Income Taxes

Income tax benefit for fiscal

years 2016, 2015, and 2014 was allocated as follows (in thousands):

	201 6			20 15			20 14
Current:
Federal	$	(1,138	)	$	1,714		$	(5,047	)
State		289			(48	)		(1,586	)
Foreign		118			118			322
		(731	)		1,784			(6,311	)
Deferred:
Federal		(1,449	)		(3,254	)		2,346
State		–			(441	)		(700	)
		(1,449	)		(3,695	)		1,646
Benefit for income taxes from
continuing operations		(2,180	)		(1,911	)		(4,665	)
Benefit for income taxes from
discontinued operations		–			–			(106	)
Total benefit for income taxes	$	(2,180	)	$	(1,911	)	$	(4,771	)

As previously mentioned in Note 1 to the Consolidated Financial Statements, w

e early adopted ASU 2015-17 on a prospective basis during the fourth quarter of fiscal year 2016. Prior periods were not retroactively adjusted. Based on the adoption of this guidance, all deferred taxes are classified as noncurrent in our Consolidated Balance Sheet as of May 31, 2016. Deferred tax assets and liabilities are comprised of the following (in thousands):

	20 1 6			201 5
Deferred tax assets:
General business credits carryforward	$	70,424		$	53,955
Employee benefits		22,420			25,343
Deferred escalating minimum rents		20,803			20,536
State net operating losses		9,807			7,821
Insurance reserves		5,896			6,062
Goodwill		5,033			10,813
Deferred gain on sale-leaseback transactions		4,728			5,148
Closed restaurant lease reserves		2,520			2,798
Other		7,761			7,656
Gross deferred tax assets		149,392			140,132
Deferred tax asset valuation allowances		(89,933	)		(62,799	)
Net deferred tax assets		59,459			77,333

Deferred tax liabilities:
Depreciable property and equipment		(48,367	)		(64,204	)
Other		(11,092	)		(14,578	)
Total deferred tax liabilities		(59,459	)		(78,782	)

Net deferred tax liability	$	–		$	(1,449	)

Reported in Consolidated Balance Sheets as:
Deferred income taxes – current liability	$	–		$	(7	)
Deferred income taxes – noncurrent liability		–			(1,442	)
	$	–		$	(1,449	)

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. As of May 31, 2016, we have rolling three-year historical operating losses and have concluded that the negative evidence outweighs the positive evidence.

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.

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

	201 6			201 5			201 4

Beginning of fiscal year	$	(62,799	)	$	(54,582	)	$	(24,566	)
Changes in estimated realization of deferred tax assets:
Continuing operations		(28,192	)		(9,138	)		(31,187	)
Discontinued operations		–			–			288
Other reductions		1,058			921			883
End of fiscal year	$	(89,933	)	$	(62,799	)	$	(54,582	)

As of

May 31, 2016, we had state net operating loss carryforwards of approximately $255.5 million which expire at varying times between fiscal years 2017 and 2036. The above accounting has no effect on our ability to use our state operating loss carryforwards or general business carryforward credits, which begin to expire in fiscal year 2032, in the future to reduce cash tax payments.

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

	201 6			201 5			201 4

Statutory federal income taxes	$	(18,502	)	$	(1,787	)	$	(24,351	)
State income taxes, net of federal income tax benefit		(2,926	)		(711	)		(3,564	)
FICA tip credit		(7,071	)		(7,280	)		(7,533	)
Work opportunity tax credit		(1,389	)		(1,899	)		(1,233	)
Increase in valuation allowance		28,192			9,138			31,187
Permanent differences		319			528			2,243
Other, net		(803	)		100			(1,414	)
Total benefit for income taxes	$	(2,180	)	$	(1,911	)	$	(4,665	)

We had a gross liability for unrecognized tax benefits, exclusive of accrued interest and penalties, of $

4.5 million and $3.9 million, respectively, as of May 31, 2016 and June 2, 2015, of which $3.7 million and $3.3 million, respectively, was reclassified against our deferred tax assets. As of May 31, 2016 and June 2, 2015, the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was $2.3 million and $2.4 million, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal years 2016 and 2015 follows (in thousands):

	20 1 6			20 15
Beginning of fiscal year	$	3,870		$	6,965
Additions for tax positions related to the current year		725			428
Reductions for tax positions related to the current year		(113	)		–
Additions for tax positions of prior years		868			114
Reductions for tax positions of prior years		(150	)		(2,690	)
Reductions for settlements with taxing authorities		–			(295	)
Reductions due to statute settlements		(652	)		(652	)
End of fiscal year	$	4,548		$	3,870

The liability for unrecognized tax benefits

as of May 31, 2016 includes $0.4 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 both May 31, 2016 and June 2, 2015, we had $0.4 million of accrued interest and penalties related to unrecognized tax benefits.

During

fiscal year 2016, accrued interest and penalties decreased by an insignificant amount. 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 May 31, 2016 and June 2, 2015, total liabilities of $1.3 million and $1.0 million, respectively, including the above-mentioned amounts 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.

May 31, 2016, we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2012, and with few exceptions, we are no longer subject to state and local examinations by tax authorities prior to fiscal year 2013.