Sears 2007 Annual Report Download - page 90

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
FIN 48 Accounting for Uncertainties in Income Taxes
Effective at the beginning of fiscal 2007, we adopted FIN 48, “Accounting for Uncertainties in Income
Taxes—an Interpretation of FASB Statement No. 109”. The impact upon adoption was to decrease retained
earnings by $6 million and to increase our accruals for uncertain tax positions by a corresponding amount. In
accordance with FIN 48, we increased goodwill and accruals for uncertain tax positions by $13 million to reflect
the measurement of uncertain tax positions associated with previous business acquisitions, and increased capital
in excess of par value and decreased accruals for uncertain tax positions by $2 million to reflect measurement of
an uncertain tax position related to Predecessor Company pre-petition income tax liabilities. In accordance with
AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy
Code,” resolutions of these matters results in a direct credit to capital in excess of par value within shareholders’
equity. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as
follows:
millions
Federal, State,
and Foreign
Tax
Gross UTB Balance at February 3, 2007 .............................. $408
Tax positions related to the current period:
Gross increases ............................................. 45
Gross decreases ............................................. (14)
Tax positions related to prior periods:
Gross increases ............................................. 98
Gross decreases ............................................. (21)
Settlements ................................................ (14)
Lapse of statute of limitations .................................. (48)
Gross UTB Balance at February 2, 2008 .............................. $454
At the end of fiscal 2007, we had gross unrecognized tax benefits of $454 million. Of this amount, $116
million would, if recognized, impact our effective tax rate, with the remaining amount being comprised of
unrecognized tax benefits related to gross temporary differences and prior business combinations or any other
indirect benefits. We expect that our unrecognized tax benefits could decrease up to $58 million over the next 12
months for state tax positions related to prior business dispositions due to both the expiration of the statute of
limitations for certain jurisdictions as well as expected settlements.
We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax
overpayments as components of income tax expense. As of February 2, 2008, the total amount of interest and
penalties recognized on our consolidated balance sheet was $100 million. The total amount of interest and
penalties recognized in our consolidated statement of operations for fiscal 2007 was $5 million.
We file income tax returns in both the United States and various foreign jurisdictions. The Internal Revenue
Service (“IRS”) has commenced an audit of the Holdings’ federal income tax return for the fiscal year 2005 and
the Sears federal income tax returns for the fiscal years 2004 and 2005 through the date of the Merger. The IRS
has completed its examination of Sears’ federal income tax returns for the fiscal years 2002 and 2003, and we are
working with the IRS to resolve certain matters arising from this exam. In addition, Holdings and Sears are
subject to various state, local and foreign income tax examinations for the fiscal years 2001—2005 and Kmart is
subject to such examinations for the fiscal years 2003—2005.
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