Sears 2006 Annual Report Download - page 89

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
2006 2005 2004
Effective tax rate reconciliation
Federal income tax rate ............................................ 35.0% 35.0% 35.0%
State and local taxes net of federal tax benefit ........................... 3.1 3.3 3.0
Tax credits ...................................................... (0.3) (0.3) (0.2)
Equity in net income of affiliated companies ........................... — (0.2) (0.1)
Basis difference in domestic subsidiary ................................ 0.4 — —
Canada capital gain exemption ...................................... — (3.0) —
Other ........................................................... (0.5) 1.6 —
37.7% 36.4% 37.7%
millions
February 3,
2007
January 28,
2006
Deferred tax assets and liabilities
Deferred tax assets:
Federal benefit for state and foreign taxes ............... $ 88 $ 92
Accruals and other liabilities ......................... 348 290
Capital leases ..................................... 150 205
NOL carryforwards ................................. 609 636
OPEB ........................................... 258 249
Pension/Minimum pension ........................... 355 623
Deferred revenue ................................... 665 626
Other ............................................ 213 457
Total deferred tax assets ................................. 2,686 3,178
Valuation allowance .................................... (332) (330)
Net deferred tax assets .............................. 2,354 2,848
Deferred tax liabilities:
Tradenames/Intangibles ............................. 1,203 1,334
Property and equipment ............................. 197 479
Deferred acquisition costs ............................ 439 394
Inventory ......................................... 325 245
Investments ....................................... 90 162
Other ............................................ 98 80
Total deferred tax liabilities .............................. 2,352 2,694
Net deferred tax asset ................................... $ 2 $ 154
The Company accounts for income taxes in accordance with SFAS No. 109 which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the
financial reporting and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that some portion of or all of the deferred
tax asset will not be realized.
The Predecessor Company recorded a full valuation allowance against its pre-petition deferred tax assets in
accordance with SFAS No. 109, as realization of such assets in future years was uncertain. During fiscal 2005
and fiscal 2004, the Company recognized reversals of $1,249 million and $1,155 million, respectively, based on
the utilization (or projected utilization) of such deferred tax assets. As of February 3, 2007, management
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