Sears 2009 Annual Report Download - page 87

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
$131 million. Additional state valuation allowances were created against the state losses incurred in fiscal 2009
and were netted against state valuation allowances reversals due to expiring state NOLs in fiscal 2009. The state
NOLs will predominantly expire between 2017 and 2029.
Accounting for Uncertainties in Income Taxes
We account for uncertainties in income taxes according to accounting standards for uncertain tax positions.
We are present in a large number of taxable jurisdictions, and at any point in time, can have audits underway at
various stages of completion in any of these jurisdictions. We evaluate our tax positions and establish liabilities
for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our
belief that the underlying tax positions are fully supportable. Unrecognized tax benefits are reviewed on an
ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits,
developments in case law, and closing of statute of limitations. Such adjustments are reflected in the tax
provision as appropriate. We are generally not able to reliably estimate the ultimate settlement amounts until the
close of the audit. While we do not expect material changes, it is possible that the amount of unrecognized
benefit with respect to our uncertain tax positions will significantly increase or decrease within the next 12
months related to the audits described above. At this time, we are not able to make a reasonable estimate of the
range of impact on the balance of unrecognized tax benefits or the impact on the effective tax rate related to these
items. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as
follows:
Federal, State, and Foreign Tax
millions
January 30,
2010
January 31,
2009
February 2,
2008
Gross UTB Balance at Beginning of Period .......................... $360 $ 454 $408
Tax positions related to the current period:
Gross increases ............................................ 50 66 45
Gross decreases ............................................ (17) (39) (14)
Tax positions related to prior periods:
Gross increases ............................................ 57 136 98
Gross decreases ............................................ (59) (238) (21)
Settlements ................................................... (29) (6) (14)
Lapse of statute of limitations .................................... (52) (13) (48)
Gross UTB Balance at End of Period ............................... $310 $ 360 $454
At the end of fiscal 2009, we had gross unrecognized tax benefits of $310 million. Of this amount,
$117 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. Included in the
$117 million, we have income tax liabilities of $33 million, net of federal benefit on state tax, for tax positions of
acquired entities taken prior to their acquisition by Holdings that would, with the adoption of the new accounting
standard for business combinations in 2009, impact our effective tax rate if recognized. We expect that our
unrecognized tax benefits could decrease up to $117 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 30, 2010, the total amount of interest and
87