Note 13. Income Taxes

The Company’s income (loss) before income taxes consisted of the following (in millions):



	Years Ended
	July 2, 2016			June 27, 2015			June 28, 2014
Domestic	$	(110.9	)	$	(173.1	)	$	(136.4	)
Foreign	65.0			67.8			50.6
(Loss) income before income taxes	$	(45.9	)	$	(105.3	)	$	(85.8	)

The Company’s income tax expense (benefit) consisted of the following (in millions):



	Years Ended
	July 2, 2016			June 27, 2015			June 28, 2014
Federal:
Current	$	—		$	0.1		$	(0.2	)
Deferred	(26.2		)	2.3			(4.5		)
	(26.2		)	2.4			(4.7		)
State:
Current	—			(0.1		)	—
Deferred	(1.5		)	0.1			(0.3		)
	(1.5		)	—			(0.3		)
Foreign:
Current	21.3			17.9			16.7
Deferred	10.9			5.8			(22.9		)
	32.2			23.7			(6.2		)
Total income tax (benefit) expense	$	4.5		$	26.1		$	(11.2	)

The federal and state deferred tax benefit primarily relates to the intraperiod allocation rules for other comprehensive income and discontinued operations and the release of deferred tax liabilities on tax deductible goodwill that is impaired for financial statement purposes. The foreign current expense primarily relates to the Company’s profitable operations in certain foreign jurisdictions. The foreign deferred tax expense primarily relates to a one-time increase in valuation allowance associated with deferred tax assets transferred to Lumentum in connection with the Separation.

There was no material tax benefit associated with exercise of stock options for the fiscal years ended July 2, 2016, June 27, 2015 and June 28, 2014.

A reconciliation of the Company’s income tax expense (benefit) at the federal statutory rate to the income tax expense (benefit) at the effective tax rate is as follows (in millions):



	Years Ended
	July 2, 2016			June 27, 2015			June 28, 2014
Income tax (benefit) expense computed at federal statutory rate	$	(16.1	)	$	(36.8	)	$	(30.0	)
Goodwill impairment	19.4			—			—
Intraperiod allocation	(20.7		)	—			(6.4		)
Foreign rate differential	(2.0		)	(2.3		)	(0.5		)
Valuation allowance	18.2			56.7			43.6
Research and experimentation benefits and other tax credits	(1.1		)	(0.9		)	(0.1		)
Statute expiration	—			—			(21.7		)
Reversal of previously accrued taxes	—			(0.8		)	(0.7		)
Permanent items	6.7			8.0			3.8
Other	0.1			2.2			0.8
Income tax (benefit) expense	$	4.5		$	26.1		$	(11.2	)

The components of the Company’s net deferred taxes consisted of the following (in millions):



	Years Ended
	July 2, 2016			June 27, 2015			June 28, 2014
Gross deferred tax assets:
Tax credit carryforwards	$	141.0		$	131.4		$	124.8
Net operating loss carryforwards	1,846.3			2,226.1			2,261.4
Capital loss carryforwards	145.9			4.1			4.9
Inventories	6.1			6.7			6.4
Accruals and reserves	27.4			30.2			43.9
Investments	34.4			0.7			0.8
Other	60.3			55.5			54.3
Acquisition-related items	65.2			59.9			54.3
Gross deferred tax assets	2,326.6			2,514.6			2,550.8
Valuation allowance	(2,174.3		)	(2,334.5		)	(2,321.8		)
Deferred tax assets	152.3			180.1			229.0
Gross deferred tax liabilities:
Acquisition-related items	(13.2		)	(20.9		)	(31.0		)
Undistributed foreign earnings	—			(4.7		)	(4.2		)
Other	(31.1		)	(44.5		)	(49.3		)
Deferred tax liabilities	(44.3		)	(70.1		)	(84.5		)
Total net deferred tax assets (liabilities)	$	108.0		$	110.0		$	144.5

At the beginning of the second quarter of fiscal 2016, the Company prospectively adopted the authoritative guidance on balance sheet classification of deferred taxes, which requires deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the Consolidated Balance Sheets. This classification eliminates the need to separately identify the net current and net non-current deferred tax asset or liability in each jurisdiction. As of June 27, 2015, deferred tax assets and deferred tax liabilities of $2.0 million and $7.1 million, respectively, were not reclassified from current to non-current as the Company elected to adopt the authoritative guidance prospectively.

As of July 2, 2016, the Company had federal, state and foreign tax net operating loss carryforwards of $5,008.3 million, $886.0 million and $609.2 million, respectively, and federal, state and foreign research and other tax credit carryforwards of $100.7 million, $39.6 million and $0.7 million, respectively. As a result of the Lumentum transaction we utilized federal and state net operating losses of approximately $1,026 million and $226 million, respectively, and generated capital losses of approximately $393 million. Of the remaining net operation losses, approximately $106.4 million when realized will be credited to additional paid-in capital. The Company’s policy is to account for the utilization of tax attributes under a with-and-without approach. The tax net operating loss, tax credit and capital loss carryforwards will start to expire in calendar 2017 and at various other dates through 2035 if not utilized. Utilization of the tax net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state and foreign provisions. Loss carryforward limitations may result in the expiration or reduced utilization of a portion of the Company’s net operating losses.

