would be realized in the foreseeable future, a full valuation allowance had been established against the asset and the company had excluded the attribute from the above tabular rendition of deferred tax assets and liabilities.

U.S. income taxes have not been provided on the undistributed earnings of foreign subsidiaries, which were approximately $793 million as of December 31, 2011. We have reinvested such earnings overseas in foreign operations indefinitely and expect that future earnings will also be reinvested overseas indefinitely.

Valuation allowances have been established to reduce our deferred asset to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain deferred tax assets related to net operating loss carryforwards and other tax attributes. Because of the downturn in our performance during this recessionary period, as well as the significant restructuring activities and charges we have taken in response, during the third quarter of 2009, the company established valuation allowances totaling $321.6 million, with $279.1 million related to domestic deferred tax assets and $42.5 million related to foreign deferred tax assets. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. An accumulation of recent pre-tax losses is considered strong negative evidence in that evaluation. The charge to establish the valuation allowance followed the third quarter 2009 condition of reaching or nearly reaching a 36 month cumulative loss position in certain taxing jurisdictions. While the company believes positive evidence exists with regard to the realizability of these deferred tax assets, it is not considered sufficient to outweigh the objectively verifiable negative evidence, including the cumulative 36 month pre-tax loss history. Valuation allowances in certain foreign jurisdictions were removed during 2010 and 2011 because sufficient positive financial information existed, resulting in tax benefit recognition of $10 million and $9 million, respectively. Deferred tax assets without valuation allowances remain in certain foreign tax jurisdictions where supported by the evidence.


(Dollars in millions)	Beginning Balance		Net Change			Ending Balance

Valuation allowances at:
December 31, 2011	$	648.9	$	(27.2	)	$	621.7
December 25, 2010	$	657.0	$	(8.1	)	$	648.9

Of the $621.7 million valuation allowance as of December 31, 2011, $4.4 million is attributable to net operating loss carryforward assets generated from equity compensation deductions that if realized in future period would benefit additional paid-in capital.

The following is a reconciliation of income taxes at the Federal statutory rate to the provision (benefit) for income taxes:


(Dollars in thousands)	2011			2010			2009
Federal tax computed at the statutory rate	$	11,417		$	(19,836	)	$	(108,903	)
State taxes, net of Federal benefit		1,417			1,434			1,951
Foreign income taxed at rates other than Federal		(22,290	)		(15,926	)		(21,882	)
Increase (reduction) in valuation allowance		(7,927	)		29,777			387,735
Non-deductible foreign interest		11,818			5,094			13,198
Change in uncertain tax positions		(77,085	)		(32,283	)		5,526
Tax expense from intercompany transactions		4,955			1,090			—
Subpart F income		10,101						—
Change in tax rate		1,529			—			—
Disposition of foreign affiliates		—			(8,562	)		—
Gain on intercompany sale		—			20,216			—
Other items, net		2,993			8,526			9,947

Income tax expense (benefit)	$	(63,072	)	$	(10,470	)	$	287,572

The significant tax jurisdictions related to the line item foreign income taxed at rates other than Federal include the UK, the Netherlands and France.

The following table summarizes the activity related to our uncertain tax positions ("UTPs"):


(Dollars in thousands)	2011			2010			2009
Beginning Balance	$	110,540		$	141,125		$	119,626
Additions based on tax positions related to the current year		—			3,436			5,505
Additions for tax positions of prior years		471,081			24,936			19,149
Reductions for tax positions of prior years		(40,083	)		(32,572	)		(2,820	)
Statute expirations		(60,131	)		(17	)		(335	)
Settlements		(474,880	)		(26,368	)		—

Ending Balance	$	6,527		$	110,540		$	141,125

During the third quarter of 2011, following closure of certain tax audits and the expiration of the statute of limitations on previously open tax years, we reversed approximately $66 million of UTPs. An additional UTP accrual of $15 million was reversed during the fourth quarter of 2011 following closure of certain tax audits.

Included in the balance of $6.5 million at December 31, 2011, are $5.1 million of net uncertain tax positions that, if recognized, would affect the effective tax rate. The difference of $1.4 million primarily results from positions which if sustained would be fully offset by a valuation allowance.

We file a U.S. federal income tax return and other income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations for years before 2009. Our U.S. federal filings for 2009 and 2010 are under routine examination, and it is reasonably possible that audits for some of these periods will be closed prior to the end of 2012. Additionally, the U.S. federal tax return for 2011 is under concurrent year review. Significant international tax jurisdictions include the UK, the Netherlands, France and Germany. Generally, we are subject to routine examination for years 2006 and forward in these jurisdictions. It is reasonably possible that certain of these audits will close within the next 12 months, which could result in a decrease of as much as $2.6 million or an increase of as much as $1.0 million to our accrued uncertain tax positions. Additionally, we anticipate that it is reasonably possible that new issues will be raised or resolved by tax authorities that may require changes to the balance of unrecognized tax benefits, however, an estimate of such changes cannot reasonably be made.

As part of the ongoing 2009 and 2010 audits, the U.S. Internal Revenue Service ("IRS") has proposed a deemed royalty assessment from our foreign operations with a tax and penalty amount of approximately $126 million. The company disagrees with this assessment and, based on the technical merits of this issue, believes that no accrual is required at this time. The company is working with its outside tax advisors and the IRS to resolve this dispute in a timely manner. To the extent the IRS prevailed on this issue, the income statement impact may be lowered because of available net operating losses and other deferred tax assets.

We recognize interest related to unrecognized tax benefits in interest expense and penalties in the provision for income taxes. Because of the expiration of statute and settlement reached with certain taxing authorities, we recognized a net interest credit of $30.4 million in 2011 and $6.7 million in 2010. We recognized expense from interest and penalties of approximately $4.4 million in 2009. We had approximately $7.3 million accrued for the payment of interest and penalties as of December 31, 2011.

In connection with the expensing of the fair value of employee stock options, we have elected to calculate our pool of excess tax benefits under the alternative or "short-cut" method. At adoption, this pool of benefits was approximately $55.3 million and was approximately $101.2 million as of December 31, 2011. This pool may increase in future periods if tax benefits realized are in excess of those based on grant date fair values or may decrease if used to absorb future tax deficiencies determined for financial reporting purposes.