Note 8: Income Taxes

Income before income taxes includes income from foreign operations of $ 6,007,000, $ 3,423,000 and $ 2,361,000 for fiscal 2013, 2012 and 2011, respectively.

Total income tax expense for the fiscal years ended January 3, 2014, December 28, 2012 and December 30, 2011 consisted of the following:

	Fiscal Years
(In thousands)	2013		2012		2011

Current
Federal	$	22,468	$	23,562	$	20,544
Foreign		1,411		852		656
State		4,824		4,304		4,587
		28,703		28,718		25,787
Deferred
Federal		(2,703)		(3,378)		(3,013)
State		(695)		(816)		(650)
		(3,398)		(4,194)		(3,663)
Total	$	25,305	$	24,524	$	22,124

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)	2013			2012			2011

Tax at federal statutory rate	$	22,381		$	21,612		$	19,187
State taxes, net of federal benefit		2,819			2,409			2,568
Tax exempt interest income		(36)			(104)			(74)
Non-deductible expenses		226			296			240
Non-deductible stock-based compensation		(79)			(40)			12
Other		(6)			351			191
Tax expense	$	25,305		$	24,524		$	22,124

Effective tax rate		39.6	%		39.7	%		40.4	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 3, 2014 and December 28, 2012 are presented in the following schedule:

	Fiscal Years
(In thousands)	2013		2012

Deferred tax assets:
Accrued liabilities and allowances	$	15,539	$	14,503
Deferred compensation		22,373		17,252
Total deferred tax assets		37,912		31,755

Deferred tax liabilities:
State taxes		(1,519)		(1,099)
Deductible goodwill		(2,925)		(2,829)
Property, equipment and leasehold improvements		(622)		(500)
Unrealized gain of deferred compensation plan assets		(3,215)		(1,095)
Other		(394)		(216)
Total deferred tax liabilities		(8,675)		(5,739)
Net deferred tax assets	$	29,237	$	26,016

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 January 3, 2014, December 28, 2012 and December 30, 2011, the net deduction in tax payable arising from employees’ stock award activity was $ 4,267,000, $ 3,948,000 and $ 2,378,000, 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 2010. The Company is no longer subject to California franchise tax examinations for years prior to 2009. 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 2009.

At January 3, 2014, the Company had unrecognized tax benefits of $ 1,147,000, 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:

Balance at December 30, 2011	$	388,000
Additions based on tax positions related to the current year		275,000
Additions for tax positions of prior years		317,000
Reductions due to lapse of statute of limitations		(72,000)
Reductions due to change in accounting method		-
Settlements		-

Balance at December 28, 2012	$	908,000
Additions based on tax positions related to the current year		316,000
Additions for tax positions of prior years		-
Reductions due to lapse of statute of limitations		(77,000)
Reductions due to change in accounting method		-
Settlements		-

Balance at January 3, 2014	$	1,147,000

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 January 3, 2014 was $ 2,379,000. 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. The unrecognized deferred tax liability for these earnings is estimated to be approximately $ 118,000.