OfficeMax 2014 Annual Report Download - page 95

Table of Contents


Additionally, the Company has $125 million of U.S. Federal foreign tax credit carryforwards, which expire between 2015 and 2024, and $17 million of state
and foreign tax credit carryforwards, $5 million of which can be carried forward indefinitely, and the remaining balance will expire between 2023 and 2027.
As a result of the Merger in 2013, the Company triggered an “ownership change” as defined in Internal Revenue Code Section 382 and related provisions.
Sections 382 and 383 place a limitation on the amount of taxable income which can be offset by carryforward tax attributes, such as net operating losses or
tax credits, after a change in control. Generally, after a change in control, a loss corporation cannot deduct carryforward tax attributes in excess of the
limitation prescribed by Section 382 and 383. Therefore, certain of the Company’s carryforward tax attributes may be subject to an annual limitation
regarding their utilization against taxable income in future periods. The Company estimates that at least $15 million of deferred tax assets related to
carryforward tax attributes will not be realized because of Section 382 and related provisions. Accordingly, in 2013, the Company reduced the impacted
deferred tax assets by this amount, which was fully offset by a corresponding change in the valuation allowance. If the Company were to experience another
ownership change in future periods, the Company’s deferred tax assets and income tax expense may be negatively impacted.
U.S. deferred income taxes have not been provided on certain undistributed earnings of foreign subsidiaries, which were approximately $416 million as of
December 27, 2014. The determination of the amount of the related unrecognized deferred tax liabilities is not practicable because of the complexities
associated with the hypothetical calculations. The Company has historically reinvested such earnings overseas in foreign operations and expects that future
earnings will also be indefinitely reinvested overseas, with the exception of certain foreign subsidiaries acquired as a result of the Merger. Accordingly, the
Company has recorded the deferred tax liabilities associated with the undistributed earnings of such foreign subsidiaries.
The following summarizes the activity related to valuation allowances for deferred tax assets:
(In millions)  2013 2012
Beginning balance  $583 $622
Additions, charged to expense   26 —
Additions, due to the Merger   84 —
Deductions   (10) (39)
Ending balance  $683 $583
The Company has significant deferred tax assets in the U.S. and in foreign jurisdictions against which valuation allowances have been established to reduce
such deferred tax assets to an amount that is more likely than not to be realized. The establishment of valuation allowances requires significant judgment and
is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in
determining the appropriateness of recording a valuation allowance on deferred tax assets. An accumulation of recent pre-tax losses is considered strong
negative evidence in that evaluation. While the Company believes positive evidence exists with regard to the realizability of these deferred tax assets, it is
not considered sufficient to outweigh the objectively verifiable negative evidence, including the cumulative 36-month pre-tax loss history.
In 2014, the Company released valuation allowances in certain foreign jurisdictions due to the existence of sufficient positive evidence, which resulted in an
income tax benefit of $4 million. Valuation allowances were established in certain foreign jurisdictions in 2012 because the realizability of the related
deferred tax assets was no longer more likely than not. As of 2014, valuation allowances remain in the U.S. and certain foreign jurisdictions where the
Company believes it is necessary to see further positive evidence, such as sustained achievement of cumulative profits, before these valuation allowances can
be released. If such positive evidence
93