Sears 2008 Annual Report Download - page 82

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
At the end of fiscal 2007, we had a state NOL deferred tax asset of $178 million and a valuation allowance
of $120 million. In fiscal 2008, there was a net addition to the state NOL deferred tax asset of $8 million,
bringing the ending balance to $186 million. The additional NOL’s were the result of additional state losses
incurred in fiscal 2008, netted against NOL expirations. The valuation allowance decreased by $3 million, to
$117 million. Additional state valuation allowances were created against the state losses incurred in fiscal 2008
and were netted against state valuation allowances reversals due to expiring state NOL’s in fiscal 2008. The state
NOL’s will predominantly expire between 2017 and 2028.
FIN 48 Accounting for Uncertainties in Income Taxes
Effective at the beginning of fiscal 2007, we adopted FASB Interpretation No. 48 (“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 result 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:
Federal, State, and Foreign Tax
millions
January 31,
2009
February 2,
2008
Gross UTB Balance at Beginning of Period ....................... $454 $408
Tax positions related to the current period:
Gross increases .......................................... 66 45
Gross decreases ......................................... (39) (14)
Tax positions related to prior periods:
Gross increases .......................................... 136 98
Gross decreases ......................................... (238) (21)
Settlements ................................................. (6) (14)
Lapse of statute of limitations .................................. (13) (48)
Gross UTB Balance at End of Period ............................ $360 $454
At the end of fiscal 2008, we had gross unrecognized tax benefits of $360 million. Of this amount,
$80 million would, if recognized, impact our effective tax rate, with the remaining amount being comprised of
unrecognized tax benefits related to gross temporary differences or any other indirect benefits. In addition, with
the adoption of SFAS 141(R), we have income tax liabilities of $59 million, net of federal benefit on state tax,
for tax positions of acquired entities taken prior to their acquisition by Holdings. We expect that our
unrecognized tax benefits could decrease up to $70 million over the next 12 months for federal and state
settlements and for federal and 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 related 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 January 31, 2009, the total amount of interest and
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