Red Lobster 2016 Annual Report Download - page 48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DARDEN
44
As of May 29, 2016, we had unrecognized tax benefits of $14.3 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. Included in the balance of unrecognized tax benefits at May 29, 2016,
is $1.2 million related to tax positions for which it is reasonably possible
that the total amounts could change during the next 12 months based on
the outcome of examinations. The $1.2 million relates to items that would
impact our effective income tax rate.
A reconciliation of the beginning and ending amount of unrecognized
tax benefits follows:
(in millions)
Balances at May 31, 2015 $13.7
Additions related to current-year tax positions 3.9
Reductions related to prior-year tax positions (0.4)
Reductions due to settlements with taxing authorities (1.0)
Reductions to tax positions due to statute expiration (1.9)
Balances at May 29, 2016 $14.3
We recognize accrued interest related to unrecognized tax benefits in
income tax expense. Penalties, when incurred, are recognized in 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) 2016 2015 2014
Interest expense on unrecognized
tax benefits $0.5 $1.1 $0.4
At May 29, 2016, we had $0.7 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 (CAP), whereby
our U.S. federal income tax returns are reviewed by the IRS both prior to
and after their filing. 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 all 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 2015, and state and local, or non-U.S. income tax exami-
nations by tax authorities for years before fiscal 2011.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
May 29, May 31,
(in millions)
2016 2015
Accrued liabilities $ 109.4 $ 104.9
Compensation and employee benefits 176.0 186.6
Deferred rent and interest income 97.8 88.9
Net operating loss, credit and charitable
contribution carryforwards 47.1 50.1
Other 5.9 6.5
Gross deferred tax assets $ 436.2 $ 437.0
Valuation allowance (17.0) (13.5)
Deferred tax assets, net of valuation allowance $ 419.2 $ 423.5
Trademarks and other acquisition
related intangibles (226.4) (220.6)
Buildings and equipment (238.6) (337.1)
Capitalized software and other assets (34.0) (28.1)
Other (12.1) (22.1)
Gross deferred tax liabilities $(511.1) $(607.9)
Net deferred tax liabilities $ (91.9) $(184.4)
Net operating loss, credit and charitable contribution carryforwards
have the potential to expire. We have taken current and potential future expi-
rations into consideration when evaluating the need for valuation allowances
against these deferred tax assets. 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.
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which our deferred tax assets are
deductible, we believe it is more-likely-than-not that we will realize the
benefits of these deductible differences, net of the existing valuation
allowances at May 29, 2016.