Note 8: Income Taxes

Income before income taxes includes income from foreign operations of $2,361,000, $2,995,000 and $1,269,000 for fiscal 2011, 2010 and 2009, respectively.

Total income tax expense for the fiscal years ended December 30, 2011, December 31, 2010 and January 1, 2010 consisted of the following:

	Fiscal Years
(In thousands)	2011			2010			2009

Current
Federal	$	20,544		$	17,383		$	14,932
Foreign		656			758			320
State		4,587			4,275			3,742
		25,787			22,416			18,994
Deferred
Federal		(3,013	)		(2,474	)		(3,353	)
State		(650	)		(755	)		(747	)
		(3,663	)		(3,229	)		(4,100	)
Total	$	22,124		$	19,187		$	14,894

The Company’s effective tax rate differs from the statutory federal tax rate of 35% as shown in the following schedule:

	Fiscal Years
(In thousands)	2011			2010			2009

Tax at federal statutory rate	$	19,187		$	16,347		$	12,957
State taxes, net of federal
benefit		2,568			2,361			1,881
Tax exempt interest income		(74	)		(62	)		(210	)
Non-deductible expenses		240			205			170
Non-deductible stock-based compensation		12			34			54
Other		191			302			42
Tax expense	$	22,124		$	19,187		$	14,894

Effective tax rate		40.4	%		41.1	%		40.2	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 30, 2011 and December 31, 2010 are presented in the following schedule:

	Fiscal Years
(In thousands)	2011			2010

Deferred tax assets:
Accrued liabilities and allowances	$	13,288		$	11,786
Deferred compensation		13,916			11,448
Total deferred tax assets		27,204			23,234

Deferred tax liabilities:
State taxes		(1,095	)		(1,289	)
Deductible goodwill		(2,724	)		(2,490	)
Property, equipment and leasehold improvements		(866	)		(217	)
Other		(534	)		(872	)
Total deferred tax liabilities		(5,219	)		(4,868	)
Net deferred tax assets	$	21,985		$	18,366

Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

The Company is entitled to a deduction for federal and state tax purposes with respect to employees’ stock award activity. The net deduction in taxes otherwise payable arising from that deduction has been credited to additional paid-in capital. For the fiscal years ended December 30, 2011, December 31, 2010 and January 1, 2010, the net deduction in tax payable arising from employees’ stock award activity was $2,378,000, $3,972,000 and $3,282,000 respectively.

The Company and its subsidiaries file income tax returns in the United States federal jurisdiction, California and various other state and foreign jurisdictions. The Company is no longer subject to United States federal income tax examination for years prior to 2008. The Company is no longer subject to California franchise tax examinations for years prior to 2007. With few exceptions, the Company is no longer subject to state and local or non-United States income tax examination by tax authorities for years prior to 2007.

At December 30, 2011, the Company had unrecognized tax benefits of $388,000, which primarily related to uncertainty regarding the sustainability of certain deductions taken on the Company’s federal and state income tax returns. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance at January 1, 2010		324,000
Additions based on tax positionsrelated to the current year		83,000
Additions for tax positions of prior years		3,000
Reductions due to lapse of statute of limitations		(34,000	)
Settlements		-

Balance at December 31, 2010	$	376,000

Additions based on tax positions related to the current year		83,000
Additions for tax positions of prior years		-
Reductions due to lapse of statute of limitations		(55,000	)
Reductions due to change in accounting method		(16,000	)
Settlements		-

Balance at December 30, 2011	$	388,000

Unrecognized tax benefits are included in other liabilities in the accompanying balance sheet. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. There are no uncertain tax positions whose resolution in the next 12 months is expected to materially affect operating results.

Deferred income taxes have not been provided on the undistributed earnings of foreign subsidiaries. The amount of such earnings at December 30, 2011 was $2,184,000. These earnings have been permanently reinvested and the Company does not plan to initiate any action that would precipitate the payment of income taxes thereon. It is not practicable to estimate the amount of additional tax that might be payable on the undistributed foreign earnings.