Red Lobster 2012 Annual Report Download - page 59

Notes to Consolidated Financial Statements
Darden
Darden Restaurants, Inc. 2012 Annual Report 55
The following table is a reconciliation of the U.S. statutory income tax rate
to the effective income tax rate from continuing operations included in the
accompanying consolidated statements of earnings:
Fiscal Year
2012 2011 2010
U.S. statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal tax benefits 2.5 1.8 2.5
Benefit of federal income tax credits (11.1) (8.3) (8.7)
Other, net (1.1) (2.4) (3.7)
Effective income tax rate 25.3% 26.1% 25.1%
As of May 27, 2012, we had estimated current prepaid federal and state
income taxes of $4.1 million and $8.1 million, respectively. These amounts
are included in our accompanying consolidated balance sheets as prepaid
income taxes.
As of May 27, 2012, we had gross unrecognized tax benefits of $15.7 million,
which represents the aggregate tax effect of the differences between tax return
positions and benefits recognized in our consolidated financial statements, all
of which would favorably affect the effective tax rate if resolved in our favor.
A reconciliation of the beginning and ending amount of unrecognized tax
benefits follows:
(in millions)
Balances at May 29, 2011 $21.9
Additions to tax positions recorded during the current year 2.7
Reductions to tax positions due to settlements with taxing authorities (2.2)
Reductions to tax positions due to statute expiration (6.7)
Balances at May 27, 2012 $15.7
We recognize accrued interest related to unrecognized tax benefits in
interest expense. Penalties, when incurred, are recognized in selling, general
and administrative expense. Interest expense associated with unrecognized tax
benefits, excluding the release of accrued interest related to prior year matters
due to settlement or the lapse of the statute of limitations was as follows:
Fiscal Year
(in millions) 2012 2011 2010
Interest expense on unrecognized
tax benefits $0.4 $1.6 $2.5
At May 27, 2012, we had $1.7 million accrued for the payment of interest
associated with unrecognized tax benefits.
For U.S. federal income tax purposes, we participate in the Internal Revenue
Service’s (IRS) Compliance Assurance Process whereby our U.S. federal income
tax returns are reviewed by the IRS both prior to and after their filing. The U.S.
federal income tax returns that we filed through the fiscal year ended May 30,
2010 have been audited by the IRS. In the first quarter of fiscal 2012, the IRS
completed the audit of our tax returns for the fiscal year ended May 30, 2010
with no material adjustments. The Company’s tax returns for the fiscal year
ended May 29, 2011 are under audit, and are expected to be completed by the
second quarter of fiscal 2013. The IRS commenced examination of our U.S.
federal income tax returns for May 27, 2012 in the first quarter of fiscal 2012.
The examination is anticipated to be completed by the first quarter of fiscal
2014. Income tax returns are subject to audit by state and local governments,
generally years after the returns are filed. These returns could be subject to
material adjustments or differing interpretations of the tax laws. The major
jurisdictions in which the Company files income tax returns include the U.S.
federal jurisdiction, Canada, and most states in the U.S. that have an income
tax. With a few exceptions, the Company is no longer subject to U.S. federal
income tax examinations by tax authorities for years before fiscal 2011, and
state and local, or non-U.S. income tax examinations by tax authorities for years
before fiscal 2002.
Included in the balance of unrecognized tax benefits at May 27, 2012 is
$1.0 million related to tax positions for which it is reasonably possible that the
total amounts could change during the next twelve months based on the outcome
of examinations. The $1.0 million relates to items that would impact our effective
income tax rate.
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
(in millions) May 27, 2012 May 29, 2011
Accrued liabilities $ 65.9 $ 46.2
Compensation and employee benefits 221.2 193.6
Deferred rent and interest income 61.3 55.1
Other 23.4 15.9
Gross deferred tax assets $ 371.8 $ 310.8
Trademarks and other acquisition related intangibles (175.3) (178.0)
Buildings and equipment (363.3) (314.3)
Capitalized software and other assets (15.1) (12.0)
Other (6.5) (6.3)
Gross deferred tax liabilities $(560.2) $(510.6)
Net deferred tax liabilities $(188.4) $(199.8)
A valuation allowance for deferred tax assets is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Realization is dependent upon the generation of future taxable income
or the reversal of deferred tax liabilities during the periods in which those
temporary differences become deductible. We consider the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment.