Note D – Income Taxes

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


	Year Ended
(in thousands)	August 29, 2015		August 30, 2014		August 31, 2013
Domestic	$	1,676,640	$	1,550,203	$	1,486,386
International		125,972		112,511		101,297

	$	1,802,612	$	1,662,714	$	1,587,683

The provision for income tax expense consisted of the following:


	Year Ended
(in thousands)	August 29, 2015			August 30, 2014			August 31, 2013
Current:
Federal	$	522,073		$	516,983		$	466,803
State		41,921			54,481			46,494
International		42,406			36,204			38,202

		606,400			607,668			551,499
Deferred:
Federal		38,299			(762	)		16,816
State		941			(7,752	)		3,139
International		(3,269	)		(6,184	)		(251	)

		35,971			(14,698	)		19,704

Income tax expense	$	642,371		$	592,970		$	571,203

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 29, 2015			August 30, 2014			August 31, 2013
Federal tax at statutory U.S. income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net		1.5	%		1.8	%		2.0	%
Other		(0.9	%)		(1.1	%)		(1.0	%)

Effective tax rate		35.6	%		35.7	%		36.0	%

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


(in thousands)	August 29, 2015			August 30, 2014
Deferred tax assets:
Net operating loss and credit carryforwards	$	49,088		$	40,507
Accrued benefits		85,266			79,932
Pension		21,104			21,493
Other		56,125			59,432

Total deferred tax assets		211,583			201,364
Less: Valuation allowances		(8,833	)		(10,604	)

		202,750			190,760
Deferred tax liabilities:
Property and equipment		(68,920	)		(59,016	)
Inventory		(294,242	)		(273,005	)
Prepaid Expenses		(27,134	)		(15,694	)
Other		(25,270	)		(21,091	)

Total deferred tax liabilities		(415,566	)		(368,806	)

Net deferred tax liability	$	(212,816	)	$	(178,046	)

Deferred taxes are not provided for temporary differences of $431.9 million at August 29, 2015, and $345.0 million at August 30, 2014, 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 is approximately $12 million and $9 million at August 29, 2015 and August 30, 2014, respectively.

At August 29, 2015 and August 30, 2014, the Company had deferred tax assets of $19.5 million and $11.2 million, respectively, from net operating loss (“NOL”) carryforwards available to reduce future taxable income totaling approximately $113.6 million and $87.6 million, respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2016 through 2034. At August 29, 2015 and August 30, 2014, the Company had deferred tax assets for income tax credit carryforwards of $29.6 million and $29.3 million, respectively. Certain income tax credit carryforwards have no expiration and others will expire, if not utilized, in various years from fiscal 2022 through 2026.

At August 29, 2015 and August 30, 2014, the Company had a valuation allowance of $8.8 million and $10.6 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. 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 29, 2015			August 30, 2014
Beginning balance	$	33,128		$	30,643
Additions based on tax positions related to the current year		5,707			7,857
Additions for tax positions of prior years		625			2,114
Reductions for tax positions of prior years		(1,268	)		(1,355	)
Reductions due to settlements		(5,312	)		(2,074	)
Reductions due to statute of limitations		(4,446	)		(4,057	)

Ending balance	$	28,434		$	33,128

Included in the August 29, 2015 and the August 30, 2014 balances are $16.8 million and $19.1 million, respectively, 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 $2.9 million and $4.3 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 29, 2015 and August 30, 2014, 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 2011 and prior. With few exceptions, the Company is no longer subject to state and local or Non-U.S. examinations by tax authorities for fiscal year 2010 and prior. The Company is typically engaged in various tax examinations at any given time by U.S. federal, state and local, and international taxing jurisdictions. As of August 29, 2015, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $1.6 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.