19. INCOME TAXES

Income Tax Provisions

For financial reporting purposes, earnings before income taxes consists of the following:



	2014		2013		2012
		(In thousands)
U.S.	$	1,287,371	$	1,351,947	$	1,606,928
Foreign		188,253		195,508		177,074
Total	$	1,475,624	$	1,547,455	$	1,784,002

The income tax provision for each fiscal year consists of the following:



	2014		2013		2012
	(In thousands)
U.S. federal income taxes	$	433,795	$	439,667	$	540,861
State and local income taxes		55,736		69,759		77,064
Foreign income taxes		54,560		45,602		44,492
Total	$	544,091	$	555,028	$	662,417

The current and deferred components of the income tax provisions for each fiscal year are as follows:



	2014		2013		2012
		(In thousands)
Current	$	574,760	$	582,889	$	840,745
Deferred		(30,669)		(27,861)		(178,328)
Total	$	544,091	$	555,028	$	662,417

The deferred tax provisions result from the effects of net changes during the year in deferred tax assets and liabilities arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Deferred Tax Assets and Liabilities

Significant components of Sysco’s deferred tax assets and liabilities are as follows:



	June 28, 2014		June 29, 2013
	(In thousands)
Deferred tax liabilities:
Excess tax depreciation and basis differences of assets	$	416,417	$	455,752
Goodwill and intangible assets		211,434		208,229
Other		15,171		18,127
Total deferred tax liabilities		643,022		682,108
Deferred tax assets:
Net operating tax loss carryforwards		20,123		19,149
Benefit on unrecognized tax benefits		22,170		23,833
Pension		287,046		224,990
Share-based compensation		41,262		39,316
Deferred compensation		33,280		34,951
Self-insured liabilities		65,002		47,538
Receivables		47,688		48,236
Inventory		62,799		63,509
Cash flow hedge		56,826		5,815
Other		26,471		44,760
Total deferred tax assets		662,667		552,097
Total net deferred tax (assets) liabilities	$	(19,645)	$	130,011

The company’s net operating tax loss carryforwards as of June 28, 2014 and June 29, 2013 consisted primarily of state net operating tax loss carryforwards. The state net operating tax loss carryforwards outstanding as of June 28, 2014 expire in fiscal years 2017 through 2033. There were no valuation allowances recorded for the state tax loss carryforwards as of June 28, 2014 and June 29, 2013 because management believes it is more likely than not that these benefits will be realized based on utilization forecasts.

Effective Tax Rates

Reconciliations of the statutory federal income tax rate to the effective income tax rates for each fiscal year are as follows:



	2014		2013		2012
U.S. statutory federal income tax rate	35.00	%	35.00	%	35.00	%
State and local income taxes, net of any applicable federal income tax benefit	2.82		2.59		2.65
Foreign income taxes	(1.66)		(1.22)		(1.07)
Other	0.71		(0.50)		0.55
	36.87	%	35.87	%	37.13	%

The effective tax rate of 36.87% for fiscal 2014 was negatively impacted primarily by two items. First, the company recorded tax expense of $6.2 million related to a non-deductible penalty that the company incurred. Second, the company recorded net tax expense of $5.2 million for tax and interest related to various federal, foreign and state uncertain tax positions. This negative impact was partially offset by the recording of $5.7 million of tax benefit related to disqualifying dispositions of Sysco stock pursuant to share-based compensation arrangements. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate also had the impact of reducing the effective tax rate.

The effective tax rate of 35.87% for fiscal 2013 was favorably impacted primarily by two items. First, the company recorded a tax benefit of $14.0 million related to changes in estimates for the prior year domestic tax provision. Second, the company recorded a tax benefit of $8.8 million related to disqualifying dispositions of Sysco stock pursuant to share-based compensation arrangements. The effective tax rate was negatively impacted by the recording of $5.7 million in tax and interest related to various federal, foreign and state uncertain tax positions. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate also had the impact of reducing the effective tax rate.

The effective tax rate for fiscal 2012 was 37.13%. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate had the impact of reducing the effective tax rate.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:



	2014		2013
		(In thousands)
Unrecognized tax benefits at beginning of year	$	108,337	$	103,988
Additions for tax positions related to prior years		2,128		15,431
Reductions for tax positions related to prior years		(41,802)		(2,030)
Additions for tax positions related to the current year		-		-
Reductions for tax positions related to the current year		-		-
Reductions due to settlements with taxing authorities		(19,483)		(9,052)
Reductions due to lapse of applicable statute of limitations		-		-
Unrecognized tax benefits at end of year	$	49,180	$	108,337

As of June 28, 2014, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefits was $36.7 million. The expense recorded for interest and penalties related to unrecognized tax benefits in fiscal 2014 was $14.8 million. In the fourth quarter of fiscal 2014, we reclassified a receivable that would arise upon the resolution of an unrecognized tax benefit from a gross position in other assets to a net position in other long-term liabilities on our consolidated balance sheet due to a change in circumstances related to transfer pricing positions.

As of June 29, 2013, $11.6 million of the gross liability for unrecognized tax benefits was netted within prepaid income taxes due to expected payment in fiscal 2014. As of June 29, 2013, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefits was $36.8 million, of which $5.8 million was netted within prepaid income taxes due to expected payment in fiscal 2014. The expense recorded for interest and penalties related to unrecognized tax benefits in fiscal 2013 was $5.0 million.

If Sysco were to recognize all unrecognized tax benefits recorded as of June 28, 2014, approximately $35.1 million of the $49.2 million reserve would reduce the effective tax rate. If Sysco were to recognize all unrecognized tax benefits recorded as of June 29, 2013, approximately $42.0 million of the $108.3 million reserve would reduce the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco’s positions are sustained on audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in various states and the allocation of income and expense between tax jurisdictions. In addition, the amount of unrecognized tax benefits recognized within the next twelve months may decrease due to the expiration of the statute of limitations for certain years in various jurisdictions; however, it is possible that a jurisdiction may open an audit on one of these years prior to the statute of limitations expiring. At this time, an estimate of the range of the reasonably possible change cannot be made.

The IRS has open audits for Sysco’s 2006, 2007, 2008 and 2009 federal income tax returns. As of June 28, 2014, Sysco’s tax returns in the majority of the state and local jurisdictions and Canada are no longer subject to audit for the years before 2008. However, in Canada, the company remains open to transfer pricing adjustments back to 2003 for some entities. Certain tax jurisdictions require partial to full payment on audit assessments or the posting of letters of credit in order to proceed to the appeals process. Although the outcome of tax audits is generally uncertain, the company believes that adequate amounts of tax, including interest and penalties, have been accrued for any adjustments that may result from those open years.

Other

Undistributed income of certain consolidated foreign subsidiaries at June 28, 2014 amounted to $1,104.1 million for which no deferred U.S. income tax provision has been recorded because Sysco intends to permanently reinvest such income in those foreign operations. An estimate of any U.S. income or foreign withholding taxes that may be applicable upon actual or deemed repatriation is not practical due to the complexities associated with the hypothetical calculation.