JCPenney 2004 Annual Report Download - page 47

J.C. PENNEY COMPANY, INC.2 004 ANNUAL REPORT
Notes to the Consolidated Financial Statements
45
Management Transition Costs
In 2004, the Company recorded a $29 million charge related to
the previously announced senior management transition.
Other
Other expenses in 2002 included operating losses of $10 million
related to third-party fulfillment operations that were discontinued
in 2002.
19 INCOME TAXES
Deferred tax assets and liabilities reflected in the accompanying
Consolidated Balance Sheets were measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or set-
tled. Deferred tax assets and liabilities from continuing operations
as of January 29, 2005 and January 31, 2004 were comprised of
the following:
2004 2003
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
($ in millions) Assets (Liabilities) Assets (Liabilities)
Current
Discontinued operations-
Eckerd $ 86 $ –– $ –– $ (875)
Accrued vacation pay 47 –– 51 ––
Inventories 17 –– –– (102)
Closed unit reserves 1 –– 8 ––
Other(1) 67 (55) 35 (60)
Total current $ 218 $ (55) $ 94 $ (1,037)
Net current assets/
(liabilities) $ 163(3) $ (943)
Non-current
Depreciation and
amortization $ –– $ (921) $ –– $ (886)
Prepaid pension –– (629) –– (539)
Pension and other
retiree obligations 261 –– 267 ––
Leveraged leases –– (273) –– (280)
State taxes and net
operating losses 149 –– 164 ––
Workers’ compensation/
general liability 92 –– 83 ––
Discontinued operations-
Eckerd 44 –– –– ––
Closed unit reserves 8 –– 11 ––
Other(2) 107 (54) 122 (51)
Total noncurrent $ 661 (1,877) $ 647 $ (1,756)
Valuation allowance (102) –– (108) ––
Net noncurrent (liabilities) $(1,318) $ (1,217)
Total net deferred tax
(liabilities) $(1,155) $(2,160)
(1) Other current deferred tax assets include tax items related to gift cards and accruals for sales returns
and allowances. Other current deferred tax liabilities include tax items related to property taxes and pre-
paid expenses.
(2) Other noncurrent deferred tax assets include tax items related to deferred compensation and environ-
mental cleanup costs. Other noncurrent deferred tax liabilities include tax items related to unrealized
gain/loss and original issue discount.
(3) A current deferred tax asset of $163 million is included in Receivables in the Company’s 2004
Consolidated Balance Sheet.
At the end of 2003, the Company established an estimated cur-
rent deferred tax liability of $875 million based on the pending sale
of Eckerd. In accordance with SFAS No. 109, a tax liability for the
excess of the financial reporting basis over the outside tax basis of
an investment in a subsidiary shall be recognized when it is appar-
ent that the temporary difference will reverse in the foreseeable
future. This criteria was met as of year-end 2003 with Eckerd clas-
sified as a discontinued operation. Upon completion of the sale of
the Eckerd operations in July 2004, this current deferred tax liabili-
ty was reclassified to income taxes payable. Subsequent to the
close of the sale, the Company made payments totaling $822 mil-
lion in relation to these tax liabilities.
Deferred tax assets are evaluated for recoverability based on
estimated future taxable income. The character and nature of
future taxable income may not allow the Company to realize certain
tax benefits of state net operating losses (NOLs) within the pre-
scribed carryforward period. Accordingly, a valuation allowance
has been established for the amount of deferred tax assets gener-
ated by state NOLs that may not be realized.
Deferred tax liabilities are evaluated and adjusted as appropri-
ate considering the progress of audits of various taxing jurisdic-
tions. Management does not expect the outcome of tax audits to
have a material adverse effect on the Company’s financial condi-
tion, results of operations or cash flow.
U.S. income and foreign withholding taxes were not provided
on certain unremitted earnings of international affiliates that the
Company considers to be permanent investments.
Income tax expense for continuing operations is as follows:
Income Tax Expense for Continuing Operations
($ in millions) 2004 2003 2002
Current
Federal and foreign $ 340 $ 40 $ 22
State and local 14 5 13
354 45 35
Deferred
Federal and foreign (8) 126 90
State and local 711 5
(1) 137 95
Total $ 353 $ 182 $ 130
A reconciliation of the statutory federal income tax rate to the
effective rate for continuing operations is as follows:
Reconciliation of Tax Rates for Continuing Operations
(percent of pre-tax income) 2004 2003 2002
Federal income tax
at statutory rate 35.0% 35.0% 35.0%
State and local income
tax, less federal income
tax benefit 1.3 2.1 2.8
Tax effect of dividends on
ESOP shares (1.0) (2.6) (6.0)
Other permanent
differences and credits (0.6) (1.3) (0.3)
Effective tax rate for
continuing operations 34.7% 33.2% 31.5%