Taxes on Income

The components of income (loss) before income tax expense are as follows (in millions):



	2011		2010		2009
Domestic	$	500.3	$	549.6	$	(1,315.6	)
Foreign	381.8		331.6		362.3
	$	882.1	$	881.2	$	(953.3	)

The components of income tax expense are as follows (in millions):



	2011			2010			2009
Current:
Federal	$	223.2		$	180.2		$	137.1
State	48.0			43.9			34.3
Foreign	156.4			97.8			114.9
	427.6			321.9			286.3
Deferred:
Federal	(45.1		)	(20.7		)	(111.4		)
State	(16.0		)	(5.2		)	(25.6		)
Foreign	(2.6		)	(5.4		)	(5.1		)
	(63.7		)	(31.3		)	(142.1		)
	$	363.9		$	290.6		$	144.2

Reconciliation of the provision for income taxes at the U.S. federal statutory income tax rate to the Company’s income taxes is as follows (dollars in millions):



	2011			2010			2009
Statutory rate	35		%	35		%	35		%
Income tax expense (benefit) using federal statutory rate	$	308.7		$	308.4		$	(333.7	)
State taxes on income net of federal benefit	20.8			25.2			5.7
Non deductible goodwill impairment	—			—			549.5
Canadian tax rate differential	(6.1		)	(23.1		)	(16.0		)
Utilization of foreign tax credits	(28.5		)	—			—
Tax settlements	(0.2		)	1.5			(70.0		)
Taxes on foreign earnings not permanently reinvested	98.9			—			—
Other	(29.7		)	(21.4		)	8.7
	$	363.9		$	290.6		$	144.2

Income tax expense increased by $98.9 million in 2011 as a result of repatriation taxes on a $1.1 billion dividend from the Company's Canadian subsidiary to the U.S. parent.

Safeway began to accrue repatriation taxes on the earnings of its Canadian subsidiary in the second quarter of 2011. As a result of this change in policy, income tax for 2011 was reduced by $28.5 million as Safeway will use foreign tax credits to reduce the U.S. tax on those earnings.

Income tax expense was reduced by $74.9 million in 2009 for previously unrecognized tax benefits and related interest income. The recognition of these items is primarily due to the settlement of a claim with the Internal Revenue Service (“IRS”) with respect to the 2002 and 2003 impairment of the Company’s investment in Dominick’s, and the completion of the IRS examination of the Company’s tax returns for 2004 and 2005.

Significant components of the Company’s net deferred tax liability at year end were as follows (in millions):



	2011			2010
Deferred tax assets:
Pension liability	$	295.3		$	244.1
Workers’ compensation and other claims	189.2			187.7
Employee benefits	205.5			175.0
Accrued claims and other liabilities	91.5			74.1
Reserves not currently deductible	36.7			43.7
Foreign tax credit carryforwards	35.3			—
State tax credit carryforwards	20.7			17.8
Operating loss carryforwards	2.0			2.3
Other assets	14.2			21.7
	890.4			766.4
Valuation Allowance	(29.1		)	—
	$	861.3		$	766.4

	2011			2010
Deferred tax liabilities:
Property	$	663.8		$	649.5
Inventory	312.9			306.5
Investments in foreign operations	9.5			60.2
	986.2			1,016.2
Net deferred tax liability	124.9			249.8

At December 31, 2011, the Company had net operating loss carryforwards for federal income tax purposes of approximately $5.7 million which expire at various dates from 2022 to 2026. The Company also had state tax credit carryforwards of $31.9 million which have no expiration date.

At December 31, 2011, the Company had foreign tax credit carryforwards of $35.3 million which expire in 2021. A valuation allowance has been recorded against $29.1 million of these carryforwards. The valuation allowance is recorded when it becomes more likely than not that a portion of the deferred tax asset will not be realized.

At year-end 2010, Safeway considered the unremitted earnings of its foreign operations totaling $2.1 billion to be indefinitely reinvested. No deferred tax liability had been recognized at year-end 2010 for the remittance of such earnings to the U.S., because the Company intended to utilize those earnings in its foreign operations for an indefinite period of time or to repatriate such earnings only when tax efficient to do so. In the first quarter of 2011, Safeway finalized a tax strategy to reduce the overall incremental tax cost of repatriation to an acceptable level, and Safeway's Board of Directors declared a $1.1 billion dividend from the Company's Canadian subsidiary. Safeway accrued taxes on that dividend of $98.9 million.

Safeway anticipates that it will continue to repatriate future Canadian earnings to the United States, and accordingly, following the $1.1 billion dividend, began accruing taxes on current Canadian earnings effective as of the second quarter of 2011.

At year-end 2011, no deferred tax liability has been recognized for the $1.2 billion of unremitted foreign earnings accumulated prior to the second quarter of 2011, because the Company intends to utilize those earnings in the foreign operations for an indefinite period of time. If Safeway did not consider these earnings to be indefinitely reinvested, the deferred tax liability would have been in the range of $125.0 million to $160.0 million at year-end 2011.

A reconciliation of the beginning and ending amount of unrecognized tax benefits follows (in millions):



	2011			2010			2009
Balance at beginning of year	$	159.9		$	151.0		$	129.2
Additions based on tax positions related to the current year	17.8			4.3			4.1
Additions for tax positions of prior years	0.5			10.6			105.3
Reductions for tax positions of prior years	(3.5		)	(4.7		)	(69.2		)
Foreign currency translation	(0.1		)	0.4			1.0
Expiration of statute of limitations	—			(0.8		)	(0.9		)
Settlements	(13.3		)	(0.9		)	(18.5		)
Balance at end of year	$	161.3		$	159.9		$	151.0

As of December 31, 2011, January 1, 2011 and January 2, 2010, the balance of unrecognized tax benefits included tax positions of $43.1 million (net of tax), $43.7 million (net of tax) and $37.4 million (net of tax), respectively, that would reduce the Company’s effective income tax rate if recognized in future periods.

Income tax expense in 2011, 2010 and 2009 included benefits of $0.4 million (net of tax), $0.5 million (net of tax) and $10.0 million (net of tax), respectively, related to interest and penalties. As of December 31, 2011 and January 1, 2011, the Company’s accrual for net interest and penalties was a liability of $3.0 million and $2.0 million, respectively.

The Company and its domestic subsidiaries file income tax returns with federal, state and local tax authorities within the United States. The Company’s foreign affiliates file income tax returns in various foreign jurisdictions, the most significant of which are Canada and certain of its provinces. The IRS examination of the Company’s federal income tax returns for 2004 and 2005 is complete. With limited exceptions, including certain income tax refund claims, the Company is no longer subject to federal income tax examinations for fiscal years before 2006, and is no longer subject to state and local income tax examinations for fiscal years before 2002. With limited exceptions, including proposed deficiencies which the Company is protesting, Safeway’s foreign affiliates are no longer subject to examination by Canada and certain of its provinces for fiscal years before 2006.

The Company does not anticipate that unrecognized tax benefits will significantly change in the next 12 months.