Sears 2011 Annual Report Download - page 90

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
On the basis of this analysis and the significant negative objective evidence, for the year ended January 28,
2012, a valuation allowance of $2.1 billion has been added to record only the portion of the deferred tax asset
that more likely than not will be realized. Of the total valuation allowance recorded, $317 million was recorded
through other comprehensive income. The amount of the deferred tax asset considered realizable, however, could
be adjusted if estimates of future taxable income during the carryforward period are reduced or increased, or if
objective negative evidence in the form of cumulative losses is no longer present and additional weight may be
given to subjective evidence such as our projections for growth.
At the end of 2010, we had a state net operating loss (“NOL”) deferred tax asset of $250 million and a
valuation allowance of $153 million. The state NOL’s will expire predominately between 2019 and 2032.
At January 28, 2012, we have $1.1 billion Federal NOL carryforwards from the current year, which will
expire in 2032. We have credit carryforwards of $385 million, which will expire between 2015 and 2032.
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 28,
2012
January 29,
2011
January 30,
2010
Gross UTB Balance at Beginning of Period .......................... $192 $ 310 $360
Tax positions related to the current period:
Gross increases ............................................ 22 25 50
Gross decreases ............................................ (8) (10) (17)
Tax positions related to prior periods:
Gross increases ............................................ 20 51 57
Gross decreases ............................................ (19) (161) (59)
Settlements ................................................... (4) (13) (29)
Lapse of statute of limitations .................................... (10) (10) (52)
Exchange rate fluctuations ....................................... (1) — —
Gross UTB Balance at End of Period ............................... $192 $ 192 $310
At the end of 2011, we had gross unrecognized tax benefits of $192 million. Of this amount, $93 million
would, if recognized, impact our effective tax rate, with the remaining amount being comprised of unrecognized
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