American Eagle Outfitters 2009 Annual Report Download - page 68

Unrecognized tax benefits decreased by $9.5 million and $1.9 million during Fiscal 2009 and 2008,
respectively. The decreases were primarily due to federal and state income tax settlements and statute of limitation
lapses. The Company does not anticipate any significant changes to the unrecognized tax benefits recorded at the
balance sheet date over the next twelve months.
The Company records accrued interest and penalties related to unrecognized tax benefits in the provision for
income taxes. Accrued interest and penalties related to unrecognized tax benefits included in the Consolidated Balance
Sheet were $7.0 million and $11.4 million as of January 30, 2010 and January 31, 2009, respectively. During Fiscal 2009,
the Company recognized a net benefit of $3.3 million in the provision for income taxes related to the reversal of accrued
interest and penalties primarily due to federal and state income tax settlements. An immaterial amount of interest and
penalties were recognized in the provision for income taxes during Fiscal 2008 and 2007.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The Internal Revenue Service (“IRS”) examination of the Company’s U.S. federal income tax
returns for the tax years ended July 2006 and July 2007 were completed in November of 2009. Additionally, the
previously unagreed item for the tax years ended July 2003 to July 2005 was resolved through a review and
agreement with IRS Appeals during Fiscal 2009. Accordingly, all years prior to July 2008 are no longer subject to
U.S. federal income tax examinations by tax authorities. During Fiscal 2009, the Company changed its tax year end
to a 52/53 week year that ends on the Saturday nearest January 31 from July 31 to conform to its financial statement
year end. This change was effective for the tax year ended January 31, 2009. An IRS examination of the July 2008
and January 2009 federal income tax returns is scheduled to begin in the first quarter of Fiscal 2010. The Company
does not anticipate that any adjustments will result in a material change to its financial position, results of operations
or cash flow. With respect to state and local jurisdictions and countries outside of the United States, with limited
exceptions, generally, the Company and its subsidiaries are no longer subject to income tax audits for tax years
before 2003. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts
of tax, interest and penalties have been provided for any adjustments that are expected to result from these years.
The Company has foreign tax credit carryovers associated with the repatriation of earnings from Canada in the
amount of $26.8 million as of January 30, 2010. The foreign tax credit carryovers expire in Fiscal 2019 to the extent
not utilized. No valuation allowance has been recorded on the foreign tax credit carryovers because we believe it is
more likely than not the foreign tax credits will be utilized prior to expiration.
The Company has been certified to qualify for nonrefundable incentive tax credits in Kansas for additional
expenditures related to the Ottawa, Kansas distribution center. As a result, the Company has a deferred tax asset
related to Kansas tax credit carryforwards of $5.0 million (net of federal income taxes). These tax credits can be
utilized to offset future Kansas income taxes and will generally expire in eight years. The use of these tax credits is
dependent upon the level of income tax due to Kansas and the Company meeting certain requirements in future
periods. Due to the contingencies related to the future use of these tax credits, we believe it is more likely than not
that the full benefit of this asset will not be realized within the carryforward period. Thus, a valuation allowance of
$5.0 million (net of federal income taxes) has been recorded as of January 30, 2010. The valuation allowance
recorded as of January 31, 2009 was $3.8 million. The Company may earn additional tax credits or change its
assessment of the valuation allowance if certain employment and training requirements are met.
During Fiscal 2009 and 2008, the Company recorded a valuation allowance against deferred tax assets arising
from the other than temporary impairment or disposition of certain investment securities. The disposition of the
investment securities results in a capital loss that can only be utilized to the extent of capital gains. These capital
losses are subject to a three year carryback period and a five year carryforward period for tax purposes. The capital
losses generally will expire in Fiscal 2014. Due to the contingencies related to the future use of these capital losses,
we believe it is more likely than not that the full benefit of this asset will not be realized within the carryforward
period. Thus, the Company has recorded a valuation allowance against the deferred tax assets arising from the other
than temporary impairment or disposition of these investment securities. The valuation allowance related to these
investment securities was $10.7 million and $9.1 million as of January 30, 2010 and January 31, 2009, respectively.
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AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)