Pep Boys 2008 Annual Report Download - page 144

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2009, February 2, 2008 and February 3, 2007
(dollar amounts in thousands, except share data)
The temporary differences between the book and tax treatment of income and expenses result in
deferred tax assets and liabilities, which are included within the consolidated balance sheets. The
Company must assess the likelihood that any recorded deferred tax assets will be recovered against
future taxable income. To the extent the Company believes that recovery is not more likely than not, a
valuation allowance must be established. Cumulative losses in recent years constitute ‘‘negative
evidence’’ that a recovery is not more likely than not, which must be rebutted by ‘‘positive evidence’’ to
avoid establishing a valuation allowance. To establish this positive evidence, the Company considers
various tax planning strategies for generating income sufficient to utilize the deferred tax assets,
including the potential sale of real estate and the conversion of the Company’s accounting policy for its
inventory from LIFO to FIFO. After considering all this evidence, the Company had valuation
allowances for these matters of $107,212 and $93,231 as of January 31, 2009 and February 2, 2008,
respectively.
The Company and its subsidiaries file income tax returns in the U.S. federal, various states and
Puerto Rico jurisdictions. The Company’s U.S. federal returns for tax years 2004 and forward are
subject to examination. The federal audit of tax years 2001, 2002 and 2003 was closed during the
second quarter of fiscal year 2007 resulting in the recognition of a $4,227 additional income tax benefit
due to the lapse of the statute of limitations. State and local income tax returns are generally subject to
examination for a period of three to five years after filing of the respective return. In Puerto Rico, the
2005 through 2008 tax years are subject to examination by their respective tax authorities. The
Company has various state income tax returns in the process of examination, appeals and litigation.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized tax benefit balance at February 4, 2007 ................ $6,392
Gross increases for tax positions taken in prior years ............... 1,550
Gross decreases for tax positions taken in prior years ............... (371)
Gross increases for tax positions taken in current year .............. 503
Lapse of statue of limitations ................................ (4,227)
Unrecognized tax benefit balance at February 2, 2008 ................ $3,847
Gross increases for tax positions taken in prior years ............... 147
Gross decreases for tax positions taken in prior years ............... (831)
Gross increases for tax positions taken in current year .............. 313
Settlements taken in current year ............................. (311)
Lapse of statute of limitations ................................ (707)
Unrecognized tax benefit balance at January 31, 2009 ................ $2,458
The Company recognizes potential interest and penalties for unrecognized tax benefits in income
tax expense and, accordingly, during fiscal year 2008, the Company recognized approximately $201
benefit of potential interest and penalties associated with uncertain tax positions. At January 31, 2009
and February 2, 2008, the Company has recorded approximately $971 and $1,172, respectively, for the
payment of interest and penalties which are excluded from the $2,458 unrecognized tax benefit noted
above.
Included in the unrecognized tax benefit of $2,458 and $3,847 at January 31, 2009 and February 2,
2008 was $1,526 and $2,244, respectively, of tax benefits that, if recognized, would affect our annual
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