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, net of federal benefit, to income tax expense in the fiscal quarter ended October 26, 2013, to increase unrecognized tax benefits and 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.

On February 27, 2015, the Company reached an agreement with the Division whereby the Company paid $33,000 in March 2015 to settle the disputes with the Division over nexus and the deductibility of certain payments between subsidiaries for fiscal years 2000 through 2014. Net of federal benefit, the total cash outflow as a result of the settlement is expected to be $21,000. Under the terms of the agreement, the Company withdrew its appeal of the Tax Court opinion on the nexus dispute. In addition, the case pending on the deductibility of certain payments between subsidiaries has been dismissed and the Division has withdrawn the related assessments. The Company recorded an income tax benefit of $7,293, net of federal taxes, in the fiscal quarter ending April 25, 2015 to reverse remaining unrecognized tax benefits and related interest and penalties in excess of the settlement.

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



	39 Weeks Ended
	April 25, 2015			April 26, 2014
Balance at beginning of year	$	28,993		$	17,640
Reclassification to offset net operating loss carryforward (1)	(1,147		)	—
Additions based on tax positions related to prior periods	—			7,589
Additions based on tax positions related to the current period	46			1,019
Reductions based on tax positions related to prior periods	(546		)	—
Cash paid on settlements	(26,862		)	—
Balance at end of period	$	484		$	26,248

(1) In accordance with Accounting Standards Update 2013-11, unrecognized tax benefits of $1,147 were reclassified from income taxes payable to offset related net operating loss carryforward deferred tax assets at the beginning of fiscal 2015.

The Company recognizes interest and penalties on income taxes in income tax expense. The Company recognized a benefit of $9,811 ($6,396 net of federal and state taxes) and expense of $9,653 ($6,283 net of federal and state benefits) related to interest and penalties on income taxes in the thirty-nine weeks ended April 25, 2015 and April 26, 2014, respectively. The amount of accrued interest and penalties included within income taxes payable was $158 and $16,107 at April 25, 2015 and July 26, 2014, respectively.