Saks Fifth Avenue 2008 Annual Report Download - page 37

records rent liabilities on the consolidated balance sheets for contingent percentage of sales lease provisions
when the Company determines that it is probable that the specified levels will be reached during the fiscal year.
INCOME AND OTHER TAXES
The majority of the Company’s deferred tax assets at January 31, 2009 consist of federal and state net
operating loss carryforwards that will expire between 2009 and 2028. During 2008, the valuation allowance
against net operating loss carryforwards was increased based on projections of future profitability. At January 31,
2009 the Company believes that it will be sufficiently profitable during the periods from 2009 to 2028 to utilize
all of its federal NOLs and a portion of its state NOLs. To the extent management’s estimates of future taxable
income by jurisdiction are greater than or less than management’s current estimates, future increases or decreases
in the income tax benefit for net operating losses could occur.
The Company is routinely under audit by federal, state and local authorities in the areas of income taxes and
the remittance of sales and use taxes. Audit authorities may question the timing and amount of deductions, the
allocation of income among various tax jurisdictions and compliance with federal, state and local tax laws. In
evaluating the exposure associated with various tax filing positions, the Company often accrues for exposures
related to uncertain tax positions.
During 2008, an additional reserve of $.5 million was established for issues raised in current state tax
examinations and previously filed federal tax returns relating to prior periods. During 2007, an additional reserve
of $1.8 million was established for issues raised in current state tax examinations and previously filed federal tax
returns relating to prior periods. During 2006, the Company concluded a federal income tax examination for the
2003 and 2004 tax years and concluded a number of state income tax examinations as well which resulted in a
decrease in the amount previously accrued for exposures related to uncertain tax positions of $10.2 million. At
January 31, 2009, the Company believes it has appropriately accrued for future exposures related to uncertain tax
positions. To the extent the Company were to prevail in matters for which accruals have been established or be
required to pay amounts in excess of reserves, the Company’s effective tax rate in a given financial statement
period may be materially impacted.
The Company adopted the provisions of the Financial Accounting Standards Board Interpretation (“FIN”)
No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109” (“FIN No. 48”)
effective as of the beginning of fiscal year 2007. As a result of the implementation of FIN No. 48, the Company
recorded a $33.7 million decrease in the liability for unrecognized tax benefits which was accounted for as an
increase to the beginning shareholder’s equity. Including the cumulative effect of the decrease, at the beginning
and end of 2008 the Company had approximately $44.6 million and $45.3 million (net of federal and state
benefits) of total unrecognized tax benefits, respectively. Of these totals, $13.3 million and $14.0 million (net of
federal and state benefits) represents the amounts of unrecognized tax benefits that, if recognized, would affect
the effective income tax rate in any future periods. It is reasonably possible that the amount of unrecognized tax
benefits will increase or decrease in the next twelve months as a result of settling uncertain tax positions.
However, the Company does not anticipate this to result in any material changes to the amount of unrecognized
tax benefits.
As a result of the analysis of uncertain tax positions upon the adoption of FIN No. 48, the net deferred tax
asset related to state net operating loss carryforwards increased. Therefore, the Company performed a valuation
allowance analysis to determine the realization of this asset. This analysis resulted in an additional valuation
allowance of $19.3 million with the offset recorded to shareholders’ equity in accordance with Statement of
Position (“SOP”) 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”
(“SOP 90-7”). The Company is subject to the provisions of SOP 90-7 for these net operating losses since these
losses were acquired through the acquisition of a company that had previously filed bankruptcy.
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