13. Income Taxes

Income before income taxes and the provision for income taxes for fiscal years 2013, 2012 and 2011, consist of the following (in thousands):

	Fiscal 2013			Fiscal 2012			Fiscal 2011

Income before income taxes:
United States	$	675,438		$	486,258		$	248,108
Foreign		65,436			89,883			54,639

Total income before income taxes	$	740,874		$	576,141		$	302,747

Income tax expense:
United States federal:
Current	$	202,006		$	75,932		$	75,225
Deferred		(8,654	)		74,042			(3,327	)

		193,352			149,974			71,898
State and local:
Current		47,930			40,270			13,939
Deferred		(1,695	)		(712	)		(1,758	)

		46,235			39,558			12,181

Total United States		239,587			189,532			84,079

Foreign:
Current		29,901			26,860			21,306
Deferred		(12,717	)		(3,751	)		(3,686	)

Total foreign		17,184			23,109			17,620

Total income tax expense	$	256,771		$	212,641		$	101,699

Net deferred tax liabilities consist of the following (in thousands) as of:

	September 28, 2013			September 29, 2012

Deferred tax assets:
Section 263A capitalized expenses	$	1,876		$	2,150
Deferred hedging losses		4,774			3,919
Deferred compensation		13,632			11,534
Net operating loss carryforward		—			1,017
Capital loss carryforward		1,418			1,418
Valuation allowance—capital loss carryforward		(1,418	)		(1,418	)
Warranty, obsolete inventory and bad debt allowance		32,692			27,421
Tax credit carryforwards		3,651			3,301
Other reserves and temporary differences		15,558			12,412

Gross deferred tax assets		72,183			61,754
Deferred tax liabilities:
Prepaid expenses		(2,994	)		(2,367	)
Depreciation		(125,504	)		(123,044	)
Intangible assets		(138,262	)		(144,329	)
Other reserves and temporary differences		(237	)		(10,994	)

Gross deferred tax liabilities		(266,997	)		(280,734	)

Net deferred tax liabilities	$	(194,814	)	$	(218,980	)

A reconciliation for continuing operations between the amount of reported income tax expense and the amount computed using the U.S. Federal Statutory rate of 35% is as follows (in thousands):

	Fiscal 2013			Fiscal 2012			Fiscal 2011

Tax at U.S. Federal Statutory rate	$	259,306		$	201,692		$	105,961
Increase (decrease) in rates resulting from:
Foreign tax rate differential		(13,087	)		(18,072	)		(9,289	)
Non-deductible stock compensation expense		2,700			1,024			1,761
State taxes, net of federal benefit		31,869			27,114			11,276
Provincial taxes		7,878			10,591			6,309
Domestic production activities deduction		(23,558	)		(9,245	)		(7,831	)
Acquisition costs		—			—			4,158
Federal tax credits		(4,506	)		(282	)		(962	)
Release of capital loss valuation allowance		—			(3,071	)		(6,194	)
Other		(3,831	)		2,890			(3,490	)

Tax at effective rates	$	256,771		$	212,641		$	101,699

As of September 28, 2013, the Company had a $17.7 million state capital loss carryforward and a state net operating loss carryforward of $11.5 million available to be utilized against future taxable income for years through fiscal 2015 and 2029, respectively, subject to annual limitation pertaining to change in ownership rules under the Internal Revenue Code of 1986, as amended (the "Code"). Based upon earnings history, the Company concluded that it is more likely than not that the net operating loss carryforward will be utilized prior to its expiration but that the capital loss carryforward will not. The Company has recorded a $1.4 million valuation allowance against the entire deferred tax asset balance for the capital loss carryforward

The total amount of unrecognized tax benefits as of September 28, 2013 and September 29, 2012 was $23.3 million and $24.0 million, respectively. The amount of unrecognized tax benefits at September 28, 2013 that would impact the effective tax rate if resolved in favor of the Company is $19.7 million. As a result of prior acquisitions, the Company is indemnified for up to $16.6 million of the total reserve balance, and the indemnification is capped at CDN $37.9 million. If these unrecognized tax benefits are resolved in favor of the Company, the associated indemnification receivable, recorded in other long-term assets would be reduced accordingly. As of September 28, 2013 and September 29, 2012, accrued interest and penalties of $2.0 million and $0.6 million, respectively, were included in the Consolidated Balance Sheets. The Company recognizes interest and penalties in income tax expense. The Company released $1.5 million of unrecognized tax benefits in the fourth quarter of fiscal 2013 due to the expiration of the statute of limitations. Income tax expense included $0.4 million, $0.2 million and $0.3 million of interest and penalties for fiscal 2013, 2012, and 2011, respectively.

A reconciliation of increases and decreases in unrecognized tax benefits, including interest and penalties, is as follows (in thousands):

	Fiscal 2013			Fiscal 2012			Fiscal 2011

Gross tax contingencies—balance, beginning of year	$	23,956		$	24,419		$	5,480
Increases from positions taken during prior periods		438			2,864			—
Decreases from positions taken during prior periods		—			(4,093	)		(236	)
Increases from positions taken during current periods		2,709			906			19,175
Decreases resulting from the lapse of the applicable statute of limitations		(3,820	)		(140	)		—

Gross tax contingencies—balance, end of year	$	23,283		$	23,956		$	24,419

The Company expects to release $3.4 million of unrecognized tax benefits during fiscal 2014 due to the expiration of the statute of limitations.

As of September 28, 2013, the Company had approximately $155.5 million of undistributed international earnings, most of which are Canadian-sourced. With the exception of the repayment of intercompany debt, all earnings of the Company's foreign subsidiaries are considered indefinitely reinvested and no U.S. deferred taxes have been provided on those earnings. If these amounts were distributed to the U.S. in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes, which could be material. Determination of the amount of any unrecognized deferred income tax on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

In the normal course of business, the Company is subject to tax examinations by taxing authorities both inside and outside the United States. The Company is currently being examined by the Internal Revenue Service for its fiscal year ended September 25, 2010. With some exceptions, the Company is no longer subject to examinations with respect to returns filed for fiscal years prior to 2006.