U.S. income and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on $319.6 million of undistributed earnings for certain foreign subsidiaries. The Company intends to reinvest these earnings indefinitely outside of the United States. The Company estimates that an additional $17.0 million of U.S. income or foreign withholding taxes would have to be provided if these earnings were repatriated back to the U.S.

The valuation allowance decreased by $160.2 million in fiscal 2016, increased by $12.6 million in fiscal 2015, and decreased by $12.1 million in fiscal 2014. The decrease during fiscal 2016 was primarily due to the Lumentum transaction. The increase during fiscal 2015 was primarily related to the increases in the deferred tax assets and intangible amortization. The decrease during fiscal 2014 was primarily related to an increase in acquisition and debt issuance related deferred tax liabilities. The following table provides information about the activity of our deferred tax valuation allowance (in millions):



Deferred Tax Valuation Allowance	Balance at Beginning of Period		Additions Charged to Expenses or Other Accounts(1)		Deductions Credited to Expenses or Other Accounts(2)			Balance at End of Period
Year Ended July 2, 2016	$	2,334.5	$	227.5	$	(387.7	)	$	2,174.3
Year Ended June 27, 2015	$	2,321.8	$	39.5	$	(26.8	)	$	2,334.5
Year Ended June 28, 2014	$	2,333.9	$	32.2	$	(44.3	)	$	2,321.8


(1)	Additions include current year additions charged to expenses and current year build due to increases in net deferred tax assets, return to provision true-ups, other adjustments and OCI impact to deferred taxes.


(2)	Deductions include current year releases credited to expenses and current year reductions due to decreases in net deferred tax assets, return to provision true-ups, other adjustments and OCI impact to deferred taxes.

Approximately $514.7 million of the valuation allowance as of July 2, 2016 was attributable to pre-fiscal 2006 windfall stock option deductions, the benefit of which will be credited to paid-in-capital if and when realized through a reduction in income tax payable. Beginning with fiscal 2006, the Company began to track the windfall stock option deductions off-balance sheet. If and when realized, the tax benefit associated with those deductions will be credited to additional paid-in-capital.

During fiscal 2014, the Company recognized $21.7 million of uncertain tax benefits related to deferred tax assets due to the expiration of the statute of limitations in a non-US jurisdiction. In addition, the Company recorded a tax benefit of $6.4 million related to the income tax intraperiod tax allocation rules in relation to other comprehensive income.

A reconciliation of unrecognized tax benefits between June 29, 2013 and July 2, 2016 is as follows (in millions):



Balance at June 29, 2013	$	58.2
Additions based on tax positions related to current year	3.2
Additions due to foreign currency rate fluctuation	1.1
Reductions for lapse of statute of limitations	(21.7		)
Reductions based on state credit expiration	(1.7		)
Reductions based on the tax positions related to the prior year	(0.8		)
Balance at June 28, 2014	38.3
Additions based on tax positions related to current year	1.9
Reductions for lapse of statute of limitations	(3.3		)
Reductions due to foreign currency rate fluctuations	(0.1		)
Balance at June 27, 2015	36.8
Additions based on tax positions related to current year	5.1
Reductions for lapse of statute of limitations	(0.2		)
Balance at July 2, 2016	$	41.7

The unrecognized tax benefits relate primarily to the allocations of revenue and costs among the Company’s global operations and the validity of some U.S. tax credits. Included in the balance of unrecognized tax benefits at July 2, 2016 are $3.0 million of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefits at July 2, 2016 are $38.7 million of tax benefits that, if recognized, would result in adjustments to the valuation allowance and are included in deferred taxes and other non-current tax liabilities, net in the Consolidated Balance Sheets.

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits within the income tax provision. The amount of interest and penalties accrued as of July 2, 2016 and June 27, 2015 was approximately $1.7 million and $1.6 million, respectively. During fiscal 2016, the Company’s accrued interest and penalties decreased by $0.1 million primarily relating to the lapse of statute in a non-US jurisdiction. The unrecognized tax benefits that may be recognized during the next twelve months is approximately $1.0 million.

The Company is routinely subject to various federal, state and foreign audits by taxing authorities. The Company believes that adequate amounts have been provided for any adjustments that may result from these examinations.

The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of July 2, 2016:



Tax Jurisdictions	Tax Years
United States	2013 and onward
Canada	2010 and onward
China	2011 and onward
France	2013 and onward
Germany	2014 and onward
Korea	2011 and onward
United Kingdom	2015 and onward