Income Taxes

The following table sets out the tax expense and the effective tax rate for the company from continuing operations:



	Quarter Ended						Six Months Ended
(In millions)	December 28, 2013			December 29, 2012			December 28, 2013			December 29, 2012
Continuing operations
Income before income taxes	$	107		$	89		$	151		$	164
Income tax expense (benefit)	(7		)	31			8			57
Effective tax rate	(6.4		)%	34.4		%	5.2		%	34.8		%

Second Quarter 2014

In the second quarter of 2014, the company recognized a tax benefit of $7 million on pretax income from continuing operations of $107 million, or an effective tax rate of (6.4)%. The tax expense and related effective tax rate on continuing operations were impacted by recognizing $45 million in tax benefits from discrete tax items, primarily resulting from the release of a valuation allowance on state deferred tax assets.

In the first six months of 2014, the company recognized a tax expense of $8 million on pretax income from continuing operations of $151 million, or an effective tax rate of 5.2%. The tax expense and related effective tax rate on continuing operations was determined by applying a 35.2% estimated annual effective tax rate to pretax earnings, and then recognizing $45 million of tax benefits from discrete tax items, primarily resulting from the release of a valuation allowance on state deferred tax assets.

Second Quarter 2013

In the second quarter of 2013, the company recognized a tax expense of $31 million on pretax income from continuing operations of $89 million, or an effective tax rate of 34.4%.

In the first six months of 2013, the company recognized a tax expense of $57 million on pretax income from continuing operations of $164 million, or an effective tax rate of 34.8%. The tax expense and related effective tax rate on continuing operations was determined by applying a 34.9% estimated annual effective tax rate to pretax earnings and recognizing various discrete items, none of which were material individually or in the aggregate.

Unrecognized Tax Benefits

Each quarter, the company makes a determination of the tax liability needed for unrecognized tax benefits that should be recorded in the financial statements. For tax benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The year-to-date net decrease in the liability for unrecognized tax benefits was $4 million, resulting in a ending balance of $63 million as of December 28, 2013. The $4 million net decrease in the gross liability for uncertain tax positions is the result of a $6 million decrease for audit settlements, primarily offset by a $2 million increase related to prior years. At this time, the company estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by $5 million to $30 million in the next twelve months from a variety of uncertain tax positions as a result of the completion of tax audits currently in process and the expiration of statutes of limitations.

The company’s tax returns are routinely audited by federal, state, and foreign tax authorities and these audits are at various stages of completion at any given time. The Internal Revenue Service (IRS) has completed examinations of the company’s U.S. income tax returns through 2010. With few exceptions, the company is no longer subject to state and local income tax examinations by tax authorities for years prior to 2005.