INCOME TAXES

In prior years, the state of New Jersey issued two separate tax assessments related to nexus beginning in fiscal 2000 and the deductibility of certain payments between subsidiaries beginning in fiscal 2002. Village contested both of these assessments through the state’s conference and appeals process and was subsequently denied. The Company then filed two complaints in Tax Court against the New Jersey Division of Taxation (the "Division") contesting these assessments and a trial limited to the nexus dispute was conducted in June 2013. On October 23, 2013, the Tax Court issued their opinion on the matter in favor of the Division. As a result, the Company recorded a $10,052 charge to income tax expense in the fiscal quarter ended October 26, 2013, which included a $4,933 (net of federal benefit of $2,656) increase in unrecognized tax benefits and $5,119 (net of federal benefit of $2,078) of related interest and penalties for tax positions taken in prior years. This charge increased our fiscal 2014 beginning of year accrued tax liability to reflect the estimated total tax, interest and penalties due if the Company was unable to overturn the Court’s decision upon appeal.

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



	26 Weeks Ended
	January 24, 2015		January 25, 2014
Balance at beginning of year	$	28,993	$	17,640
Additions based on tax positions related to prior periods	—		7,589
Additions based on tax positions related to the current period	1,919		1,019
Balance at end of period	$	30,912	$	26,248

The Company recognizes interest and penalties on income taxes in income tax expense. The Company recognized $1,405 and $8,973 related to interest and penalties on income taxes in the twenty-six weeks ended January 24, 2015 and January 25, 2014, respectively. The amount of accrued interest and penalties included within income taxes payable was $17,512 and $16,107 at January 24, 2015 and July 26, 2014, respectively.

On February 27, 2015, the Company reached an agreement with the Division whereby the Company will pay approximately $33,000 in March 2015 to settle the disputes over nexus and the deductibility of certain payments between subsidiaries with the Division for fiscal years 2000 through 2014. The final settlement amount is subject to adjustment upon filing additional tax returns in New Jersey. Net of federal benefit, the total expected cash outflow as a result of the settlement will be in the range of $21,000 to $22,000. Under the terms of the agreement, the Company will withdraw its appeal of the Tax Court opinion on the nexus dispute. In addition, the case pending on the deductibility of certain payments between subsidiaries will be dismissed and the Division will withdraw the related assessments. The Company will reverse all remaining unrecognized tax benefits and related interest and penalties in excess of the settlement, resulting in an estimated income tax benefit in the range of $7,000 to $8,000 during the fiscal quarter ending April 25, 2015.