Petsmart 2007 Annual Report Download - page 69

jurisdictions through 1998 and foreign jurisdictions through 1996. We could be subject to audits in these
jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve
and may cover multiple years. During 2007, we recorded a net benefit of approximately $4.0 million from the
settlement of uncertain tax positions with various state tax jurisdictions and the lapse of the statute of limitations for
certain tax positions. During 2006, we settled an audit with the Internal Revenue Service. This included settlement
of an affirmative issue we raised during 2005 with respect to the characterization of certain losses. The settlement
resulted in an overall benefit of $3.4 million. Also included in 2006 were $3.0 million of net tax benefits primarily
due to the expiration of the statute of limitations for certain tax positions and additional federal and state tax credits.
The net benefits are reflected in income tax expense in the Consolidated Statements of Operations and Compre-
hensive Income. We cannot make an estimate of the range of possible changes that may result from other audits.
We adopted the provisions of FIN 48 as of January 29, 2007. As a result, we recognized a reduction of
$1.2 million to the January 29, 2007 retained earnings balance in the Consolidated Balance Sheets.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Unrecognized tax benefits, January 29, 2007 ................................... $12,334
Gross increases — tax positions related to the current year ........................ 1,115
Gross settlements ....................................................... (4,200)
Lapse of statute of limitations .............................................. (741)
Gross increases — foreign currency translation ................................. 316
Balance at February 3, 2008 ............................................... $ 8,824
Included in the balance of unrecognized tax benefits at February 3, 2008 are $7.8 million of tax benefits that, if
recognized, would affect the effective tax rate.
We continue to recognize penalties and interest accrued related to unrecognized tax benefits as income tax
expense. During 2007 we accrued penalties of $0.2 million and interest of $1.0 million related to the unrecognized
tax benefits noted above. In total, as of February 3, 2008, we had recognized a liability for penalties of $1.3 million
and interest of $2.0 million.
Our unrecognized tax benefits largely include state exposures from filing positions taken on state tax returns
and characterization of income and timing of deductions on federal and state tax returns. We believe that it is
reasonably possible that approximately $3.0 million of our currently remaining unrecognized tax positions, each of
which are individually insignificant, may be recognized by the end of 2008 as a result of settlements or a lapse of the
statute of limitations.
As of February 3, 2008, we had, for income tax reporting purposes, federal net operating loss carryforwards of
$59.4 million which expire in varying amounts between 2019 and 2020 and state net operating loss carryforwards of
$1.2 million which expire in varying amounts between 2010 and 2011. The federal net operating loss carryforwards
are subject to certain limitations on their utilization pursuant to Section 382 of the Internal Revenue Code of 1986,
as amended.
F-19
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)