Dollar General 2009 Annual Report Download - page 93

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Income taxes (Continued)
The Company has state net operating loss carryforwards as of January 29, 2010 that total
approximately $203.9 million which will expire in 2017 through 2023. The Company also has state tax
credit carryforwards of approximately $24.1 million that will expire beginning in 2010 through 2025.
The valuation allowance has been provided for federal capital losses and state tax credit
carryforwards. The 2009 decrease of $1.7 million was recorded as a reduction in income tax expense.
The 2008 increase of $8.2 million was recorded as income tax expense of $3.0 million and an
adjustment to goodwill of $5.2 million. The full amount of the change in the valuation allowance for
the 2007 Successor period, a decrease of $4.2 million, was recorded as an adjustment to goodwill. The
increase of $0.6 million in the Predecessor period ended July 6, 2007 was included in income tax
expense. Based upon expected future income, management believes that it is more likely than not that
the results of operations will generate sufficient taxable income to realize the deferred tax assets after
giving consideration to the valuation allowance.
During 2008, goodwill recorded in connection with the Merger was reduced by $6.3 million
principally as a result of the favorable settlement of uncertain income tax positions that existed at the
time of the Merger.
The Predecessor adopted the provisions of accounting standards relating to uncertain tax
provisions effective February 3, 2007. The adoption resulted in an $8.9 million decrease in retained
earnings and a reclassification of certain amounts between deferred income taxes and other noncurrent
liabilities to conform to the balance sheet presentation requirements. As of the date of adoption, the
total uncertain tax benefits were $77.9 million. This amount excludes the federal income tax benefit for
the uncertain tax positions related to state income taxes, which is included in deferred tax assets. As a
result of the adoption, the reserve for interest expense related to income taxes was increased to
$15.3 million and a reserve for potential penalties of $1.9 million related to uncertain income tax
positions was recorded.
Subsequent to the adoption, the Company has elected to record income tax related interest and
penalties as a component of the provision for income tax expense.
The Internal Revenue Service (‘‘IRS’’) is examining the Company’s federal income tax returns for
fiscal years 2005 and 2006. The 2004 and earlier years are not open for examination. The 2007, 2008
and 2009 fiscal years, while not currently under examination, are subject to examination at the
discretion of the IRS. The Company has various state income tax examinations that are currently in
progress. The estimated liability related to these state income tax examinations is included in the
Company’s reserve for uncertain tax positions. Generally, the Company’s tax years ended in 2006 and
forward remain open for examination by the various state taxing authorities.
As of January 29, 2010, accruals for uncertain tax benefits, interest expense related to income taxes
and potential income tax penalties were $67.6 million, $8.8 million and $1.7 million, respectively, for a
total of $78.1 million. Of this amount, $8.5 million and $68.0 million are reflected in current liabilities
as Accrued expenses and other and in noncurrent Other liabilities, respectively, in the consolidated
balance sheet with the remaining $1.6 million reducing deferred tax assets related to net operating loss
carry forwards.
During the fiscal year ended January 29, 2010, the Company included in its consolidated statement
of operations a net increase of $11.9 million, $2.3 million and $0.4 million related to uncertain tax
benefits, interest expense related to income taxes and potential tax penalties, respectively.
82