Sears 2012 Annual Report Download - page 94

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
94
At the end of 2012 and 2011, we had a federal and state net operating loss (“NOL”) deferred tax asset of $722
million and $672 million, respectively, which will expire predominately between 2019 and 2033. We have credit
carryforwards of $605 million, which will expire between 2015 and 2033.
In connection with the separation of SHO, the Company incurred a taxable gain of $266 million. The gain
primarily related to the determination that the fair value of the consideration received exceeded the tax basis of the
net assets of SHO at the date of the separation. The amount of taxes otherwise payable resulting from the gain was
reduced by utilization of $105 million of deferred tax assets, primarily NOL carryforwards. As the Company had
previously recorded a valuation allowance against these NOL carryforwards, $105 million of the related valuation
allowance was released upon their utilization.
In connection with the taxable spin of approximately 45 percent of the Company's common shares in Sears
Canada Inc., the Company incurred a taxable gain of $367 million. The gain primarily relates to the determination
that the fair market value of the common shares distributed to the public shareholders exceeded the tax basis of the
shares distributed. The amount of taxes otherwise payable resulting from the gain was reduced by utilization of $40
million of net deferred tax assets, primarily NOL carryforwards. As the Company had previously recorded a
valuation allowance against these NOL carryforwards, $40 million of the related valuation allowance was released
upon their utilization.
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 federal, foreign and/or 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 February 2, 2013 January 28, 2012 January 29, 2011
Gross UTB Balance at Beginning of Period . . . . . . . . . . . . . . . . . . . . . $ 192 $ 192 $ 310
Tax positions related to the current period:
Gross increases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 22 25
Gross decreases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8)(8)(10)
Tax positions related to prior periods:
Gross increases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 20 51
Gross decreases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33)(19)(161)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)(4)(13)
Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10)(10)(10)
Exchange rate fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —(1) —
Gross UTB Balance at End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161 $ 192 $ 192
At the end of 2012, we had gross unrecognized tax benefits of $161 million. Of this amount, $94 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. We expect that our unrecognized tax