Note 11 - Income Taxes

12 Months Ended

Jun. 03, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

11. Income Taxes

Income tax benefit for fiscal 2014, 2013, and 2012 was allocated as follows (in thousands):

	2014			2013			2012
(Benefit)/provision for income taxes from continuing operations	$	(4,665	)	$	1,500		$	(12,152	)
Benefit for income taxes from discontinued operations		(106	)		(8,519	)		(2,598	)
Total benefit for income taxes	$	(4,771	)	$	(7,019	)	$	(14,750	)

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

	2014			2013			2012
Current:
Federal	$	(5,047	)	$	8,966		$	3,169
State		(1,586	)		1,200			3,321
Foreign		322			163			155
		(6,311	)		10,329			6,645
Deferred:
Federal		2,346			(8,397	)		(17,402	)
State		(700	)		(432	)		(1,395	)
		1,646			(8,829	)		(18,797	)
	$	(4,665	)	$	1,500		$	(12,152	)

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

	2014			2013
Deferred tax assets:
General business credits carryforward	$	48,007		$	31,063
Employee benefits		22,748			22,485
Deferred escalating minimum rents		19,832			19,055
Goodwill		11,691			12,004
State net operating losses		10,260			8,394
Insurance reserves		6,267			5,777
Deferred gain on sale-leaseback transactions		5,148			5,232
Closed restaurant lease reserves		4,316			3,464
Other		13,202			16,705
Gross deferred tax assets		141,471			124,179
Deferred tax asset valuation allowances		(54,582	)		(24,566	)
Net deferred tax assets		86,889			99,613
Deferred tax liabilities:
Depreciable property and equipment		(73,954	)		(87,542	)
Other		(13,038	)		(10,528	)
Total deferred tax liabilities		(86,992	)		(98,070	)
Net deferred tax (liability)/asset	$	(103	)	$	1,543
Reported in Consolidated Balance Sheets as:
Deferred income taxes – current asset	$	3,397		$	7,296
Deferred income taxes – noncurrent liability		(3,500	)		(5,753	)
	$	(103	)	$	1,543

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 consider 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 concluded that objective and subjective positive evidence outweighed negative evidence, and it was more likely than not we would 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 and/or relatively short carryforward periods and annual limits of loss carryforward available for use 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.

We increased our valuation allowance to $54.6 million as of June 3, 2014.  Included within the $30.9 million expensed in fiscal 2014 was $31.2 million attributable to our loss from continuing operations and a benefit of $(0.3) million attributable to our income from discontinued operations.  Fiscal 2013 and 2012 included expenses for increases in deferred tax asset valuation allowances of $22.2 million and $0.9 million, respectively, of which $20.9 million and $0.9 million, respectively, was attributable to continuing operations.

A rollforward of our valuation allowance is as follows (in thousands):

	2014			2013			2012
Beginning of year	$	(24,566	)	$	(2,392	)	$	(1,501	)
Changes in estimated realization of deferred tax assets:
Continuing operations		(31,187	)		(20,885	)		(866	)
Discontinued operations		288			(1,289	)		(25	)
Other reductions		883			–			–
End of year	$	(54,582	)	$	(24,566	)	$	(2,392	)

As of June 4, 2013, we had state net operating loss carryforwards of approximately $218.1 million which expire at varying times between fiscal 2015 and 2034.  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 eighteen years, in the future to reduce cash tax payments.

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

	2014			2013			2012
Statutory federal income taxes	$	(24,351	)	$	(7,677	)	$	(3,019	)
State income taxes, net of federal income tax benefit		(3,564	)		(1,484	)		(1,639	)
FICA tip credit		(7,533	)		(8,189	)		(8,192	)
Work opportunity tax credit		(1,233	)		(1,366	)		(2,150	)
Other federal tax credits		(103	)		(155	)		(384	)
Increase in valuation allowance		31,187			20,885			866
Permanent differences		2,243			339			1,293
Other, net		(1,311	)		(853	)		1,073
	$	(4,665	)	$	1,500		$	(12,152	)

We had a liability for unrecognized tax benefits, exclusive of accrued interest and penalties, of $7.0 million at June 3, 2014, $2.6 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 2014 and 2013 follows (in thousands):

	2014			2013
Beginning of year	$	13,016		$	6,424
Additions for tax positions related to the current year		532			4,594
Additions for tax positions of prior years		321			4,468
Reductions for tax positions of prior years		(5,186	)		(1,856	)
Reductions for settlements with taxing authorities		(619	)		(408	)
Reductions due to statute settlements		(1,099	)		(206	)
End of year	$	6,965		$	13,016

The liability for unrecognized tax benefits as of June 3, 2014 includes $3.2 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, along with the pending approval of accounting method changes.

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 3, 2014, we had $0.5 million of accrued interest and penalties related to unrecognized tax benefits.

During 2014, accrued interest and penalties decreased by $0.4 million, of which $0.2 million affected the 2014 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 3, 2014, total liabilities of $7.4 million, including the above-mentioned $0.5 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 3, 2014, we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2011, and with few exceptions, state and local examinations by tax authorities prior to fiscal year 2011.