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INCOME TAXES

12 Months Ended

May 28, 2016

Income Tax Disclosure [Abstract]

9.	INCOME TAXES

Loss from continuing operations before income taxes includes the following components (in thousands):

		Fiscal Year Ended
		May 28, 2016				May 30, 2015				May 31, 2014
United States		$	(7,274	)		$	(9,287	)		$	(1,399	)
Foreign			1,054				2,293				747
Loss before income taxes		$	(6,220	)		$	(6,994	)		$	(652	)

The provision (benefit) for income taxes for fiscal 2016, 2015, and 2014 consists of the following (in thousands):

		Fiscal Year Ended
		May 28, 2016				May 30, 2015				May 31, 2014
Current:
Federal		$	0			$	(326	)		$	214
State			17				14				1
Foreign			441				191				601
Total current		$	458			$	(121	)		$	816
Deferred:
Federal		$	0			$	(1,964	)		$	(585	)
State			0				530				(169	)
Foreign			88				89				(369	)
Total deferred		$	88			$	(1,345	)		$	(1,123	)
Income tax provision (benefit)		$	546			$	(1,466	)		$	(307	)

The differences between income taxes at the U.S. federal statutory income tax rate of 34% and the reported income tax provision (benefit) for fiscal 2016, 2015, and 2014 are summarized as follows:

		Fiscal Year Ended
		May 28, 2016				May 30, 2015				May 31, 2014
Federal statutory rate			34	%			34	%			34	%
Effect of:
State income taxes, net of federal tax benefit			4.2				5.3				14.1
Foreign income inclusion			(0.4	)			(1.6	)			(10.2	)
Foreign taxes at other rates			0.6				4.4				(4.4	)
Permanent tax differences			(0.8	)			(0.5	)			(3.9	)
Intercompany items			—				2.2				(11.0	)
Compensation items			—				—				(12.7	)
Tax reserves			(6.0	)			0.8				(7.2	)
Additional U.S. tax on undistributed foreign earnings			(32.7	)			(0.5	)			37.6
Net increase in valuation allowance for deferred tax assets			(11.4	)			(27.3	)			(3.4	)
Return to provision adjustments			3.9				4.0				15.3
Other			(0.2	)			0.1				(1.2	)
Effective tax rate			(8.8	)%			20.9	%			47.0	%

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our deferred tax assets and liabilities reflect continuing operations as of May 28, 2016 and May 30, 2015. Significant components are as follows (in thousands):

		Fiscal Year Ended
		May 28, 2016				May 30, 2015
Deferred tax assets:
NOL carryforwards - foreign and domestic		$	9,089			$	5,960
Inventory valuations			1,141				1,060
Goodwill			798				1,031
Foreign tax credits			304				322
Severance reserve			34				—
Foreign capital loss			1,079				1,073
Other			2,167				1,983
Subtotal		$	14,612			$	11,429
Valuation allowance - foreign and domestic			(5,871	)			(5,158	)
Net deferred tax assets after valuation allowance		$	8,741			$	6,271
Deferred tax liabilities:
Accelerated depreciation		$	(973	)		$	(218	)
Tax on undistributed foreign earnings			(6,702	)			(4,813	)
Other			(175	)			(202	)
Subtotal		$	(7,850	)		$	(5,233	)
Net deferred tax assets		$	891			$	1,038
Supplemental disclosure of deferred tax assets :
Domestic		$	4,190			$	3,477
Foreign		$	2,549			$	2,710
Total		$	6,739			$	6,187

As of May 28, 2016, we had approximately $5.7 million of net deferred tax assets for federal net operating loss ("NOL") carryforwards, compared to $3.0 million as of May 30, 2015. Net deferred tax assets for domestic state NOL carryforwards amounted to approximately $2.7 million, compared to $2.4 million during fiscal year 2015. Net deferred tax assets related to foreign NOL carryforwards totaled approximately $0.6 million with various or indefinite expiration dates. The amount of net deferred tax assets related to foreign NOL carryforwards was the same as the fiscal year 2015. We also have a net deferred tax asset of $0.3 million related to foreign tax credit carryforwards as of May 28, 2016 and May 30, 2015. The changes in balances from prior year for the federal NOL carryforwards is driven by current year forecast taxable losses. We do not have any alternative minimum tax credit carryforward as of May 28, 2016.

