INCOME TAXES

Income (loss) from continuing operations before income taxes by jurisdiction is as follows:



	2011			2010			Transition Period			2009
	(In thousands)
US	$	(481,048	)	$	(7,594	)	$	(64,709	)	$	(200,334	)
Foreign	(6,078		)	74,082			(3,737		)	26,485
Total	$	(487,126	)	$	66,488		$	(68,446	)	$	(173,849	)

The components of income tax expense (benefit) are set forth below:



	2011			2010			Transition Period			2009
	(In thousands)
Current:
Federal	$	741		$	28,156		$	10,266		$	(320	)
Foreign	13,132			25,815			(245		)	2,829
State and other	1,914			(8,549		)	—			(2,617		)
Total current	15,787			45,422			10,021			(108		)
Deferred:
Federal	(9,128		)	(27,823		)	(118,514		)	(21,025		)
Foreign	1,033			(41,212		)	15,434			1,199
State and other	872			(225		)	(9,312		)	(1,652		)
Total deferred	(7,223		)	(69,260		)	(112,392		)	(21,478		)
	$	8,564		$	(23,838	)	$	(102,371	)	$	(21,586	)

The effective tax rate for continuing operations for 2011 was (1.8%) compared to (35.9)% for 2010. The effective tax rate for 2011 differed from 2010 primarily as a result of an increase in the valuation allowance during 2011 and the benefit in 2010 on the deconsolidation for tax purposes of the Mexico operations.

The effective tax rate for continuing operations in 2009 was 12.4%. The effective tax rate for 2010 differed from 2009 primarily as a result of a benefit on the deconsolidation for tax purposes of the Mexico operations and a decrease in the valuation allowance. The deconsolidation for tax purposes of the Mexico operations was in response to changes in the Mexican tax laws that became effective January 1, 2010. The deconsolidation reduces the accrued taxes that had been previously recognized under the consolidated filing status as it eliminates recapturing certain taxes required under the new consolidation laws.

The following table reconciles the statutory US federal income tax rate to the Company’s effective income tax rate:



	2011			2010			Transition Period			2009
Federal income tax rate	35.0		%	35.0		%	35.0		%	35.0		%
State tax rate, net	2.6			0.8			2.1			2.0
Permanent items	(0.8	)		13.6			(0.6	)		(0.9	)
Permanent items – reorganization costs	0.1			(14.1	)		(8.5	)		(8.5	)
Domestic production activity	(0.8	)		(7.3	)		—			—
Difference in US statutory tax rate and foreign country effective tax rate	—			(7.8	)		0.6			2.2
Book income of consolidated entities attributable to noncontrolling interests	—			(1.7	)		0.2			—
Tax credits	1.8			(7.6	)		0.9			2.5
Change in reserve for unrecognized tax benefits	(2.5	)		13.9			(4.9	)		14.6
Change in valuation allowance	(35.3	)		(10.9	)		155.8			(33.0	)
Change in tax legislation	0.9			(44.3	)		(22.5	)		—
Other	(2.8	)		(5.5	)		(8.5	)		(1.5	)
Total	(1.8	)	%	(35.9	)	%	149.6		%	12.4		%

Significant components of the Company’s deferred tax liabilities and assets are as follows:



	December 25, 2011			December 26, 2010
	(In thousands)
Deferred tax liabilities:
PP&E and identified intangible assets	$	125,310		$	136,358
Inventories	88,779			88,820
Insurance claims and losses	20,890			15,432
All other current	19,026			3,043
All other noncurrent	10,905			16,956
Total deferred tax liabilities	264,910			260,609
Deferred tax assets:
Net operating losses	251,328			103,389
Foreign net operating losses	37,932			26,580
Credit carry forwards	57,781			50,055
Allowance for doubtful accounts	6,039			10,053
Accrued liabilities	48,578			35,644
All other noncurrent	19,846			16,293
Derivatives	6			693
Workers compensation	36,318			33,089
Pension and other postretirement benefits	29,269			22,615
Total deferred tax assets	487,097			298,411
Valuation allowance	(230,336		)	(53,938		)
Net deferred tax assets	256,761			244,473
Net deferred tax liabilities	$	8,149		$	16,136

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and tax-planning strategies in making this assessment.

As of December 25, 2011, the Company does not believe it has sufficient positive evidence to conclude that realization of its federal, state and foreign net deferred tax assets is more likely than not to be realized. The increase in valuation allowance of $176.4 million during 2011 was primarily due to an increase in federal, state and foreign net operating losses. As described in more detail below, during the Transition Period the Company carried back $547.7 million of its US federal net operating losses. As a result, during the Transition Period the Company released valuation allowance that had been recorded on its US federal net operating losses in the amount of $109.3 million. As of December 25, 2011, the Company's valuation allowance is $230.3 million, of which $190.7 million relates to federal and state net operating losses and credit carry forwards and $39.6 million relates to Mexico operations.

As of December 25, 2011, the Company had US federal net operating loss carry forwards of approximately $613.2 million that will begin to expire in 2026 and state net operating loss carry forwards of approximately $797.3 million that will begin to expire in 2012. The Company also had Mexico net operating loss carry forwards at December 25, 2011 of approximately $126.4 million that will begin to expire in 2012.

As of December 25, 2011, the Company had approximately $53.3 million of federal tax credit carry forwards that will begin to expire in 2024 and $4.4 million of state tax credit carry forwards that will begin to expire in 2012.

