Income Taxes

Income from continuing operations before income taxes is set forth below:



	Year Ended
	2016		2015		2014
Domestic	$	192,082	$	208,827	$	173,143
Foreign	9,608		25,301		19,397
	$	201,690	$	234,128	$	192,540

The (provision for) benefit from income taxes from continuing operations is set forth below:



	Year Ended
	2016			2015			2014
Current:
U.S. Federal	$	(75,167	)	$	(12,414	)	$	6,673
State	(5,805		)	3,346			(7,863		)
Foreign	(5,307		)	(10,778		)	(8,093		)
Current tax provision	(86,279		)	(19,846		)	(9,283		)
Deferred:
U.S. Federal	7,975			(53,916		)	(67,977		)
State	6,733			(21,375		)	671
Foreign	(495		)	988			473
Deferred tax benefit (provision)	14,213			(74,303		)	(66,833		)
Income tax provision	$	(72,066	)	$	(94,149	)	$	(76,116	)

Deferred tax assets (liabilities) are set forth below:



	Year End
	January 1, 2017			January 3, 2016
Deferred tax assets:
Unfavorable leases	$	50,771		$	40,084
Net operating loss and credit carryforwards	44,733			51,782
Accrued compensation and related benefits	31,994			35,963
Deferred rent	19,552			17,661
Accrued expenses and reserves	16,486			18,156
Other	9,293			9,157
Valuation allowances	(11,400		)	(17,097		)
Total deferred tax assets	161,429			155,706
Deferred tax liabilities:
Intangible assets	(495,505		)	(499,467		)
Owned and leased fixed assets net of related obligations	(89,251		)	(95,619		)
Other	(23,186		)	(20,333		)
Total deferred tax liabilities	(607,942		)	(615,419		)
	$	(446,513	)	$	(459,713	)

In March 2016, the FASB issued an amendment that simplifies certain aspects of the accounting for employee share-based payment transactions. See Note 1 for further details.

Changes in the Company’s deferred tax asset and liability balances were primarily the result of the utilization of net operating loss and credit carryforwards and the impact of the system optimization initiative, as described in Note 2, primarily related to state valuation allowances and favorable and unfavorable leases.

The amounts and expiration dates of net operating loss and tax credit carryforwards are as follows:



	Amount		Expiration
Tax credit carryforwards:
U.S. federal foreign tax credits	$	18,911	2021-2024
State tax credits	457		2020-2023
Foreign tax credits of non-U.S. subsidiaries	2,770		2021-2025
Total	$	22,138

Net operating loss carryforwards:
State net operating loss carryforwards	$	779,841	2017-2035

As of January 1, 2017, the Company had a deferred tax asset of $46,612 related to the state net operating loss carryforwards and federal, foreign and state tax credits before reduction for unrecognized tax benefits related to excess share-based compensation deductions. In 2016 and prior years, the Company deducted $175,376 in excess of cumulative compensation costs relating to the exercise of stock options and vesting of restricted stock. The Company has recognized $3,082, $49,613 and $9,363 in 2016, 2015 and 2014, respectively, of the $63,938 tax benefit as a reduction of current income taxes payable with an equal offsetting increase in “Additional paid-in capital.”

The Company’s valuation allowances of $11,400, $17,097 and $11,213 as of January 1, 2017, January 3, 2016 and December 28, 2014, respectively, relate to state net operating loss and foreign and state tax credit carryforwards. Valuation allowances decreased $5,697 during 2016 and increased $5,884 during 2015, primarily as a result of our system optimization initiative described in Note 2. The relative presence of company operated restaurants in various states impacts expected future state taxable income available to utilize state net operating loss carryforwards. As the system optimization initiative has changed the Company’s relative presence in various states, the Company’s judgment about the ability to utilize certain state net operating loss carryforwards has likewise changed. Valuation allowances increased $665 during 2014 primarily as a result of generating foreign tax credits with a limited carryforward period in 2014 that are in excess of what the Company expects to utilize prior to their expiration.

Deferred income taxes have not been recorded for temporary differences related to investments in non-U.S. subsidiaries. These temporary differences were approximately $108,038 at January 1, 2017 and consisted primarily of undistributed earnings considered permanently invested in operations outside the U.S. Determination of the incremental income tax liability on these unremitted earnings is dependent on circumstances existing if, and when remittance occurs. However, we estimate that if unremitted earnings were to have been remitted, the additional tax liability would have been approximately $10,640 at January 1, 2017.

