Income Taxes

The Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company’s effective income tax rate differs from the statutory rate for the tax jurisdictions where it operates primarily as the result of the impact of non-deductible and non-taxable items and tax credits recognized in relation to pre-tax results. Measurement of certain aspects of the Company’s tax positions are based on interpretations of tax regulations, federal and state case law and the applicable statutes.

The components of the provision for income taxes are as follows:



	Fiscal Year Ended
	2013			2012		2011
	(Dollars in thousands)
Current:
Federal	$	22,173		$	11,263	$	(3,116	)
Foreign	406			568		—
State	2,702			3,478		765
	25,281			15,309		(2,351		)
Deferred:
Federal	(2,866		)	9,392		14,375
Foreign	6			49		107
State	590			433		246
	(2,270		)	9,874		14,728
Total Tax Provision	$	23,011		$	25,183	$	12,377

Substantially all of the Company's pre-tax income is from operations in the United States. There were immaterial amounts of pre-tax income related to foreign operations for fiscal 2013, 2012, and 2011.

The deferred tax provision represents the change in the deferred tax assets and the liabilities representing the tax consequences of changes in the amount of temporary differences and changes in tax rates during the year. The significant components of deferred tax assets and liabilities are comprised of the following:



	July 27, 2013			July 28, 2012
	(Dollars in thousands)
Deferred tax assets:
Insurance and other reserves	$	23,089		$	22,014
Allowance for doubtful accounts and reserves	427			484
Net operating loss carryforwards	1,183			1,473
Stock-based compensation	4,231			2,705
Other	1,800			1,673
Total deferred tax assets	30,730			28,349
Valuation allowance	(1,788		)	(1,696		)
Deferred tax assets, net of valuation allowance	$	28,942		$	26,653
Deferred tax liabilities:
Property and equipment	$	36,491		$	35,832
Goodwill and intangibles	23,498			24,039
Other	712			686
Deferred tax liabilities	$	60,701		$	60,557

Net deferred tax liabilities	$	(31,759	)	$	(33,904	)

The above valuation allowance reduces the deferred tax asset balances to the amount that the Company has determined is more likely than not to be realized. Prior to fiscal 2009, the Company incurred non-cash impairment charges on an investment for financial statement purposes and recorded a deferred tax asset reflecting the tax benefits of those impairment charges. During the first quarter of fiscal 2010, the investment became impaired for tax purposes and the Company determined that it was more likely than not that the associated tax benefit would not be realized prior to its eventual expiration. Accordingly, the Company recognized a non-cash income tax charge of $1.1 million for a valuation allowance of the associated deferred tax asset during fiscal 2010. During fiscal 2012, the Company was able to utilize approximately $0.3 million of the underlying tax asset. As a result, there is $0.8 million remaining in the valuation allowance related to the investment as of July 27, 2013. As of July 27, 2013, the Company had immaterial state net operating loss carryforwards, which generally begin to expire in fiscal 2022.

The difference between the total tax provision and the amount computed by applying the statutory federal income tax rates to pre-tax income is as follows:



	Fiscal Year Ended
	2013			2012			2011
	(Dollars in thousands)
Statutory rate applied to pre-tax income	$	20,370		$	22,600		$	9,970
State taxes, net of federal tax benefit	2,271			2,766			659
Non-deductible and non-taxable items	366			208			1,517
Change in accruals for uncertain tax positions	153			93			53
Valuation allowance of deferred tax asset	—			(313		)	—
Other items, net	(149		)	(171		)	178
Total tax provision	$	23,011		$	25,183		$	12,377

The Company files income tax returns in the U.S. federal jurisdiction, multiple state jurisdictions and in Canada. With limited exceptions, the Company is no longer subject to U.S. federal and most state and local income tax examinations for fiscal years ended 2009 and prior. The Company believes its provision for income taxes is adequate; however, any significant assessment could affect the Company’s results of operations and cash flows. During fiscal 2012 the Company was notified by the Internal Revenue Service ("IRS") that its federal income tax return for a recent period was selected for examination. The IRS completed its examination during the fourth quarter of fiscal 2013. The Company received a "no change" letter as a result of this examination as the IRS did not propose any adjustments.

In the normal course of business, tax positions exist for which the ultimate outcome is uncertain. The Company establishes reserves against some or all of the tax benefit of the Company's tax positions at the time the Company determines that the ultimate outcome becomes uncertain. For purposes of evaluating whether a tax position is uncertain, management presumes the tax position will be examined by the relevant taxing authority; the technical merits of a tax position are derived from authorities in the tax law and their applicability to the facts and circumstances of the tax position; and each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the "more likely than not" recognition threshold would be recognized in the Company's income tax expense in the first interim period when the uncertainty disappears, when the matter is effectively settled, or when the applicable statue of limitations expires.

A summary of unrecognized tax benefits is as follows:



	Fiscal Year Ended
	2013			2012			2011
	(Dollars in thousands)
Balance at beginning of year	$	2,194		$	2,054		$	1,977
Additions based on tax positions related to the fiscal year	155			154			226
Additions based on tax positions related to prior years	19			6			36
Reductions related to the expiration of statues of limitation	(20		)	(20		)	(185		)
Balance at end of year	$	2,348		$	2,194		$	2,054

As of July 27, 2013 and July 28, 2012, the Company had total unrecognized tax benefits of $2.3 million and $2.2 million, respectively, which would reduce the Company’s effective tax rate during future periods if it is subsequently determined that those liabilities were not required. The Company had approximately $0.8 million and $0.6 million, respectively, for the payment of interest and penalties accrued at both July 27, 2013 and July 28, 2012. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses. Interest expense related to unrecognized tax benefits was immaterial for each of fiscal 2013, 2012, and 2011.