Income Taxes:

Our income tax expense (benefit) consists of the following for the periods presented:



	Three Months Ended
	October 2, 2016			September 27, 2015
	(in thousands, except %)
Federal and state income taxes	$	(2,662	)	$	(1,643	)
Foreign income taxes⁽¹⁾	376			135
Income tax benefit	$	(2,286	)	$	(1,508	)
Effective rate	48.7		%	32.0		%



	Nine Months Ended
	October 2, 2016			September 27, 2015
	(in thousands, except %)
Federal and state income taxes	$	4,051		$	2,431
Foreign income taxes⁽¹⁾	594			888
Income tax expense	$	4,645		$	3,319
Effective rate	41.8		%	66.8		%

_________________

(1) Including foreign taxes withheld.

Our effective income tax rates for the three and nine-month periods ended October 2, 2016 and September 27, 2015, differ from the statutory rate primarily due to the favorable impact of employment-related federal and state income tax credits, the favorable impact of adjustments related to the prior year’s estimated tax provision versus actuals, the unfavorable impact of non-deductible litigation and settlement costs related to the Merger, and the unfavorable impact of increases in the liability for uncertain tax positions.

Our quarterly provision for income taxes has historically been calculated using the annual effective rate method which applies an estimated annual effective tax rate to pre-tax income or loss. However, for the three and nine-month periods ended October 2, 2016, we have used the actual year-to-date effective tax rate (the “discrete method”), as required by ASC 740-270, Accounting for Income Taxes-Interim Reporting when a reliable estimate cannot be made. We believe that at this time, the use of the discrete method is more appropriate than the annual effective tax rate method due to significant variations in the customary relationship between income tax expense and projected annual pre-tax income or loss which occurs when projected pre-tax income or loss nears a relatively small amount in comparison to the differences between income and deductions determined for financial statement purposes versus income tax purposes. Using the discrete method, we have determined our current and deferred income tax expense as if the interim period were an annual period.

Our liability for uncertain tax positions (excluding interest and penalties) was $3.7 million and $3.3 million as of October 2, 2016 and January 3, 2016, respectively, and if recognized would decrease our provision for income taxes by $1.2 million. Within the next twelve months, we could settle or otherwise conclude income tax audits. As such, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as $0.2 million as a result of settlements with certain taxing authorities and expiring statutes of limitations within the next twelve months.

Total accrued interest and penalties related to unrecognized tax benefits as of October 2, 2016 and January 3, 2016, was $1.0 million and $1.7 million, respectively. On the Consolidated Balance Sheets, we include current interest related to unrecognized tax benefits in “Accrued interest,” current penalties in “Accrued expenses” and noncurrent accrued interest and penalties in “Other noncurrent liabilities.”