The reconciliation of income tax computed at the U.S. Federal statutory rate to reported income tax is set forth below:



	Year Ended
	2016			2015			2014
Income tax provision at the U.S. Federal statutory rate	$	(70,592	)	$	(81,945	)	$	(67,389	)
State income tax provision, net of U.S. Federal income tax effect	(3,767		)	(7,234		)	(4,747		)
Non-deductible goodwill (a)	(6,409		)	(7,435		)	(9,389		)
Valuation allowances (b)	4,915			(6,075		)	(665		)
Foreign and U.S. tax effects of foreign operations	2,278			4,389			4,089
Non-deductible expenses and other	1,509			4,151			1,985
	$	(72,066	)	$	(94,149	)	$	(76,116	)

_______________

(a)

Substantially all of the goodwill included in the gain on sales of restaurants in 2016, 2015 and 2014 under our system optimization initiative was non-deductible for tax purposes. See Notes 2 and 9 for further information. Included in the 2016 amount is a $3,837 federal benefit related to the correction to a prior year identified and recorded in the second quarter of 2016. The corresponding state benefit correction of $398 is included in the state income tax provision amount above.

(b)

Includes changes for deferred tax assets generated or utilized during the current year and changes in our judgment regarding the likelihood of the utilization of deferred tax assets. 2016 and 2015 primarily relate to changes in the likelihood of the utilization of deferred tax assets related to state net operating loss carryforwards. Included in the 2016 amount is a $2,878 benefit related to the correction to a prior year identified and recorded in the first quarter of 2016.

The Company’s system optimization initiative described in Note 2 impacted our tax provision due to the following: (1) goodwill disposal and other non-deductible expenses incurred in connection with the sale of restaurants during 2016, 2015 and 2014 of $7,544, $8,987 and $9,389, respectively, (2) changes to the Canadian deferred tax rate of $70 in 2014, (3) a decrease in the state deferred tax rate of $2,692 in 2016 and an increase of $1,587 in 2015 and (4) a decrease in valuation allowances related to the likelihood of the utilization of state net operating loss carryforwards of $2,062 in 2016 and an increase of $4,542 in 2015. These amounts are included in the state income tax provision, the foreign provision, non-deductible goodwill and the valuation allowance amounts presented in the table above.

The Company participates in the Internal Revenue Service (the “IRS”) Compliance Assurance Process (“CAP”). As part of CAP, tax years are examined on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. As such, our tax returns for fiscal years 2009 through 2015 have been settled. Certain of the Company’s state income tax returns from its 2012 fiscal year and forward remain subject to examination. We believe that adequate provisions have been made for any liabilities, including interest and penalties that may result from the completion of these examinations.

Unrecognized Tax Benefits

As of January 1, 2017, the Company had unrecognized tax benefits of $19,545, which, if resolved favorably would reduce income tax expense by $14,752. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:



	Year End
	January 1, 2017			January 3, 2016			December 28, 2014
Beginning balance	$	21,224		$	25,715		$	23,897
Additions:
Tax positions of current year	306			927			—
Tax positions of prior years	440			476			2,678
Reductions:
Tax positions of prior years	(2,126		)	(5,182		)	(582		)
Settlements	(42		)	(251		)	—
Lapse of statute of limitations	(257		)	(461		)	(278		)
Ending balance	$	19,545		$	21,224		$	25,715

The reduction of unrecognized tax benefits in 2016 was primarily related to a $1,822 revaluation of certain state net operating loss carryforwards as a result of the system optimization initiative which did not reduce tax expense.

During 2017, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $714, due to the lapse of statutes of limitations and expected settlements with taxing authorities.

During 2016, 2015 and 2014, the Company recognized $75, $(1,627) and $315 of expense (income) for interest and $25, $(15) and $(330) of expense (income) for penalties, respectively, related to uncertain tax positions. The Company has approximately $1,296 and $1,223 accrued for interest and $615 and $642 accrued for penalties as of January 1, 2017 and January 3, 2016, respectively.