CompUSA 2008 Annual Report Download - page 88

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result of additional losses incurred in foreign and state jurisdictions. Valuation allowances decreased $.7 million in 2008
for carryforward losses utilized for which valuation allowances had been previously provided. As of December 31, 2007,
the valuation allowances of $7.4 million included $6.0 million related to net operating loss carryforwards in foreign
jurisdictions, $1.2 million for state net operating loss carryforwards and $0.2 million for other state deductible temporary
differences. During 2007, valuation allowances decreased $10.5 million primarily as a result of the reversal of the valuation
allowance in the United Kingdom, utilization of net operating losses and timing differences in the United Kingdom and
utilization of state net operating loss deductions in the United States. During 2006, valuation allowances increased $2.6
million as a result of additional losses incurred in certain state jurisdictions and adjustments of prior year’ s allowances in
foreign jurisdictions.
The Company is routinely audited by federal, state and foreign tax authorities with respect to its income taxes. The
Company regularly reviews and evaluates the likelihood of audit assessments and believes it has adequately accrued for
exposures for tax liabilities resulting from future tax audits. To the extent the Company would be required to pay amounts in
excess of reserves or prevail on matters for which accruals have been established, the Company’ s effective tax rate in a
given period may be materially impacted. The Company’ s federal income tax returns for fiscal years 2005 and 2006 are
currently under audit by the Internal Revenue Service. The Company does not expect the outcome of the audit to have a
material impact on the Company’ s consolidated financial statements. The Company has not signed any consents to extend
the statute of limitations for any subsequent years. The Company’ s significant state tax returns have been audited through
2005. The Company considers its significant tax jurisdictions in foreign locations to be the United Kingdom, Canada,
France, Italy and Germany. The Company remains subject to examination in the United Kingdom for years after 2001, in
Canada for years after 2000, in France for years after 2004, in Italy for years after 2002. Audits are currently ongoing in the
Netherlands for 2006 and in Germany for 2005 and 2006.
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This
interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be taken in income tax returns. For those benefits to be
recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. At January
1, 2007, the Company had a liability for unrecognized tax benefits of $3,379,000 (including interest and penalties of
$731,000) of which $283,000 was charged to retained earnings at January 1, 2007. Of this total, $2,586,000 (net of the
federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect
the effective income tax rate in any future periods. At December 31, 2007 the Company had a liability for unrecognized tax
benefits of $1,547,000 (including interest and penalties of $631,000). Of this total, $1,467,000 (net of the federal benefit on
state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective
income tax rate in any future periods. The following table details activity of the Company’ s uncertain tax positions during
2008 and 2007:
December 31,
2008 2007
Balance beginning of year $916 $2,648
Decreases related to settlements with taxing authorities - (1,732)
Balance end of year $916 $916
Interest and penalties of approximately $46,000 and $69,000 related to unrecognized tax benefits were expensed in 2008 and
2007 and are included in income tax expense. Additionally, included in income tax expense in 2008 is an interest and
penalty reserves reversal of approximately $399,000 related to a state tax audit that was settled favorably. Within the next
twelve months the Company believes it reasonably possible that these tax positions, related to foreign tax audits, will be
reduced.
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Leases - The Company is obligated under operating lease agreements for the rental of certain office and warehouse facilities
and equipment which expire at various dates through September 2026. The Company currently leases its headquarters
office/warehouse facility in New York from an entity owned by the Company’ s three principal shareholders and senior
executive officers. The Company believes that these payments were no higher than would be paid to an unrelated lessor for
comparable space. The Company also acquires certain computer and communications equipment pursuant to capital lease
obligations.