Income Taxes:

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



	Three Months Ended
	July 2, 2017			July 3, 2016
	(in thousands, except %)
Federal and state income taxes	$	(3,420	)	$	(4,551	)
Foreign income taxes ⁽¹⁾	103			109
Income tax expense (benefit)	$	(3,317	)	$	(4,442	)



	Six Months Ended
	July 2, 2017		July 3, 2016
	(in thousands, except %)
Federal and state income taxes	$	6,678	$	6,712
Foreign income taxes ⁽¹⁾	383		218
Income tax expense (benefit)	$	7,061	$	6,930

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(1) Including foreign taxes withheld.

Our effective income tax rate for the three months ended July 2, 2017 and July 3, 2016 differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits partially offset by the impact of non-deductible litigation costs related to the Merger (see Note 10 “Consolidating Guarantor Financial Information” for a definition of the Merger). Our effective income tax rate for the six months ended July 2, 2017 and July 3, 2016 differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits partially offset by the impact of non-deductible litigation costs related to the Merger. In addition, both the three-month and six-month periods ended July 3, 2016, were negatively impacted by an increase in the liability for uncertain tax positions and a change in state income tax rates.

For the periods presented herein, we have used the year-to-date effective tax rate (the “discrete method”), as prescribed by ASC 740-270, Accounting for Income Taxes-Interim Reporting when a reliable estimate of the estimated annual rate cannot be made. We believe 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 annual 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 $3.0 million and $3.1 million as of July 2, 2017 and January 1, 2017, respectively, and if recognized would decrease our provision for income taxes by $1.5 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 $0.5 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 July 2, 2017 and January 1, 2017, was $1.3 million and $1.2 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.”