Note 12. Income Taxes

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



	Years Ended
	July 1, 2017		July 2, 2016			June 27, 2015
Domestic	$	94.7	$	(110.9	)	$	(173.1	)
Foreign	91.9		65.0			67.8
Income (loss) before income taxes	$	186.6	$	(45.9	)	$	(105.3	)

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



	Years Ended
	July 1, 2017		July 2, 2016			June 27, 2015
Federal:
Current	$	—	$	—		$	0.1
Deferred	1.0		(26.2		)	2.3
	1.0		(26.2		)	2.4
State:
Current	0.2		—			(0.1		)
Deferred	—		(1.5		)	0.1
	0.2		(1.5		)	—
Foreign:
Current	18.0		21.3			17.9
Deferred	2.1		10.9			5.8
	20.1		32.2			23.7
Total income tax expense	$	21.3	$	4.5		$	26.1

The federal deferred tax expense primarily relates to the amortization of tax deductible goodwill. The foreign current expense primarily relates to the Company’s profitable operations in certain foreign jurisdictions. The foreign deferred tax expense primarily relates to the use of deferred tax assets in profitable foreign jurisdictions.

There was no material tax benefit associated with exercise of stock options for the fiscal years ended July 1, 2017, July 2, 2016 and June 27, 2015.

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



	Years Ended
	July 1, 2017			July 2, 2016			June 27, 2015
Income tax expense (benefit) computed at federal statutory rate	$	65.3		$	(16.1	)	$	(36.8	)
Goodwill impairment	—			19.4			—
Intraperiod allocation	—			(20.7		)	—
Foreign rate differential	(6.6		)	(2.0		)	(2.3		)
Valuation allowance	(27.4		)	18.2			56.7
Research and experimentation benefits and other tax credits	(1.4		)	(1.1		)	(0.9		)
Reversal of previously accrued taxes	(0.2		)	—			(0.8		)
Permanent items	(9.1		)	6.7			8.0
Other	0.7			0.1			2.2
Income tax expense	$	21.3		$	4.5		$	26.1

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



	Years Ended
	July 1, 2017			July 2, 2016			June 27, 2015
Gross deferred tax assets:
Tax credit carryforwards	$	150.6		$	141.0		$	131.4
Net operating loss carryforwards	1,875.4			1,846.3			2,226.1
Capital loss carryforwards	102.4			145.9			4.1
Inventories	5.4			6.1			6.7
Accruals and reserves	30.3			27.4			30.2
Investments	0.7			34.4			0.7
Other	51.9			60.3			55.5
Acquisition-related items	55.5			65.2			59.9
Gross deferred tax assets	2,272.2			2,326.6			2,514.6
Valuation allowance	(2,097.8		)	(2,174.3		)	(2,334.5		)
Deferred tax assets	174.4			152.3			180.1
Gross deferred tax liabilities:
Acquisition-related items	(6.5		)	(13.2		)	(20.9		)
Undistributed foreign earnings	(3.0		)	—			(4.7		)
Other	(57.3		)	(31.1		)	(44.5		)
Deferred tax liabilities	(66.8		)	(44.3		)	(70.1		)
Total net deferred tax assets	$	107.6		$	108.0		$	110.0

As of July 1, 2017, the Company had federal, state and foreign tax net operating loss carryforwards of $5,115.1 million, $762.2 million and $624.0 million, respectively, and federal, state and foreign research and other tax credit carryforwards of $103.9 million, $40.7 million and $1.4 million, respectively. Under current guidance, approximately $117.7 million of the net operating losses when realized, would have been 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. Upon the Company’s adoption of the new guidance on share-based payment awards in fiscal 2018, we expect our deferred tax assets related to the $117.7 million net operating losses to increase which will be offset by a corresponding increase in our valuation allowance. The tax net operating loss, tax credit and capital loss carryforwards will start to expire in calendar 2018 and at various other dates through 2037 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 $373.3 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 $21.5 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 $76.5 million in fiscal 2017, decreased by $160.2 million in fiscal 2016, and increased by $12.7 million in fiscal 2015. The decrease during fiscal 2017 was primarily due to the utilization of deferred tax assets and the increase in deferred tax liabilities as result of the issuance of convertible debt. The decrease during fiscal 2016 was primarily related to the Lumentum transaction. The increase during fiscal 2015 was primarily related to an increase in the deferred tax assets and intangible amortization. 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 1, 2017	$	2,174.3	$	44.7	$	(121.2	)	$	2,097.8
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


(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.


(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 increases in deferred tax liabilities.

Under current guidance, approximately $514.7 million of the valuation allowance as of July 1, 2017 was attributable to pre-fiscal 2006 windfall stock option deductions, the benefit of which would have been 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 would have been credited to additional paid-in-capital. Upon the Company’s adoption of the new guidance on share-based payment awards in fiscal 2018, the benefit if realized will no longer be credited to additional paid-in capital.

During fiscal 2016, the Company recognized a tax expense of $8.9 million related to a one-time increase in valuation allowance associated with deferred tax assets transferred to Lumentum in connection with the Separation. The tax expense was partially offset by a deferred tax benefit of $9.5 million related to the write off of tax deductible goodwill and a tax benefit of $20.7 million related to the income tax intraperiod tax allocation rules for discontinued operations and other comprehensive income.

A reconciliation of unrecognized tax benefits between June 28, 2014 and July 1, 2017 is as follows (in millions):



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
Additions based on tax positions related to current year	1.6
Additions based on tax positions related to prior year	0.9
Reduction based on tax positions related to prior year	(3.5		)
Reductions for lapse of statute of limitations	(1.8		)
Balance at July 1, 2017	$	38.9

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 1, 2017 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 1, 2017 are $36.0 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 1, 2017 and July 2, 2016 was approximately $1.8 million and $1.7 million, respectively. During fiscal 2017, the Company’s accrued interest and penalties increased 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 $0.1 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 1, 2017:



Tax Jurisdictions	Tax Years
United States	2014 and onward
Canada	2016 and onward
China	2012 and onward
France	2014 and onward
Germany	2014 and onward
Korea	2012 and onward
United Kingdom	2016 and onward