Note D – Income Taxes

The components of income from continuing operations before income taxes are as follows:


	Year Ended
(in thousands)	August 31, 2013		August 25, 2012		August 27, 2011

Domestic	$	1,486,386	$	1,373,142	$	1,255,127
International		101,297		79,844		69,119

	$	1,587,683	$	1,452,986	$	1,324,246

The provision for income tax expense consisted of the following:


	Year Ended
(in thousands)	August 31, 2013			August 25, 2012			August 27, 2011

Current:
Federal	$	466,803		$	424,895		$	364,117
State		46,494			47,386			39,473
International		38,202			24,775			27,015

		551,499			497,056			430,605

Deferred:
Federal		16,816			33,679			57,625
State		3,139			(2,822	)		(5,031	)
International		(251	)		(5,300	)		(7,927	)

		19,704			25,557			44,667

Income tax expense	$	571,203		$	522,613		$	475,272

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 31, 2013			August 25, 2012			August 27, 2011

Federal tax at statutory U.S. income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net		2.0	%		2.0	%		1.7	%
Other		(1.0	%)		(1.0	%)		(0.8	%)

Effective tax rate		36.0	%		36.0	%		35.9	%

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


(in thousands)	August 31, 2013			August 25, 2012

Deferred tax assets:
Net operating loss and credit carryforwards	$	41,785		$	36,605
Insurance reserves		16,237			18,185
Accrued benefits		67,350			63,320
Pension		18,004			43,904
Other		45,597			41,658

Total deferred tax assets		188,973			203,672
Less: Valuation allowances		(11,593	)		(9,532	)

		177,380			194,140
Deferred tax liabilities:
Property and equipment		(84,512	)		(67,480	)
Inventory		(262,653	)		(244,414	)
Other		(27,341	)		(31,437	)

Total deferred tax liabilities		(374,506	)		(343,331	)

Net deferred tax liability	$	(197,126	)	$	(149,191	)

Deferred taxes are not provided for temporary differences of approximately $260.0 million at August 31, 2013, and $195.8 million at August 25, 2012, 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 31, 2013 and August 25, 2012, the Company had deferred tax assets of $8.7 million and $12.3 million, respectively, from net operating loss (“NOL”) carryforwards available to reduce future taxable income totaling approximately $75.5 million and $76.6 million, respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2014 through 2032. At August 31, 2013 and August 25, 2012, the Company had deferred tax assets for income tax credit carryforwards of $33.1 million and $24.3 million, respectively. Certain income tax credit carryforwards have no expiration and others will expire, if not utilized, in various years from fiscal 2014 through 2027.

At August 31, 2013 and August 25, 2012, the Company had a valuation allowance of $11.6 million and $9.5 million, respectively, on deferred tax assets associated with NOL and tax credit carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. The $2.1 million net increase in the valuation allowance during fiscal 2013 related to increases from certain NOLs and tax credits arising in fiscal 2013 and decreases due to NOL expirations. Management believes it is more likely than not that the remaining deferred tax assets will be fully realized.

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


(in thousands)	August 31, 2013			August 25, 2012

Beginning balance	$	27,715		$	29,906
Additions based on tax positions related to the current year		7,015			6,869
Additions for tax positions of prior years		2,758			44
Reductions for tax positions of prior years		(470	)		(1,687	)
Reductions due to settlements		(3,019	)		(4,586	)
Reductions due to statute of limitations		(3,356	)		(2,831	)

Ending balance	$	30,643		$	27,715

Included in the August 31, 2013 balance is $20.1 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 $4.7 million and $4.1 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 31, 2013 and August 25, 2012, respectively.

The Company files U.S. federal, U.S. state and local, and international income tax returns. The U.S. Internal Revenue Service has completed exams on U.S. federal income tax returns for years 2009 and prior. With few exceptions, the Company is no longer subject to state and local or non-U.S. examinations by tax authorities for years before 2009. The Company is typically engaged in various tax examinations at any given time, both by U.S. federal, state and local, and international taxing jurisdictions. As of August 31, 2013, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $1.5 million over the next twelve months as a result of tax audit settlements. 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.