Safeway (SWY)

NOTE G–TAXES ON INCOME

Income tax expense was reduced by $16.1 million in the first quarter of 2009 for previously unrecognized tax benefits and related interest income. The recognition of these items is primarily due to the settlement of a federal income tax dispute with the Internal Revenue Service (“IRS”) and the completion of the IRS examination of the Company’s tax returns for 2004 and 2005 during the first quarter of 2009.

On April 29, 2009, the Company was notified by the IRS that it approved a settlement of another disputed income tax matter. The result will be a reduction in income tax expense by an estimated $50 million during the second quarter of 2009.

After considering this subsequent event, the remaining unrecognized tax benefits are approximately $65 million of which $34 million may affect the effective tax rate. The Company does not anticipate that total unrecognized tax benefits will significantly change in the next 12 months.

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SAFEWAY INC. AND SUBSIDIARIES

NOTE G–TAXES ON INCOME

It is reasonably possible that the Company will recognize a decrease of up to $81 million in unrecognized tax benefits within the next twelve months as a result of the settlement of federal tax audits. A significant portion of this decrease in unrecognized tax benefits could result in lower income tax expense. However, the timing and amounts of these audit settlements are subject to significant uncertainty.

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SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE G–TAXES ON INCOME

As of March 22, 2008, there have been no material changes to the Company's uncertain tax positions disclosures as provided in Note H of the 2007 Annual Report on Form 10-K. The Company does not anticipate that total unrecognized tax benefits will significantly change prior to March 28, 2009.

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SAFEWAY INC. AND SUBSIDIARIES

NOTE G–TAXES ON INCOME

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on December 31, 2006, the first day of the 2007 fiscal year. The Company recorded the cumulative effect of adopting FIN 48 by increasing stockholders’ equity by $139.7 million.

As of December 31, 2006, the Company had unrecognized tax benefits of $138.8 million. Of this amount, $114.4 million (net of tax) represents the amount that would reduce the Company’s effective income tax rate, if recognized in future periods.

The Company recognizes interest and penalties on income taxes in income tax expense. As of December 31, 2006, the Company had $21.4 million of interest receivable on income taxes (net of tax).

The Company and its domestic subsidiaries file income tax returns with federal, state and local tax authorities within the United States. The Company’s foreign affiliates file income tax returns in various foreign jurisdictions, the most significant of which are Canada and certain of its provinces. The Internal Revenue Service (“IRS”) recently completed its examination of the Company’s federal income tax returns for 2002 and 2003, and began its examination of the returns for 2004 and 2005 in May 2007. The IRS and other tax authorities have proposed tax deficiencies on several issues. The Company is contesting these proposed tax deficiencies. With limited exceptions, including these proposed tax deficiencies and certain income tax refund claims, the Company is no longer subject to federal income tax examinations for fiscal years before 2004, and is no longer subject to state and local income tax examinations for fiscal years before 2001. With limited exceptions, the Company’s foreign affiliates are no longer subject to examination by Canada and certain of its provinces for fiscal years before 2002.

There have been no material changes to the amount of uncertain tax positions since the adoption of FIN 48.

The Company does not anticipate that total unrecognized tax benefits will significantly change prior to the end of the third quarter of 2008.

In April 2006, Safeway announced that it had settled a federal income tax refund claim for the years 1992 through 1999 for costs associated with debt financing. In the second quarter of 2006, Safeway recorded the tax refund of $259.2 million as an increase to additional paid-in capital since the tax deductions associated with the debt financing exceeded the previously recognized book expense. Additionally, income tax expense was reduced by $58.5 million for interest earned on that refund.

NOTE G–TAXES ON INCOME

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on December 31, 2006, the first day of the 2007 fiscal year. The Company recorded the cumulative effect of adopting FIN 48 by increasing stockholders’ equity by $139.7 million.

As of December 31, 2006, the Company had unrecognized tax benefits of $138.8 million. Of this amount, $114.4 million (net of tax) represents the amount that would reduce the Company’s effective income tax rate, if recognized in future periods.

The Company recognizes interest and penalties on income taxes in income tax expense. As of December 31, 2006, the Company had $21.4 million of interest receivable on income taxes (net of tax).

The Company and its domestic subsidiaries file income tax returns with federal, state and local tax authorities within the United States. The Company’s foreign affiliates file income tax returns in various foreign jurisdictions, the most significant of which are Canada and certain of its provinces. The Internal Revenue Service (“IRS”) recently completed its examination of the Company’s federal income tax returns for 2002 and 2003, and began its examination of the returns for 2004 and 2005 in May 2007. The IRS and other tax authorities have proposed tax deficiencies on several issues. The Company is contesting these proposed tax deficiencies. With limited exceptions, including these proposed tax deficiencies and certain income tax refund claims, the Company is no longer subject to federal income tax examinations for fiscal years before 2004, and is no longer subject to state and local income tax examinations for fiscal years before 2001. With limited exceptions, the Company’s foreign affiliates are no longer subject to examination by Canada and certain of its provinces for fiscal years before 2002.

The Company does not anticipate that total unrecognized tax benefits will significantly change prior to the end of the second quarter of 2008.

There have been no material changes to the amount of uncertain tax positions since the adoption of FIN 48.

In April 2006, Safeway announced that it had settled a federal income tax refund claim for the years 1992 through 1999 for costs associated with debt financing. In the second quarter of 2006, Safeway recorded the tax refund of $259.2 million as an increase to additional paid-in capital since the tax deductions associated with the debt financing exceeded the previously recognized book expense. Additionally, income tax expense was reduced by $58.5 million for interest earned on that refund.