During the Transition Period the Company generated additional net operating losses from stock compensation deductions in excess of expenses recognized for financial reporting purposes (“Excess Tax Benefits”). Excess Tax Benefits are realized when they reduce taxes payable, as determined using a “with and without” method, and are credited to additional paid-in capital when realized. The Company has not recorded Excess Tax Benefits of $22.2 million as of December 25, 2011 from excess stock-based compensation deductions taken on our tax return for which a benefit has not yet been realized.

On November 6, 2009, H.R. 3548 was signed into law and included a provision that allowed most business taxpayers an increased carry back period for net operating losses incurred in 2008 or 2009. As a result, during 2009 the Company utilized $547.7 million of its US federal net operating losses under the expanded carry back provisions of H.R. 3548 and filed a claim for refund of $169.7 million. The Company received $122.6 million in refunds from the Internal Revenue Service (“IRS”) from the carry back claims during 2010. The Company anticipates receipt of the remainder of its claim pending resolution of its litigation with the IRS. See “Note 17. Commitments and Contingencies” for additional information.

Section 382 of the Internal Revenue Code of 1986, as amended, imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its US net operating losses and tax credits to reduce its tax liability. The Company experienced an ownership change in December 2009, but believes that utilization of the US net operating losses and tax credits will not be hindered by the Section 382 limitation.

The Company has not provided any deferred income taxes on the undistributed earnings of its Mexico subsidiaries based upon the determination that such earnings will be indefinitely reinvested. As of December 25, 2011, the cumulative undistributed earnings of these subsidiaries were approximately $121.1 million. If such earnings were not considered indefinitely reinvested, the Company estimates it would be subject to approximately $42.4 million of US federal income taxes before considering the availability of any US foreign tax credits. For activity after fiscal year ending September 2008, the Company is not permanently reinvesting its earnings in Puerto Rico. Therefore, the earnings generated in Puerto Rico have US taxes provided on the earnings as if the earnings were distributed.

On October 31, 2009, the Mexican Congress enacted tax reform that became effective January 1, 2010. Under the provisions of the new law, the corporate tax rate increased from 28% to 30% beginning in calendar year 2010, will decrease from 30% to 29% in calendar year 2013, and will return to 28% in calendar year 2014. Also, beginning in calendar year 2010, the tax reform treated most consolidated income tax return benefits as temporary benefits for which deferred taxes must be paid once a five-year period has elapsed. For deferred taxes generated in calendar year 2006, that tax must be paid as follows: 25% in each of calendar years 2012 and 2013, 20% in calendar year 2014 and 15% in each of calendar years 2015 and 2016. Additionally, under the new bill, there are recapture rules that apply to separate company losses (post calendar year 1998) utilized in consolidation whereby the losses must be recaptured within five years instead of ten years if the separate company does not generate income to offset the losses. As a result of the tax impact of the new law, the Company recognized a charge of $15.4 million during the Transition Period.

During 2011, the Company completed its deconsolidation of its Mexico operations from a tax perspective to help minimize the impact of the new Mexico tax reform. As a result, all of the Mexico subsidiaries filed separate returns in 2011. The deconsolidation reduced the accrued taxes that had been previously recognized under the consolidated filing status as it eliminated recapturing certain taxes required under the new consolidation laws. As a result of the deconsolidation, the Company recognized a benefit of $4.3 million and $29.5 million during 2011 and 2010, respectively.

The Company follows the provisions of ASC 740-10-25 that clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax benefit is required to meet before being recognized in the financial statements.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



	December 25, 2011			December 26, 2010
	(In thousands)
Unrecognized tax benefits, beginning of year	$	66,674		$	25,516
Increase as a result of tax positions taken during the current year	6,368			9,005
Increase as a result of tax positions taken during prior years	13,964			87,654
Decrease as a result of tax positions taken during prior years	(22,198		)	(55,156		)
Decrease relating to settlements with taxing authorities	—			(345		)
Unrecognized tax benefits, end of year	$	64,808		$	66,674

Included in unrecognized tax benefits of $64.8 million at December 25, 2011, was $19.6 million of tax benefits that, if recognized, would reduce the Company's effective tax rate. It is not practicable at this time to estimate the amount of unrecognized tax benefits that will change in the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. As of December 25, 2011, the Company had recorded a liability of $23.9 million for interest and penalties. During 2011, accrued interest and penalty amounts related to uncertain tax positions were increased by $5.1 million.

The IRS has concluded the examination and appeals phase for the tax year ended September 26, 2002. The Company continues to be under examination for Gold Kist and its subsidiaries for the tax years June 30, 2004 through December 27, 2006.

The Company operates in the US (including multiple state jurisdictions), Puerto Rico and Mexico. With few exceptions, the Company is no longer subject to US federal, state or local income tax examinations for years prior to 2003 and is no longer subject to Mexico income tax examinations by taxing authorities for years prior to 2006.

The Company is currently working with the IRS through the normal processes and procedures that are available to all taxpayers outside of bankruptcy to resolve the IRS' proofs of claim. In connection, the Company has filed various petitions in United States Tax Court (“Tax Court”) in response to the Notices of Deficiency that were issued to the Company. These matters are currently in litigation. See “Note 17. Commitments and Contingencies” for additional information.

The Company requested and received approval from the IRS to change the Company's tax year end from the Saturday nearest September 30 of each year to the last Sunday in December of each year. This change aligns the Company's tax year with the tax year of JBS USA. The Company now operates on the basis of a 52/53-week tax year that ends on the Sunday falling on or before December 31.