Income Taxes

The following were the components of (loss) income before income taxes (in thousands):



	Fiscal Years Ended
	June 26, 2016			June 28, 2015			June 29, 2014
Domestic		($45,278	)		($41,593	)		$57,867
Foreign	21,772			(42,346		)	88,664
Total (loss) income before income taxes		($23,506	)		($83,939	)		$146,531

The following were the components of income tax (benefit) expense (in thousands):



	Fiscal Years Ended
	June 26, 2016			June 28, 2015			June 29, 2014
Current:
Federal		$5,347			($12,470	)		$3,423
Foreign	7,278			13,327			15,371
State	1,244			1,242			1,876
Total current	13,869			2,099			20,670
Deferred:
Federal	(26,086		)	(7,418		)	(88		)
Foreign	12,340			(12,754		)	3,003
State	(2,093		)	(1,174		)	(544		)
Total deferred	(15,839		)	(21,346		)	2,371
Income tax (benefit) expense		($1,970	)		($19,247	)		$23,041

Actual income tax (benefit) expense differed from the amount computed by applying the U.S. federal tax rate of 35% to pre-tax earnings as a result of the following (in thousands, except percentages):



	Fiscal Years Ended
	June 26, 2016			% of Loss	June 28, 2015			% of Loss	June 29, 2014			% of Income
Federal income tax provision at statutory rate		($8,227	)	35%		($29,379	)	35%		$51,286		35%
(Decrease) increase in income tax expense resulting from:
State tax provision, net of federal benefit	(748		)	3%	(817		)	1%	2,530			2%
State tax credits	(269		)	1%	(585		)	1%	(1,004		)	(1)%
Tax exempt interest	(2,019		)	9%	(2,413		)	3%	(815		)	(1)%
48C investment tax credit	(4,334		)	18%	(6,826		)	8%	(11,310		)	(8)%
(Decrease) increase in tax reserve	(80		)	—%	(225		)	—%	15,411			11%
Change in tax depreciation methodology	—			—%	—			—%	(18,475		)	(12)%
Research and development credits	(2,138		)	9%	(2,081		)	2%	(1,574		)	(1)%
Foreign tax credit	(954		)	4%	(389		)	—%	(490		)	—%
Increase (decrease) in valuation allowance	9,286			(39)%	—			—%	(20		)	—%
Qualified production activities deduction	—			—%	(520		)	1%	(2,362		)	(1)%
Stock-based compensation	1,346			(6)%	2,988			(4)%	2,024			1%
Statutory rate differences	2,748			(12)%	18,738			(22)%	(14,285		)	(10)%
Foreign earnings taxed in U.S.	1,165			(5)%	1,793			(2)%	—			—%
Foreign currency fluctuations	748			(3)%	(818		)	1%	(20		)	—%
Other	1,506			(6)%	1,287			(1)%	2,145			1%
Income tax (benefit) expense		($1,970	)	8%		($19,247	)	23%		$23,041		16%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows (in thousands):



	June 26, 2016			June 28, 2015
Deferred tax assets:
Compensation		$3,176			$1,864
Inventories	19,656			23,172
Sales return reserve and allowance for bad debts	6,615			8,266
Warranty reserve	8,013			5,042
Federal and state net operating loss carryforwards	11,443			7,237
Federal credits	8,802			3,688
State credits	3,286			2,573
48C investment tax credits	17,838			14,980
Investments	872			953
Stock-based compensation	48,191			40,291
Deferred revenue	4,159			4,850
Other	2,792			2,034
Total gross deferred assets	134,843			114,950
Less valuation allowance	(10,770		)	(1,485		)
Deferred tax assets, net	124,073			113,465
Deferred tax liabilities:
Property and equipment	(9,549		)	(13,337		)
Intangible assets	(69,355		)	(57,819		)
Investments	(2,445		)	(505		)
Prepaid taxes and other	(1,527		)	(1,350		)
Foreign earnings recapture	(3,576		)	(2,524		)
Total gross deferred liability	(86,452		)	(75,535		)
Deferred tax asset, net		$37,621			$37,930

The components giving rise to the net deferred tax assets (liabilities) have been included in the Consolidated Balance Sheets as follows (in thousands):



	Balance at June 26, 2016
	Assets				Liabilities
	Current		Noncurrent		Current		Noncurrent
U.S. federal income taxes		$—		$26,411		$—		$—
Foreign income taxes	—		12,153		—		(943		)
Total net deferred tax assets/(liabilities)		$—		$38,564		$—		($943	)



	Balance at June 28, 2015
	Assets				Liabilities
	Current		Noncurrent		Current		Noncurrent
U.S. federal income taxes		$23,231		$52		$—		($8,915	)
Foreign income taxes	15,959		8,899		—		(1,296		)
Total net deferred tax assets/(liabilities)		$39,190		$8,951		$—		($10,211	)

The research and development credit, which had previously expired on December 31, 2014, was reinstated as part of the Protecting Americans from Tax Hikes Act of 2015, enacted on December 18, 2015. This legislation retroactively reinstated and permanently extended the research and development credit. The benefit of this credit for fiscal 2016 as well as the period December 31, 2014 through June 28, 2015 has been included in the fiscal year 2016 tax benefit representing a $1.3 million and $0.8 million benefit, respectively.

