Note D – Income Taxes

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


	Year Ended
(in thousands)	August 27, 2016		August 29, 2015		August 30, 2014
Domestic	$	1,737,727	$	1,676,640	$	1,550,203
International		174,987		125,972		112,511

	$	1,912,714	$	1,802,612	$	1,662,714

The provision for income tax expense consisted of the following:


	Year Ended
(in thousands)	August 27, 2016			August 29, 2015			August 30, 2014
Current:
Federal	$	534,621		$	522,073		$	516,983
State		39,223			41,921			54,481
International		52,844			42,406			36,204

		626,688			606,400			607,668

Deferred:
Federal		48,509			38,299			(762	)
State		9,453			941			(7,752	)
International		(12,943	)		(3,269	)		(6,184	)

		45,019			35,971			(14,698	)

Income tax expense	$	671,707		$	642,371		$	592,970

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 27, 2016			August 29, 2015			August 30, 2014
Federal tax at statutory U.S. income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net		1.6	%		1.5	%		1.8	%
Other		(1.5	%)		(0.9	%)		(1.1	%)

Effective tax rate		35.1	%		35.6	%		35.7	%

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


(in thousands)	August 27, 2016			August 29, 2015
Deferred tax assets:
Net operating loss and credit carryforwards	$	50,859		$	49,088
Accrued benefits		93,212			85,266
Pension		13,397			21,104
Other		55,203			56,125

Total deferred tax assets		212,671			211,583
Less: Valuation allowances		(13,338	)		(8,833	)

Net deferred tax asset		199,333			202,750
Deferred tax liabilities:
Property and equipment		(93,943	)		(68,920	)
Inventory		(315,563	)		(294,242	)
Prepaid Expenses		(27,395	)		(27,134	)
Other		(10,077	)		(25,270	)

Total deferred tax liabilities		(446,978	)		(415,566	)

Net deferred tax liability	$	(247,645	)	$	(212,816	)

Deferred taxes are not provided for temporary differences of $572.0 million at August 27, 2016, and $431.9 million at August 29, 2015, representing earnings of non-U.S. subsidiaries that are intended to be permanently reinvested. If a tax liability associated with these undistributed earnings had been recorded it would have been approximately $35.0 million and $12.0 million at August 27, 2016 and August 29, 2015, respectively.

At August 27, 2016 and August 29, 2015, the Company had deferred tax assets of $25.2 million and $19.5 million, respectively, from net operating loss (“NOL”) carryforwards available to reduce future taxable income totaling approximately $122.0 million and $113.6 million, respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2017 through 2035. At August 27, 2016 and August 29, 2015, the Company had deferred tax assets for income tax credit carryforwards of $25.7 million and $29.6 million, respectively. Certain income tax credit carryforwards have no expiration and others will expire, if not utilized, in various years from fiscal 2023 through 2026.

At August 27, 2016 and August 29, 2015, the Company had a valuation allowance of $13.3 million and $8.8 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 27, 2016			August 29, 2015
Beginning balance	$	28,434		$	33,128
Additions based on tax positions related to the current year		7,172			5,707
Additions for tax positions of prior years		95			625
Reductions for tax positions of prior years		(2,405	)		(1,268	)
Reductions due to settlements		(858	)		(5,312	)
Reductions due to statute of limitations		(4,712	)		(4,446	)

Ending balance	$	27,726		$	28,434

Included in the August 27, 2016 and the August 29, 2015 balances are $15.5 million and $16.8 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 $2.8 million and $2.9 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 27, 2016 and August 29, 2015, respectively.

The Company files U.S. federal, U.S. state and local and international income tax returns. With few exceptions, the Company is no longer subject to state and local or Non-U.S. examinations by tax authorities for fiscal year 2012 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 27, 2016, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $3.9 million over the next 12 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.