Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.1
Income Taxes
12 Months Ended
Feb. 01, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
 
The components of our income tax expense/(benefit) were as follows:
($ in millions)
 
2019
 
2018
 
2017
Current
 
 
 
 
 
 
Federal and foreign
 
$
4

 
$
(5
)
 
$
(60
)
State and local
 
6

 
1

 
1

Total current
 
10

 
(4
)
 
(59
)
Deferred
 
 
 
 
 
 
Federal and foreign
 
(6
)
 
(17
)
 
(63
)
State and local
 
(1
)
 
5

 
(4
)
Total deferred
 
(7
)
 
(12
)
 
(67
)
Total income tax expense/(benefit)
 
$
3

 
$
(16
)
 
$
(126
)


The following table summarizes a reconciliation of income tax expense/(benefit) compared with the amounts at the U.S. federal statutory income tax rate:
($ in millions)
 
2019
 
2018
 
2017
Federal income tax at statutory rate
 
$
(56
)
 
$
(57
)
 
$
(82
)
State and local income tax, less federal income tax benefit
 
(12
)
 
(17
)
 
(12
)
Increase/(decrease) in valuation allowance
 
61

 
47

 
33

Effect of U.S. tax reform
 

 

 
(75
)
Other, including permanent differences and credits
 
10

 
11

 
10

Total income tax expense/(benefit)
 
$
3

 
$
(16
)
 
$
(126
)


Our deferred tax assets and liabilities were as follows:
($ in millions)
 
2019
 
2018
Assets
 
 
 
 
Merchandise inventory
 
$
7

 
$
4

Accrued vacation pay
 
8

 
8

Gift cards
 
36

 
35

Stock-based compensation
 
18

 
19

State taxes
 
1

 
3

Workers’ compensation/general liability
 
38

 
41

Accrued rent
 

 
27

Litigation exposure
 
1

 
2

Interest expense limitation
 
83

 
48

Mirror savings plan
 
7

 
7

Pension and other retiree obligations
 
4

 
1

Operating lease liabilities
 
299

 

Net operating loss and tax credit carryforwards
 
710

 
707

Other
 
56

 
52

Total deferred tax assets
 
1,268

 
954

Valuation allowance
 
(869
)
 
(802
)
Total net deferred tax assets
 
399

 
152

Liabilities
 
 
 
 
Depreciation and amortization
 
(193
)
 
(223
)
Tax benefit transfers
 
(26
)
 
(29
)
Long-lived intangible assets
 
(36
)
 
(31
)
Operating lease assets
 
(260
)
 

Total deferred tax liabilities
 
(515
)
 
(283
)
Total net deferred tax liabilities
 
$
(116
)
 
$
(131
)


The Tax Act, enacted in December 2017, significantly changed the U.S. corporate income tax laws. In connection with the enactment, we recorded a net benefit of $75 million during the fourth quarter of 2017, which is primarily due to the revaluation of net deferred tax liabilities based on the new lower corporate income tax rate.

As of February 1, 2020, a valuation allowance of $869 million has been recorded against our deferred tax assets. In assessing the need for the valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our assessment, we concluded that, beginning in the second quarter of 2013, our estimate of the realization of deferred tax assets would be based solely on the future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to accelerate taxable income to utilize expiring net operating loss (NOL) and tax credit carryforwards.

We are required to allocate a portion of our tax provision between operating losses and Accumulated other comprehensive income/(loss). In 2019, the Company did not benefit any of its operating loss and incurred an actuarial loss in Other comprehensive income/(loss), the tax benefit on which was fully offset by a valuation allowance within Other comprehensive income/(loss).  Accordingly, there is a valuation allowance offsetting the tax benefit attributable to other comprehensive income included in the total valuation allowance of $869 million noted above.

The Company has federal net operating loss (NOL) carryforwards of $2.1 billion and $76 million of federal tax credit carryforwards as of February 1, 2020 that expire in 2032 through 2034. These NOL carryforwards arose prior to December 31, 2017 and are available to offset future taxable income. The Company may recognize additional NOLs in the future which, under the Tax Act, would not expire but would only be available to offset up to 80% of the Company’s future taxable income.

The Company has $341 million of federal unused interest deductions that do not expire but can be used in the future only to the extent the Company has interest limitation (explained below) in excess of its interest expense. Additionally, the Company has state NOLs that are subject to various limitations and expiration dates beginning in 2020 through 2040 and are offset fully by valuation allowances.

