Home Depot 2009 Annual Report Download - page 53

The Company believes that the realization of the deferred tax assets is more likely than not, based upon the
expectation that it will generate the necessary taxable income in future periods, and except for certain net
operating losses discussed below, no valuation reserves have been provided.
At January 31, 2010, the Company had state and foreign net operating loss carryforwards available to reduce
future taxable income, expiring at various dates from 2010 to 2028. Management has concluded that it is more
likely than not that the tax benefits related to the net operating losses will be realized. However, certain foreign
net operating losses are in jurisdictions where the expiration period is too short to be assured of utilization.
Therefore, a valuation allowance has been provided to reduce the deferred tax asset related to net operating
losses to an amount that is more likely than not to be realized. Total valuation allowances at January 31, 2010
and February 1, 2009 were $15 million and $12 million, respectively.
As a result of its sale of HD Supply, the Company incurred a tax loss, resulting in a net capital loss carryover of
approximately $244 million as of January 31, 2010. A portion of the net capital loss carryover will expire if not
used by 2013 and the remaining portion will expire in 2014. However, the Company has concluded that it is
more likely than not that the tax benefits related to the capital loss carryover will be realized based on its ability
to generate adequate capital gain income during the carryover period. Therefore, no valuation allowance has
been provided.
The Company has not provided for U.S. deferred income taxes on approximately $456 million of undistributed
earnings of international subsidiaries because of its intention to indefinitely reinvest these earnings outside the
U.S. The determination of the amount of the unrecognized deferred U.S. income tax liability related to the
undistributed earnings is not practicable; however, unrecognized foreign income tax credits would be available
to reduce a portion of this liability.
On January 29, 2007, the Company adopted the provisions of FASB ASC 740-10 related to uncertainty in
income taxes. This guidance requires application of a “more likely than not” threshold to the recognition and
derecognition of tax positions. It further requires that a change in judgment related to prior years’ tax positions
be recognized in the quarter of such change. This adoption reduced the Company’s Retained Earnings at
January 29, 2007 by $111 million. A reconciliation of the beginning and ending amount of gross unrecognized
tax benefits for continuing operations is as follows (amounts in millions):
January 31,
2010 February 1, 2009
Unrecognized tax benefits balance at beginning of fiscal year $ 695 $ 608
Additions based on tax positions related to the current year 55 67
Additions for tax positions of prior years 33 231
Reductions for tax positions of prior years (28) (142)
Reductions due to settlements (94) (65)
Reductions due to lapse of statute of limitations (2) (4)
Unrecognized tax benefits balance at end of fiscal year $ 659 $ 695
The gross amount of unrecognized tax benefits as of January 31, 2010 includes $386 million of net
unrecognized tax benefits that, if recognized, would affect the annual effective income tax rate.
The accrual for interest and penalties associated with uncertain tax positions increased by approximately
$41 million in fiscal 2009, decreased by $19 million in fiscal 2008 and increased by $32 million in fiscal 2007.
Total accrued interest and penalties as of January 31, 2010 and February 1, 2009 are $138 million and
$109 million, respectively. Interest and penalties are included in net interest expense and operating expenses,
respectively.
The Company’s income tax returns are routinely examined by domestic and foreign tax authorities. The
Company’s U.S. federal income tax returns for fiscal years 2005, 2006 and 2007 are currently under audit by
the IRS. Fiscal year 2006 is currently under audit by the Canadian tax authorities. There are also ongoing U.S.
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