Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.8
Income Taxes
12 Months Ended
Feb. 01, 2014
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes 
 
The components of our income tax expense/(benefit) were as follows:
($ in millions)
 
2013
 
2012
 
2011
Current
 
 
 
 
 
 
Federal and foreign
 
$
(16
)
 
$
(95
)
 
$
60

State and local
 
(8
)
 
79

 
16

Total current
 
(24
)
 
(16
)
 
76

Deferred
 
 
 
 
 
 
Federal and foreign
 
(428
)
 
(465
)
 
(130
)
State and local
 
(46
)
 
(70
)
 
(23
)
Total deferred
 
(474
)
 
(535
)
 
(153
)
Total
 
$
(498
)
 
$
(551
)
 
$
(77
)


A reconciliation of the statutory federal income tax rate to our effective rate is as follows:
(percent of pre-tax income/(loss))
 
2013
 
2012
 
2011
Federal income tax at statutory rate
 
(35.0
)%
 
(35.0
)%
 
(35.0
)%
State and local income tax, less federal income tax benefit
 
(4.1
)
 
(3.7
)
 
(1.8
)
Increase in valuation allowance federal and state
 
28.6

 
4.3

 

Tax benefit resulting from OCI allocation
 
(16.1
)
 

 

Tax effect of dividends on ESOP shares
 

 
(0.1
)
 
(1.9
)
Non-deductible management transition costs
 

 

 
11.3

Other, including permanent differences and credits
 
0.2

 
(1.4
)
 
(6.2
)
Effective tax rate
 
(26.4
)%
 
(35.9
)%
 
(33.6
)%


Our deferred tax assets and liabilities were as follows:
($ in millions)
 
2013
 
2012
Assets
 
 
 
 
Merchandise inventory
 
$
62

 
$
42

Accrued vacation pay
 
28

 
28

Gift cards
 
69

 
46

Stock-based compensation
 
69

 
78

State taxes
 
36

 
39

Workers’ compensation/general liability
 
93

 
92

Accrued rent
 
32

 
29

Mirror savings plan
 
21

 
22

Pension and other retiree obligations
 

 
135

Net operating loss and tax credit carryforwards
 
918

 
600

Other
 
96

 
69

Total deferred tax assets
 
1,424

 
1,180

Valuation allowance
 
(304
)
 
(66
)
Total net deferred tax assets
 
1,120

 
1,114

Liabilities
 
 
 
 
Depreciation and amortization
 
(1,024
)
 
(1,314
)
Pension and other retiree obligations
 
(172
)
 

Leveraged leases/tax benefit transfers
 
(63
)
 
(63
)
Capitalized Advertising
 
(3
)
 
(4
)
Unrealized gain on REITs
 

 
(9
)
Other
 

 
(6
)
Total deferred tax liabilities
 
(1,262
)
 
(1,396
)
Total net deferred tax liabilities
 
$
(142
)
 
$
(282
)


Deferred tax assets and liabilities included in our Consolidated Balance Sheets were as follows:
($ in millions)
 
2013
 
2012
Other current assets
 
$
193

 
$
106

Other long-term liabilities
 
(335
)
 
(388
)
Total net deferred tax liabilities
 
$
(142
)
 
$
(282
)


As of February 1, 2014, a valuation allowance of $304 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.

For the year ended February 1, 2014, we recorded a net tax benefit of $498 million that reflects the increase in the valuation allowance. The net tax benefit consists of net federal, foreign and state tax benefits of $197 million, $303 million tax benefit resulting from actuarial gains in other comprehensive income, offset by $2 million of tax expense related to the amortization of certain indefinite-lived intangible assets. In accordance with accounting standards, we are required to allocate a portion of our tax provision between operating losses and accumulated other comprehensive income. As a result, the Company recorded a tax benefit on the loss for the year, which is offset by income tax expense in other comprehensive income/(loss). However, while the income tax benefit is reported on the income statement, the income tax expense on other comprehensive income is recorded directly to accumulated other comprehensive income/(loss), which is a component of stockholders' equity.

For U.S. federal income tax purposes, we have $2.1 billion of NOL carryforwards that expire in 2032 and 2033 and $33 million of tax credit carryforwards that expire at various dates through 2033. For these U.S. federal NOL and tax credit carryforwards a net deferred tax asset of $563 million has been recorded (net of $179 million valuation allowance). A net deferred tax asset of $51 million (net of $125 million valuation allowance) has been recorded for state NOLs that expire at various dates through 2033. While these carryforwards have a potential to be used to offset future ordinary taxable income and reduce future cash tax liabilities by approximately $918 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.
The Company’s ability to utilize NOL carryforwards could be further limited if it were to experience an “ownership change,” as defined in Section 382 of the Internal Revenue 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 NOL 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 12, 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 and a related amendment to the Company's Articles of Incorporation are to be submitted to the Company’s Stockholders in May 2014 for approval and are 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)
 
2013
 
2012
 
2011
Beginning balance
 
$
76

 
$
110

 
$
162

Additions for tax positions related to the current year
 

 

 

Additions for tax positions of prior years
 
6

 
5

 
10

Reductions for tax positions of prior years
 
(1
)
 
(11
)
 
(14
)
Settlements and effective settlements with tax authorities
 
(9
)
 
(24
)
 
(45
)
Expirations of statute
 
(2
)
 
(4
)
 
(3
)
Balance at end of year 
 
$
70

 
$
76

 
$
110



As of the end of 2013, 2012 and 2011, the unrecognized tax benefits balance included $49 million, $54 million and $61 million, respectively, that, if recognized, would be a benefit in the income tax provision after giving consideration to the offsetting effect of $17 million, $19 million and $21 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. Over the next 12 months, it is reasonably possible that the amount of unrecognized tax benefits could be reduced by $2 million if our tax position is sustained upon audit, the controlling statute of limitations expires or we agree to a settlement. Accrued interest and penalties related to unrecognized tax benefits included in income tax expense as of the end of 2013, 2012 and 2011 were $6 million, $4 million and $4 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 2011. 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.