The NOL and credit carryforwards have a potential to be used to offset future taxable income and reduce future cash tax liabilities by approximately $710 million. The Company’s ability to utilize these carryforwards will depend upon the availability of future taxable income during the carryforward period and, as such, there is no assurance the Company will be able to realize such tax savings.

Interest Limitation: The Tax Act limits the Company’s interest deduction to 30% of tax earnings before interest, tax, depreciation and amortization beginning in 2018 through 2021. Thereafter, the interest deduction is limited to 30% of tax earnings before interest and taxes. Any disallowed interest in a year becomes a separate deferred tax asset with an indefinite carryforward period that can be utilized by the Company in a future tax year by an amount equal to its interest limitation in excess of its interest expense for that year. In 2019, the Company had net interest expense of $119 million disallowed which became a $35 million deferred tax asset on which a full valuation allowance was recorded.
The Company’s ability to utilize NOL and credit carryforwards and unused interest deductions could be further limited if it were to experience an “ownership change,” as defined in Section 382 of the Code and similar state provisions. An ownership change can occur whenever there is a cumulative shift in the ownership of a company by more than 50 percentage points by one or more “5% stockholders” within a three-year period. The occurrence of such a change generally limits the amount of carryforwards a company could utilize in a given year to the aggregate fair market value of the company’s common stock immediately prior to the ownership change, multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change.

As discussed in Note 14, on January 27, 2014, the Board adopted the Amended Rights Agreement to help prevent acquisitions of the Company’s common stock that could result in an ownership change under Section 382 which helps preserve the Company’s ability to use its NOL and tax credit carryforwards. The Amended Rights Agreement was ratified by the shareholder vote on May 16, 2014. On May 19, 2017, stockholders approved the extension of the term of the agreement to January 26, 2020. On January 24, 2020, the term of the Amended Rights Agreement was extended to January 25, 2023. The Company expects to submit the extension of the Amended Rights Agreement to stockholders for approval at its 2020 annual meeting of stockholders. If stockholders do not approve the extension of the Amended Rights Agreement, the Amended Rights Agreement will terminate.

The Amended Rights Agreement is designed to prevent acquisitions of the Company’s common stock that would result in a stockholder owning 4.9% or more of the Company’s common stock (as calculated under Section 382), or any existing holder of 4.9% or more of the Company’s common stock acquiring additional shares, by substantially diluting the ownership interest of any such stockholder unless the stockholder obtains an exemption from the Board.
    
A reconciliation of unrecognized tax benefits is as follows:
($ in millions)
 
2019
 
2018
 
2017
Beginning balance
 
$
35

 
$
35

 
$
79

Additions for tax positions of prior years
 
2

 
3

 
4

Reductions for tax positions of prior years
 

 
(1
)
 
(45
)
Settlements and effective settlements with tax authorities
 
(1
)
 
(2
)
 
(3
)
Balance at end of year 
 
$
36

 
$
35

 
$
35



Unrecognized tax benefits included in our Consolidated Balance Sheets were as follows:
($ in millions)
 
2019
 
2018
Deferred taxes (noncurrent liability)
 
$
35

 
$
32

Accounts payable and accrued expenses (Note 8)
 

 
2

Other liabilities (Note 9)
 
1

 
1

Total
 
$
36

 
$
35



As of the end of 2019, 2018 and 2017, the unrecognized tax benefits balance included $33 million, that, if recognized, would be a benefit in the income tax provision after giving consideration to the offsetting effect of $7 million, $7 million and $7 million, respectively, related to the federal tax deduction of state taxes. The remaining amounts reflect tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing. Accrued interest and penalties related to unrecognized tax benefits included in income tax expense as of the end of 2019, 2018 and 2017 were $2 million, $1 million and $1 million, respectively.
 
We file income tax returns in U.S. federal and state jurisdictions and certain foreign jurisdictions. Our U.S. federal returns have been examined through 2016. We are audited by the taxing authorities of many states and certain foreign countries and are subject to examination by these taxing jurisdictions for years generally after 2008. The tax authorities may have the right to examine prior periods where federal and state NOL and tax credit carryforwards were generated, and make adjustments up to the amount of the NOL and credit carryforward amounts.