During the second quarter of fiscal 2014, the Company was notified by the Internal Revenue Service that it had been allocated $30 million of federal tax credits as part of the American Recovery and Reinvestment Act of 2009 - Phase II (Internal Revenue Code Section 48C). This $30 million allocation is in addition to the $39 million previously allocated to the Company in the third quarter of fiscal 2010. The tax benefit (net of related basis adjustments) will be amortized into income over the useful life (5 years) of the underlying equipment that was placed into service to generate these credits. Since fiscal 2010, the Company has recognized an income tax benefit of $37.2 million related to the credits generated to date, with $4.3 million of this amount recognized as a tax benefit for the year ended June 26, 2016.

During the fourth quarter of fiscal 2016, the Company concluded it is likely that sufficient future taxable income needed to fully utilize net operating loss carryovers in Luxembourg will not be generated due to additional losses on the Company’s equity method investment held there. The Company recorded a $9.5 million valuation allowance against the related deferred tax asset, representing the $32.4 million net operating loss carryover net of tax. This resulted in an additional $9.5 million of income tax expense during the fourth quarter of fiscal 2016.

During the fourth quarter of fiscal 2016, the Company concluded it is likely that it will fully utilize all North Carolina income tax credits due to the expected taxable gain on the sale of the Wolfspeed Business. As a result, the Company released a $1.9 million valuation allowance against the related deferred tax asset. This resulted in an additional $1.9 million of income tax benefit during the fourth quarter of fiscal 2016.

As of June 28, 2016, the Company had approximately $36.2 million of foreign net operating loss carryovers, of which $32.4 million are offset by a valuation allowance. The foreign net operating loss carryovers have no carry forward limitation. As of June 26, 2016, the Company had approximately $22.7 million of state net operating loss carryovers, of which approximately $15.1 million are offset by a valuation allowance. Additionally, the Company had $6.9 million of state income tax credit carryforwards. The state net operating loss carryovers and income tax credit carryforwards will begin to expire in fiscal 2021 and fiscal 2017, respectively. Furthermore, the Company had approximately $0.8 million of alternative minimum tax credit carryforwards, $5.8 million of 48C credit carryforwards, $1.9 million of research and development credit carryforwards, and $1.6 million of state income tax credit carryforwards that relate to excess stock option benefits which, if and when realized, will be recognized in Additional paid-in-capital in the Consolidated Balance Sheets.

U.S. GAAP requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement.

As of June 28, 2015 the Company’s liability for unrecognized tax benefits was $17.8 million. The Company recognized a $0.6 million increase to the liability for unrecognized tax benefits due to uncertainty regarding intercompany transactions recently challenged by the Italian tax authority, and a $0.5 million decrease to the liability for unrecognized tax benefits due to a decrease in the effective tax rate related to an uncertainty regarding a change in tax depreciation methodology adopted in fiscal 2014. In addition there was a $0.2 million decrease to the amount of unrecognized tax benefits following statute expiration. As a result, the total liability for unrecognized tax benefits as of June 26, 2016 was $17.7 million. If any portion of this $17.7 million is recognized, the Company will then include that portion in the computation of its effective tax rate. Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is reasonably possible that approximately $4.3 million of gross unrecognized tax benefits will change in the next 12 months as a result of pending audit settlements or statute requirements.

The following is a tabular reconciliation of the Company’s change in uncertain tax positions (in thousands):



	Fiscal Years Ended
	June 26, 2016			June 28, 2015			June 29, 2014
Balance at beginning of period		$17,795			$18,389			$2,732
Increases related to prior year tax positions	617			—			18,040
Decreases related to prior year tax positions	(530		)	(407		)	(741		)
Expiration of statute of limitations for assessment of taxes	(155		)	(187		)	(1,642		)
Balance at end of period		$17,727			$17,795			$18,389

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Income tax (benefit) expense line item in the Consolidated Statements of (Loss) Income. Total interest and penalties accrued were as follows (in thousands):



	June 26, 2016			June 28, 2015
Accrued interest and penalties		($5	)		$10

Total interest and penalties recognized were as follows (in thousands):



	Fiscal Years Ended
	June 26, 2016			June 28, 2015			June 29, 2014
Recognized interest and penalties (benefit)		($15	)		($94	)		($51	)

The Company files U.S. federal, U.S. state and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to tax examinations for fiscal years prior to 2013. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2012. For foreign purposes, the Company is generally no longer subject to examination for tax periods 2005 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination, adjustment and recapture. The Company is currently under audit by the Italian Revenue Agency for the fiscal year ended June 30, 2013.

The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside the United States. As of June 26, 2016, U.S. income taxes were not provided for on a cumulative total of approximately $255.0 million of undistributed earnings for certain non-U.S. subsidiaries, as the Company currently intends to reinvest these earnings in these foreign operations indefinitely. If, at a later date, these earnings were repatriated to the U.S., the Company would be required to pay taxes on these amounts. Determination of the amount of any deferred tax liability on these undistributed earnings is not practicable.

During the fiscal year ended June 26, 2011, the Company was awarded a tax holiday in Malaysia with respect to its manufacturing and distribution operations. This arrangement allows for 0% tax for 10 years starting in the fiscal year ended June 26, 2011. For the fiscal years 2014, 2015, and 2016, the Company did not meet the requirements for the tax holiday, and as such, no benefit has been recognized.