NOTE 7—INCOME TAXES

The difference between the effective tax rate on earnings from continuing operations before income taxes and the U.S. federal income tax statutory rate is as follows:

	Nine Months Ended

(In thousands)	Nine Months Ended September 30, 2013			From Inception August 31, 2012 through September 27, 2012			December 30, 2011 through August 30, 2012
	(Successor)			(Successor)			(Predecessor)
Income tax expense at the federal statutory rate	$	31,975		$	(15,050	)	$	22,260
Effect of:
State income taxes		(3,610	)		100			3,005
Permanent items		120			—			1,000
Change in FIN 48 Reserve		3,535			—			—
Change in net operating loss carryforward for excess tax deductions		(28,420	)		—			—
Valuation allowance		7,260			15,050			(23,260	)

Income tax expense	$	10,860		$	100		$	3,005

Effective income tax rate		11.9	%		(0.2	)%		4.7	%

The accounting for income taxes requires that deferred tax assets and liabilities be recognized, using enacted tax rates, for the tax effect of temporary differences between the financial reporting and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized.

The state tax provision was for the states that impose their income based taxes on a gross sales method, that impose a margin tax, that have suspended the use of net operating loss carryforwards into the current tax year and amounts related to state tax credits.

The change in FIN 48 reserve relates to gross increases due to new positions during the nine months ended September 30, 2013 of $4,000,000, partially offset by favorable resolutions with taxing authorities of $(465,000).

If, in the future, the Company generates sufficient earnings in the United States federal and state tax jurisdictions where it has recorded full valuation allowances, management's conclusion regarding the need for a valuation allowance in these tax jurisdictions could change. If this were to occur, the Company could have a reduction of some or a significant portion of the Company's recorded valuation allowance in the near term, which would reduce the Company's income tax provision and therefore increase net earnings. This determination would be dependent on a number of factors which would include, but not be limited to, the Company's expectation of future taxable income.