We have historically determined that certain undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. Accordingly, we have provided a deferred tax liability totaling $6.7 million and $4.8 million as of May 28, 2016 and May 30, 2015, respectively, on foreign earnings of $48.7 million and $38.2 million, respectively. The increase year over year relates to the change in management’s assertion for RELL China. As of the fourth quarter of fiscal year 2016, we changed our assertion to no longer be permanently reinvested in China. In addition, as of May 28, 2016, $5.7 million of cumulative positive earnings of some of our foreign subsidiaries are still considered permanently reinvested pursuant to ASC 740-30, Income Taxes - Other Considerations or Special Areas (“ASC 740-30”). Due to various tax attributes that are continuously changing, it is not practicable to determine what, if any, tax liability might exist if such earnings were to be repatriated.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 28, 2016. Such objective evidence limits the ability to consider subjective evidence such as future income projections. We considered other positive evidence in determining the need for a valuation allowance in the U.S. including the repatriation of foreign earnings which we do not consider permanently reinvested in certain of our foreign subsidiaries. The weight of this positive evidence is not sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. jurisdiction.

As of May 28, 2016, a valuation allowance of $5.9 million has been established to record only the portion of the deferred tax asset that will more likely than not be realized. There has been an increase in the valuation allowance from May 30, 2015 in the amount of $0.7 million. The valuation allowance on deferred tax assets in foreign jurisdictions relates to jurisdictions where historical taxable losses have been incurred. We also recorded a valuation allowance for all domestic federal and state net deferred tax assets considering the significant cumulative losses in the U.S. jurisdiction, the reversal of the deferred tax liability for foreign earnings, and no forecast of additional U.S. income. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

Income taxes paid, including foreign estimated tax payments, were $0.7 million, $0.5 million, and $2.1 million, during fiscal 2016, 2015, and 2014, respectively.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2006 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local, or non-U.S. tax jurisdictions. We are under examination in the state of Illinois for fiscal years 2012 and 2013. We are currently under examination in Thailand for fiscal years 2008 through 2011 and France for fiscal years 2013 and 2015. Our primary foreign tax jurisdictions are Germany and the Netherlands. After the closure of the Germany tax audit for fiscal years 2009 through 2011, we have tax years open in Germany beginning in fiscal 2012 and the Netherlands beginning in fiscal 2010.

The uncertain tax positions from continuing operations as of May 28, 2016 and May 30, 2015, totaled $0.1 million. We record penalties and interest relating to uncertain tax positions in the income tax expense line item within the unaudited consolidated statements of income and comprehensive income. It is not expected that there will be a change in the unrecognized tax benefits within the next 12 months. The following table summarizes the activity related to the unrecognized tax benefits (in thousands):

		Fiscal Year Ended
		May 28, 2016				May 30, 2015
Unrecognized tax benefits, beginning of period		$	2,000			$	161
Increase in positions taken in prior period			299				2,000
Decrease in positions due to settlements			(299	)			(161	)
Unrecognized tax benefits, end of period		$	2,000			$	2,000

Unrecognized tax benefits for continuing and discontinued operations are as follows (in thousands):

		Fiscal Year Ended
		May 28, 2016				May 30, 2015
Continuing operations		$	117			$	117
Discontinued operations ⁽¹⁾			1,883				1,883
		$	2,000			$	2,000

(1)

Relates to an amended state income tax return

We record penalties and interest relating to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive Income (Loss). Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets. We have not recorded a liability for interest and penalties as of May 28, 2016, and none were recorded during May 30, 2015.

It is not expected that there will be a change in the unrecognized tax benefits due to the expiration of various statutes of limitations within the next 12 months.