Pep Boys 2010 Annual Report Download - page 115

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2011, January 30, 2010 and January 31, 2009
NOTE 8—INCOME TAXES (Continued)
opportunity credits and $8.0 million of state and Puerto Rico tax credits of which $5.5 million have full
valuation allowances recorded against them.
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 it is more likely than not that the asset will
not be recoverable, a valuation allowance must be established. The Company considers future
projections of income and tax planning strategies, such as the potential sale of real estate to generate
taxable income sufficient to utilize the deferred tax assets. To the extent the Company establishes a
valuation allowance or changes the allowance in a future period, income tax expense will be impacted.
After considering all this evidence, the Company released $3.2 million of gross valuation allowances on
certain state net operating loss carryforwards and state credits during fiscal 2010.
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. 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 2004 through 2010
tax years are subject to examination by the Puerto Rico tax authorities. The Company has various state
income tax returns in the process of examination.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
January 29, January 30, January 31,
(dollar amounts in thousands) 2011 2010 2009
Unrecognized tax benefit balance at the beginning of the year .... $2,411 $2,458 $3,847
Gross increases for tax positions taken in prior years ........... 1,331 646 147
Gross decreases for tax positions taken in prior years ........... — (526) (831)
Gross increases for tax positions taken in current year .......... 389 296 313
Settlements taken in current year ......................... — (271) (311)
Lapse of statute of limitations ........................... — (192) (707)
Unrecognized tax benefit balance at the end of the year ........ $4,131 $2,411 $2,458
The Company recognizes potential interest and penalties for unrecognized tax benefits in income
tax expense and, accordingly, the Company recognized no material income tax expense in fiscal 2010
and an income tax benefit of $0.4 million during fiscal 2009 related to potential interest and penalties
associated with uncertain tax positions. At January 29, 2011, January 30, 2010, and January 31, 2009,
the Company has recorded $0.2 million, $0.2 million, and $1.0 million, respectively, for the payment of
interest and penalties which are excluded from the unrecognized tax benefit noted above.
Unrecognized tax benefits include $1.4 million, $1.3 million, and $1.5 million, at January 29, 2011,
January 30, 2010 and January 31, 2009, respectively, of tax benefits that, if recognized, would affect the
Company’s annual effective tax rate. The Company believes it is reasonably possible that the amount
will increase or decrease within the next twelve months; however, it is not currently possible to estimate
the impact of the change.
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