NOTE 14. INCOME TAX

The components of earnings from continuing operations before income taxes are as follows:



	Year Ended August 31,
(in thousands)	2015		2014		2013
United States	$	217,008	$	108,882	$	147,204
Foreign	27,520		42,933		15,498
Total	$	244,528	$	151,815	$	162,702

The income taxes (benefit) included in the consolidated statements of earnings are as follows:



	Year Ended August 31,
(in thousands)	2015			2014			2013
Current:
United States	$	53,258		$	11,798		$	849
Foreign	3,329			2,965			1,970
State and local	2,830			4,157			1,815
Current taxes	$	59,417		$	18,920		$	4,634
Deferred:
United States	$	19,269		$	30,427		$	45,908
Foreign	722			4,457			4,980
State and local	3,362			(2,536		)	3,767
Deferred taxes	$	23,353		$	32,348		$	54,655
Total income taxes on income	$	82,770		$	51,268		$	59,289
Income taxes (benefit) on discontinued operations	(436		)	8,544			1,310
Income taxes on continuing operations	$	83,206		$	42,724		$	57,979

A reconciliation of the federal statutory rate to the Company's effective income tax rate from continuing operations is as follows:



	Year Ended August 31,
(in thousands)	2015			2014			2013
Income tax expense at statutory rate of 35%	$	85,585		$	53,135		$	56,946
State and local taxes	4,020			88			3,460
Section 199 manufacturing deduction	(4,017		)	(1,199		)	—
Foreign rate differential	(2,404		)	(6,290		)	(4,783		)
Change in valuation allowance	12,305			19,978			5,334
Deferred compensation	772			(4,164		)	(2,890		)
Nontaxable foreign interest	(16,712		)	(16,506		)	(5,445		)
Disposition of foreign subsidiaries	—			—			6,292
Australian reorganization	—			—			(7,245		)
Other	3,657			(2,318		)	6,310
Income tax expense on continuing operations	$	83,206		$	42,724		$	57,979
Effective income tax rates from continuing operations	34.0		%	28.1		%	35.6		%

The Company's effective income tax rates from discontinued operations for the years ended August 31, 2015, 2014 and 2013 were (2.2)%, 56.9% and (5.0)%, respectively.

The Company's effective income tax rate from continuing operations was 34.0% for the year ended August 31, 2015, compared to the statutory rate of 35%. Several factors influence the effective tax rate. Items that benefited the effective tax rate include: 1) income from operations in jurisdictions with lower statutory tax rates than the United States, including Poland, and 2) benefit for domestic production activity income pursuant to Section 199 of the Internal Revenue Code. Items that had a negative impact on the effective tax rate include: 1) United States state and local taxes imposed on income from domestic operations, 2) losses from operations in certain jurisdictions where the Company maintains a valuation allowance, thus providing no benefit for such losses, and 3) a non-deductible loss on assets segregated to fund the nonqualified benefit restoration plan (“BRP”).

For the year ended August 31, 2014, the effective income tax rate from continuing operations was 28.1%. It was lower than the statutory income tax rate of 35% because the Company earned a higher portion of its global income from operations in countries which have lower income tax rates than the United States, notably Poland, which has a statutory income tax rate of 19%. Additionally, the Company realized a benefit under Section 199 for domestic production activity, and had a non-taxable net holding gain on BRP assets.

For the year ended August 31, 2013, the effective income tax rate from continuing operations was 35.6%; which was higher than the U.S. statutory income tax rate of 35%. The income tax rate was primarily driven by an increase in the Company's valuation allowances on deferred tax assets in jurisdictions that more likely than not will not be realized. The increase in the valuation allowances was primarily related to unfavorable results reported by the Company's Australian operations during fiscal 2013 that led these operations to a three year cumulative loss position. As a result, the Company determined that is was more likely than not that the deferred tax assets associated with the Australian operations would not be realized.

