Note D – Income Taxes

The provision for income tax expense consisted of the following:


	Year Ended
(in thousands)	August 25, 2012			August 27, 2011			August 28, 2010
Current:
Federal	$	449,670		$	391,132		$	397,062
State		47,386			39,473			34,155

		497,056			430,605			431,217
Deferred:
Federal		28,379			49,698			(3,831	)
State		(2,822	)		(5,031	)		(5,192	)

		25,557			44,667			(9,023	)

Income tax expense	$	522,613		$	475,272		$	422,194

A reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate of 35% to income before income taxes is as follows:


	Year Ended
(in thousands)	August 25, 2012			August 27, 2011			August 28, 2010
Federal tax at statutory U.S. income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net		2.0	%		1.7	%		1.6	%
Other		(1.0	%)		(0.8	%)		(0.2	%)

Effective tax rate		36.0	%		35.9	%		36.4	%

Significant components of the Company's deferred tax assets and liabilities were as follows:


(in thousands)	August 25, 2012			August 27, 2011
Deferred tax assets:
Net operating loss and credit carryforwards	$	36,605		$	31,772
Insurance reserves		18,185			17,542
Accrued benefits		63,320			61,436
Pension		43,904			30,967
Other		41,658			39,878

Total deferred tax assets		203,672			181,595
Less: Valuation allowances		(9,532	)		(7,973	)

Net deferred tax assets		194,140			173,622
Deferred tax liabilities:
Property and equipment		(67,480	)		(64,873	)
Inventory		(244,414	)		(220,234	)
Other		(31,437	)		(44,303	)

Total deferred tax liabilities		(343,331	)		(329,410	)

Net deferred tax liability	$	(149,191	)	$	(155,788	)

Deferred taxes are not provided for temporary differences of approximately $195.8 million at August 25, 2012, and $140.2 million at August 27, 2011, representing earnings of non-U.S. subsidiaries that are intended to be permanently reinvested. Computation of the potential deferred tax liability associated with these undistributed earnings and other basis differences is not practicable.

At August 25, 2012 and August 27, 2011, the Company had deferred tax assets of $7.8 million and $8.0 million from federal tax operating losses (“NOLs”) of $22.2 million and $22.8 million, and deferred tax assets of $2.1 million and $1.1 million from state tax NOLs of $46.6 million and $22.5 million, respectively. At August 25, 2012 and August 27, 2011, the Company had deferred tax assets of $2.4 million and $1.5 million from Non-U.S. NOLs of $7.7 million and $5.1 million, respectively. The federal and state NOLs expire between fiscal 2013 and fiscal 2031. At August 25, 2012 and August 27, 2011, the Company had a valuation allowance of $9.1 million and $8.0 million, respectively, for certain federal, state, and Non-U.S. NOLs resulting primarily from annual statutory usage limitations. At August 25, 2012 and August 27, 2011, the Company had deferred tax assets of $24.3 million and $21.2 million, respectively, for federal, state, and Non-U.S. income tax credit carryforwards. Certain tax credit carryforwards have no expiration date and others will expire in fiscal 2013 through fiscal 2026. At August 25, 2012, the Company had a valuation allowance of $0.4 million for Non-U.S. tax credits.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


(in thousands)	August 25, 2012			August 27, 2011
Beginning balance	$	29,906		$	38,554
Additions based on tax positions related to the current year		6,869			6,205
Additions for tax positions of prior years		44			11,787
Reductions for tax positions of prior years		(1,687	)		(20,998	)
Reductions due to settlements		(4,586	)		(3,829	)
Reductions due to statute of limitations		(2,831	)		(1,813	)

Ending balance	$	27,715		$	29,906

Included in the August 25, 2012, balance is $18.1 million of unrecognized tax benefits that, if recognized, would reduce the Company’s effective tax rate.

The Company accrues interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense. The Company had $4.1 million and $5.2 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 25, 2012 and August 27, 2011, respectively.

The major jurisdictions where the Company files income tax returns are the United States and Mexico. With few exceptions, tax returns filed for tax years 2008 through 2011 remain open and subject to examination by the relevant tax authorities. The Company is typically engaged in various tax examinations at any given time, both by U. S. federal and state taxing jurisdictions. As of August 25, 2012, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $6.0 million over the next twelve months as a result of tax audit closings, settlements, and the expiration of statutes to examine such returns in various jurisdictions. While the Company believes that it is adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result in final settlements that differ from current estimates.