Taxes on Income

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



	2014		2013			2012
Domestic	$	159.5	$	258.3		$	370.7
Foreign	5.5		(6.7		)	(8.5		)
	$	165.0	$	251.6		$	362.2

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



	2014			2013			2012
Current:
Federal	$	(33.9	)	$	301.7		$	146.9
State	4.2			11.8			5.1
Foreign	1.9			(2.4		)	(2.9		)
	(27.8		)	311.1			149.1
Deferred:
Federal	78.5			(273.9		)	(35.4		)
State	11.2			(2.7		)	(0.7		)
Foreign	(0.1		)	—			—
	89.6			(276.6		)	(36.1		)
	$	61.8		$	34.5		$	113.0

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):



	2014			2013			2012
Statutory rate	35		%	35		%	35		%
Income tax expense using federal statutory rate	$	57.8		$	88.1		$	126.8
State taxes on income net of federal benefit	9.9			5.9			2.9
Charitable donations of inventory	(9.2		)	(9.6		)	(4.3		)
Federal tax credits	(4.0		)	(11.2		)	(2.2		)
Reversal of deferred tax liability on life insurance	—			(17.2		)	—
Equity earnings of foreign affiliate	3.6			(13.3		)	(8.4		)
Other	3.7			(8.2		)	(1.8		)
	$	61.8		$	34.5		$	113.0

In 2013, Safeway withdrew $68.7 million from the accumulated cash surrender value of corporate-owned life insurance ("COLI") policies purchased in the early 1980s and determined that a majority of the remaining cash surrender value would be received in the future through tax-free death benefits. Consequently, Safeway reversed deferred taxes on that remaining cash surrender value and reduced tax expense by $17.2 million.

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



	2014			2013
Deferred tax assets:
Pension liability	$	391.4		$	279.8
Workers’ compensation and other claims	184.3			152.0
Employee benefits	165.1			155.7
Accrued claims and other liabilities	90.4			92.4
Reserves not currently deductible	77.3			63.8
Federal deduction of state taxes	3.5			51.2
State tax credit carryforwards	21.7			21.3
Operating loss carryforwards	—			8.8
Other assets	45.6			9.5
	$	979.3		$	834.5


	2014			2013
Deferred tax liabilities:
Property	$	(546.8	)	$	(430.0	)
Inventory	(311.7		)	(273.3		)
Investment in Blackhawk	—			(17.9		)
Investments in foreign operations	(10.9		)	(6.5		)
	(869.4		)	(727.7		)
Net deferred tax asset	$	109.9		$	106.8

Deferred tax assets and liabilities are reported in the balance sheet as follows (in millions):



	2014			2013
Current deferred tax assets ⁽¹⁾	$	—		$	51.8
Noncurrent deferred tax assets ⁽²⁾	139.3			55.0
Current deferred tax liability	(29.4		)	—
Noncurrent deferred tax liability	—			—
Net deferred tax asset	$	109.9		$	106.8

⁽¹⁾ Included in Prepaid Expenses and Other Current Assets.

⁽²⁾ Included in Other Assets.

At January 3, 2015, the Company had state tax credit carryforwards of $34.6 million which expire in 2023.

At year-end 2014, no deferred tax liability has been recognized for the $180.0 million of unremitted foreign earnings 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 $50 million to $80 million at year-end 2014.

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



	2014			2013			2012
Balance at beginning of year	$	137.5		$	119.4		$	161.3
Additions based on tax positions related to the current year	12.8			75.6			2.7
Reduction for tax positions of current year	—			(4.9		)	—
Additions for tax positions of prior years	112.6			0.2			2.2
Reductions for tax positions of prior years	—			(47.1		)	(46.9		)
Foreign currency translation	—			(0.3		)	0.1
Expiration of statute of limitations	—			(1.3		)	—
Settlements	(0.2		)	(4.1		)	—
Balance at end of year	$	262.7		$	137.5		$	119.4

As of January 3, 2015, December 28, 2013 and December 29, 2012, the balance of unrecognized tax benefits included tax positions of $132.8 million (net of tax), $60.1 million (net of tax) and $42.9 million (net of tax), respectively, that would reduce the Company’s effective income tax rate if recognized in future periods.The $132.8 million of tax positions as of January 3, 2015 include $125.1 million of tax positions related to discontinued operations and $7.7 million of tax positions related to continuing operations.

Continuing operations income tax expense in 2014, 2013 and 2012 included expense of $0.3 million (net of tax), benefit of $5.9 million (net of tax) and benefit of $5.6 million (net of tax), respectively, related to interest and penalties. As of January 3, 2015 and December 28, 2013, the Company’s accrual for net interest and penalties were receivables of $0.2 million and $5.2 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 Company expects that it will no longer be subject to federal income tax examinations for fiscal years before 2007, and is no longer subject to state and local income tax examinations for fiscal years before 2007. With limited exceptions, including proposed deficiencies which the Company is protesting, Safeway’s Canadian 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 total unrecognized tax benefits will change significantly in the next 12 months.