11. Income Taxes

Income tax (benefit)/expense for fiscal 2013, 2012, and 2011 was allocated as follows (in thousands):

	2013			2012			2011
Provision/(benefit) for income taxes from
continuing operations	$	1,500		$	(12,152	)	$	7,563
Benefit for income taxes from
discontinued operations		(8,519	)		(2,598	)		(1,819	)
Total (benefit)/provision for income taxes	$	(7,019	)	$	(14,750	)	$	5,744

Income tax expense/(benefit) from continuing operations includes the following components (in thousands):

	2013			2012			2011
Current:
Federal	$	8,966		$	3,169		$	6,022
State		1,200			3,321			1,687
Foreign		163			155			132
		10,329			6,645			7,841
Deferred:
Federal		(8,397	)		(17,402	)		(1,200	)
State		(432	)		(1,395	)		922
		(8,829	)		(18,797	)		(278	)
	$	1,500		$	(12,152	)	$	7,563

Deferred tax assets and liabilities are comprised of the following (in thousands):


	2013			2012
Deferred tax assets:
General business credits carryforward	$	31,063		$	21,675
Employee benefits		22,485			27,510
Escalating minimum rents		19,055			18,438
Goodwill		12,004			7,012
State net operating losses		8,394			7,672
Insurance reserves		5,777			6,500
Deferred gain on sale-leaseback transactions		5,232			1,685
Closed restaurant lease reserves		3,464			2,704
Other		16,705			9,095
Gross deferred tax assets		124,179			102,291
Deferred tax asset valuation allowances		(24,566	)		(2,392	)
Net deferred tax assets		99,613			99,899

Deferred tax liabilities:
Depreciable property and equipment		(87,542	)		(99,901	)
Other		(10,528	)		(10,431	)
Total deferred tax liabilities		(98,070	)		(110,332	)

Net deferred tax asset/(liability)	$	1,543		$	(10,433	)

Reported in Consolidated Balance Sheets as:
Deferred income taxes – current asset	$	7,296		$	27,134
Deferred income taxes – noncurrent liability		(5,753	)		(37,567	)
	$	1,543		$	(10,433	)

The above deferred tax assets and liabilities include the income tax effect of temporary differences between financial reporting and tax reporting. Temporary differences represent the cumulative taxable or deductible amounts recorded in the consolidated financial statements in different years than recognized in the tax returns. General business credits carryforward and state net operating losses may be used to offset future taxable income, and their benefit is reflected in the deferred tax assets. Other deferred tax assets, such as employee benefits, escalating minimum rents, and certain others listed, become deductible in the tax return upon payment or funding in qualified trusts. The depreciable property and equipment temporary difference represents generally tax depreciation in excess of financial statement depreciation.

We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets in the future. A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment. In assessing the need for a valuation allowance, we have considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction.

Through the third quarter of fiscal 2013, we had concluded that objective and subjective positive evidence outweighed negative evidence, and concluded it was more likely than not to realize all of our federal and most of our state deferred tax assets, except for loss carryforwards in certain states that have had cumulative losses due to our state tax planning strategies and/or relatively short carryforward periods and annual limits on how much loss carryforward can be used to offset future taxable income. As of June 4, 2013, we recorded a valuation allowance following the conclusion that the negative evidence outweighed the positive evidence. This conclusion was reached primarily as a result of changes in our rolling three-year historical operating losses, as recent decisions by our new senior management team to discontinue certain concepts and slow down the growth of our Lime Fresh concept led to impairment and other losses and caused our three-year cumulative pre-tax income as of the third quarter end to swing to a three-year cumulative pre-tax loss as of the fourth quarter end.

In accordance with the applicable accounting standards, we are unable to use future income projections to support the realization of our deferred tax assets as a consequence of the above conclusion. Instead, in determining the appropriate amount of the valuation allowance, we considered the timing of future reversal of our taxable temporary differences and available tax strategies that, if implemented, would result in the realization of deferred tax assets. With one small exception considered for fiscal 2020, none of the tax strategies we included would be required prior to fiscal 2029.

We increased our valuation allowance to $24.6 million as of June 4, 2013. Of the $22.2 million expensed in fiscal 2013, $20.9 million was attributed to our loss from continuing operations. Fiscal 2012 and 2011 included expenses for increases in deferred tax asset valuation allowances of $0.9 million and $1.5 million, respectively, all of which related to state net operating losses and was attributable to continuing operations.

As of June 4, 2013, we had state net operating loss carryforwards of approximately $176.1 million which expire at varying times between fiscal 2014 and 2033. The above accounting has no effect on our ability to use our state operating loss carryforwards or general business carryforward credits, which don't begin to expire for nineteen years, into the future to reduce cash tax payments.

A reconciliation from the statutory federal income tax (benefit)/expense to the reported income tax expense/(benefit) from continuing operations is as follows (in thousands):

	2013			2012			2011

Statutory federal income taxes	$	(7,677	)	$	(3,019	)	$	19,991
State income taxes, net of federal income tax benefit		(1,484	)		(1,639	)		428
FICA tip credit		(8,189	)		(8,192	)		(8,237	)
Work opportunity tax credit		(1,366	)		(2,150	)		(2,623	)
Other federal tax credits		(155	)		(384	)		(197	)
Increase in valuation allowance		20,885			866			1,478
Other, net		(514	)		2,366			(3,277	)
	$	1,500		$	(12,152	)	$	7,563

We had a liability for unrecognized tax benefits, exclusive of accrued interest and penalties, of $13.0 million at June 4, 2013, $3.5 million of which, if recognized, would impact our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal 2013 and 2012 follows (in thousands):

	2013			2012
Beginning of year	$	6,424		$	5,171
Additions for tax positions related to the current year		4,594			901
Additions for tax positions of prior years		4,468			2,079
Reductions for tax positions of prior years		(1,856	)		(764	)
Reductions for settlements with taxing authorities		(408	)		(110	)
Reductions due to statute settlements		(206	)		(853	)
End of year	$	13,016		$	6,424

The liability for unrecognized tax benefits as of June 4, 2013 includes $1.1 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations and negotiations with tax authorities.

As discussed in Note 1 to the Consolidated Financial Statements, our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our tax returns. At June 4, 2013, we had $0.9 million of accrued interest and penalties related to unrecognized tax benefits.

During 2013, accrued interest and penalties decreased by $0.1 million, an insignificant amount of which affected the 2013 effective tax rate. If we were to prevail on all uncertain tax positions, the reversal of this accrual would also be a benefit to our effective tax rate. At June 4, 2013, total liabilities of $13.9 million, including the above-mentioned $0.9 million for the payment of accrued interest and penalties, are included in Accrued liabilities – Rent and other and Other deferred liabilities as reported on the Consolidated Balance Sheets.

At June 4, 2013, we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2010, and with few exceptions, state and local examinations by tax authorities prior to fiscal year 2009.