The Company made net payments of $61.0 million and $11.8 million for income taxes for the years ended August 31, 2015 and 2014, respectively. The Company received net refunds of $7.6 million for income taxes for the year ended August 31, 2013.

The income tax effects of significant temporary differences giving rise to deferred tax assets and liabilities are as follows:



	August 31,
(in thousands)	2015			2014
Deferred tax assets:
Deferred compensation and employee benefits	$	48,309		$	51,956
Net operating losses and credits	78,838			68,736
Reserves and other accrued expenses	21,380			45,246
Allowance for doubtful accounts	3,334			3,760
Intangibles	8,086			6,707
Other	9,562			8,766
Total deferred tax assets	169,509			185,171
Valuation allowance for deferred tax assets	(79,965		)	(69,762		)
Deferred tax assets, net	$	89,544		$	115,409
Deferred tax liabilities:
Fixed assets	$	102,144		$	99,016
Inventory	3,774			8,320
Other	3,981			4,066
Total deferred tax liabilities	$	109,899		$	111,402
Deferred tax assets, net of deferred tax liabilities	$	(20,355	)	$	4,007

Net operating losses giving rise to deferred tax assets consist of $304.5 million of state net operating losses that expire during the tax years ending from 2016 to 2035 and foreign net operating losses of $219.5 million that expire during the tax years beginning in 2016. These assets will be reduced as income tax expense is recognized in future periods.

The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. During the year ended August 31, 2015, the Company recorded a valuation allowance of $10.2 million related to net operating loss carryforwards in certain state and foreign jurisdictions due to the uncertainty of their realization. During the year ended August 31, 2014, the Company recorded a valuation allowance in the amount of $20.9 million related to net operating loss carryforwards in certain state and foreign jurisdictions due to the uncertainty of their realization.

In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of August 31, 2015, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $463.2 million of undistributed earnings and profits associated with the excess of the amount for financial reporting over the income tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.

The unrecognized income tax benefits as of both August 31, 2015 and 2014 were $27.3 million, of which $12.0 million, if recognized, would have impacted the Company's effective income tax rate at the end of both fiscal 2015 and 2014. The unrecognized income tax benefits as of August 31, 2013 were $28.6 million, of which $13.3 million, if recognized, would have impacted the Company's effective income tax rate at the end of fiscal 2013.

A reconciliation of the beginning and ending amounts of unrecognized income tax benefits is as follows:



	August 31,
(in thousands)	2015		2014			2013
Balance at September 1	$	27,349	$	28,551		$	27,384
Change in tax positions of current year	—		—			1,255
Change for tax positions of prior years	—		(1,202		)	—
Reductions due to settlements with taxing authorities	—		—			(88		)
Balance at August 31	$	27,349	$	27,349		$	28,551

The Company's policy classifies interest recognized on an underpayment of income taxes and any statutory penalties recognized on a tax position as income tax expense, and the balances at the end of a reporting period are recorded as part of the current or noncurrent liability for uncertain income tax positions. At August 31, 2015 and 2014, the Company had accrued interest and penalties related to uncertain tax positions of $4.2 million and $3.4 million, respectively.

During the twelve months ending August 31, 2016, it is reasonably possible that the statute of limitations pertaining to positions of the Company in prior year income tax returns may lapse or that income tax audits in various taxing jurisdictions could be finalized. As a result, the total amount of unrecognized income tax benefits may decrease by approximately $17.8 million, which would reduce the provision for income taxes on earnings by $2.5 million.

The Company files income tax returns in the United States and multiple foreign jurisdictions with varying statutes of limitations. In the normal course of business, the Company and its subsidiaries are subject to examination by various taxing authorities. The following is a summary of tax years subject to examination:

U.S. Federal — 2009 and forward

U.S. States — 2009 and forward

Foreign — 2008 and forward

The Company is under examination by the Internal Revenue Service and state revenue authorities from 2009 to 2011. Management believes the Company's recorded income tax liabilities as of August 31, 2015 sufficiently reflect the anticipated outcome of these examinations.