8. Income Taxes

The Company is being taxed at the U.S. corporate level as a C-Corporation and has provided U.S. Federal, State and foreign income taxes.

Significant components of income tax expense (benefit) for the fiscal years ended 2013, 2012 and 2011 are as follows:


	2013		2012		2011
Current
United States
Federal	$	-		(3)	$	-
State		2		-		1
Non-U.S.		4		4		3
Current income tax provision		6		1		4
Deferred:
United States
Federal		26		3		(57)
State		(3)		(1)		7
Non-U.S.		(1)		(1)		(1)
Deferred income tax expense (benefit)		22		1		(51)
Expense (benefit) for income taxes	$	28	$	2	$	(47)

U.S. income (loss) from continuing operations before income taxes was $77 million, $2 million, and $(342) million for fiscal 2013, 2012, and 2011, respectively. Non-U.S. income (loss) from continuing operations before income taxes was $8 million, $2 million, and $(4) million for fiscal 2013, 2012, and 2011, respectively.

The reconciliation between U.S. Federal income taxes at the statutory rate and the Company's benefit for income taxes on continuing operations for fiscal 2013, 2012, and 2011 are as follows:


	2013		2012		2011
U.S. Federal income tax expense (benefit) at the statutory rate	$	29	$	1	$	(121)
Adjustments to reconcile to the income tax provision:
U.S. State income tax expense, net of valuation allowance		(1)		(1)		8
Impairment of goodwill		-		-		58
Permanent differences		-		1		1
Transaction costs		-		-		1
Changes in foreign valuation allowance		1		1		3
Rate differences between U.S. and foreign		(2)		1		1
Other		1		(1)		2
Expense (benefit) for income taxes	$	28	$	2	$	(47)

Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax liability as of fiscal 2013 and 2012 are as follows:


	2013		2012
Deferred tax assets:
Allowance for doubtful accounts	$	3	$	4
Deferred gain on sale-leaseback		14		15
Accrued liabilities and reserves		34		60
Inventories		9		8
Net operating loss carryforward		343		393
Alternative minimum tax (AMT) credit carryforward		9		9
Federal and state tax credits		14
Other		7		6
Total deferred tax assets		433		495
Valuation allowance		(59)		(51)
Total deferred tax assets, net of valuation allowance		374		444
Deferred tax liabilities:
Property, plant and equipment		187		190
Intangible assets		300		322
Debt extinguishment		132		132
Other		1		1
Total deferred tax liabilities		620		645
Net deferred tax liability	$	(246)	$	(201)

In the United Sates the Company had $824 million of Federal net operating loss carryforwards, which will be available to offset future taxable income. As of fiscal year-end 2013, the Company had foreign net operating loss carryforwards of $117 million, which will be available to offset future taxable income. If not used, the Federal net operating loss carryforwards will expire in future years beginning 2025 through 2031. AMT credit carryforwards totaling $9 million are available to the Company indefinitely to reduce future years' Federal income taxes. The Company has $1 million of Federal Research and Development tax credits that will expire in 2033.

In connection with the initial public offering, the Company entered into an income tax receivable agreement that provides for the payment to pre-initial public offering stockholders, option holders and holders of our stock appreciation rights, 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that are actually realized (or are deemed to be realized in the case of a change of control) as a result of the utilization of our and our subsidiaries' net operating losses attributable to periods prior to the initial public offering. The Company expects to pay between $313 million and $360 million in cash related to this agreement. This range is based on the Company's assumptions using various items, including valuation analysis and current tax law. The Company recorded an obligation of $313 million which was recognized as a reduction of Paid-in capital on the Consolidated Balance Sheets. The balance at the end of fiscal 2013 was $308 million.

The Company believes that it will not generate sufficient future taxable income to realize the tax benefits in certain foreign jurisdictions related to the deferred tax assets. The Company also has certain state net operating losses that may expire before they are fully utilized. Therefore, the Company has provided a full valuation allowance against certain of its foreign deferred tax assets and a valuation allowance against certain of its state deferred tax assets included within the deferred tax assets.

Prior changes in ownership have created limitations under Sec. 382 of the internal revenue code on annual usage of net operating loss carryforwards. However, all of the Company's Federal net operating loss carryforwards should be available for use within the next five years. As part of the effective tax rate calculation, if we determine that a deferred tax asset arising from temporary differences is not likely to be utilized, we will establish a valuation allowance against that asset to record it at its expected realizable value. The Company has not provided a valuation allowance on its Federal net operating loss carryforwards in the United States because it has determined that future reversals of its temporary taxable differences will occur in the same periods and are of the same nature as the temporary differences giving rise to the deferred tax assets. Our valuation allowance against deferred tax assets was $59 million and $51 million as of fiscal year-end 2013 and 2012, respectively, related to the foreign and U.S. State operations. The Company paid cash taxes of $3 million, $2 million and $2 million in fiscal 2013, 2012, and 2011, respectively.

Uncertain Tax Positions

We adopted the provisions of the Income Taxes standard of the Codification. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with guidance provide by FASB and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Our policy to include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes did not change.

The following table summarizes the activity related to our gross unrecognized tax benefits from year-end fiscal 2012 to year-end fiscal 2013:


	2013		2012
Beginning unrecognized tax benefits	$	8	$	33
Gross increases – tax positions in prior periods		6		2
Gross decreases – tax positions in prior periods		-		(25)
Gross increases – current period tax positions		1		-
Settlements		(1)		-
Lapse of statute of limitations		-		(2)
Ending unrecognized tax benefits	$	14	$	8

The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $7 million and $5 million for fiscal year-end 2013 and 2012.

As of fiscal year-end 2013, we had $1 million accrued for payment of interest and penalties related to our uncertain tax positions. Our penalties and interest related to uncertain tax positions are included in income tax expense.

We and our subsidiaries are routinely examined by various taxing authorities. Although we file U.S. Federal, U.S. State, and foreign tax returns, our major tax jurisdiction is the U.S. The IRS has completed an examination of our 2003 tax year. The Company is currently under examination by the IRS for U.S. Federal tax years 2010 and 2011. Our 2004 - 2009 tax years remain subject to examination by the IRS. There are various other on-going audits in various other jurisdictions that are not material to our financial statements.

As of the end of fiscal 2013, we had unremitted earnings from foreign subsidiaries including earnings that have been or are intended to be permanently reinvested for continued use in foreign operations, accordingly, no provision for US Federal or State income taxes has been provided thereon. If distributed, those earnings would result in additional income tax expense at approximately the U.S. statutory rate. Determination of the amount of unrecognized deferred US income tax liability is not practicable due to the complexities associated with its hypothetical calculation . We have identified non U.S. funds from India that are not permanently reinvested and have recognized deferred tax liabilities for additional tax expense that we expect to incur upon repatriation of earnings that are not sourced from previously taxed income.