Sears 2014 Annual Report Download - page 105

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
105
and February 2, 2013. Such objective evidence limits the ability to consider other subjective evidence such as our
projections for future income.
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 was 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. For the year ended February 2, 2013, $213 million of the valuation allowance increase was
recorded through other comprehensive income. For the year ended February 1, 2014, the valuation allowance
increased by $623 million, but none of the increase was recorded through other comprehensive income. Included in
the $623 million valuation allowance increase was $138 million for state separate entity deferred tax assets, as
Kmart Corporation incurred a three-year cumulative loss in 2013. For the year ended January 31, 2015, the valuation
allowance increased by $1.1 billion of which $454 million was recorded through other comprehensive income.
During the quarterly assessment of deferred tax assets for the year ended January 31, 2015, management
determined that it was no longer probable that sufficient future taxable income would be available to allow the
deferred tax assets of Sears Canada to be realized. A significant piece of negative evidence evaluated was the recent
and anticipated profitability were lower than previously projected. The Company also considered the impact on the
timing of the implementation of strategic initiatives at Sears Canada to improve profitability due to their recent
senior management changes and realization that certain strategies would not achieve previously expected targets. In
assessing the realizability of Sears Canada's deferred tax assets, management considered the four sources of taxable
income included in the accounting standards applicable for income taxes. Of these four sources of taxable income,
Sears Canada was only able to avail itself of future reversals of existing taxable differences and taxable income in
prior carryback years to realize a tax benefit of an existing deductible temporary difference. Therefore, a valuation
allowance of $152 million was added to record only the portion of the deferred tax asset that more likely than not
will be realized. We recognized the $152 million valuation allowance charge during the third quarter of 2014 in
continuing operations. This $152 million valuation allowance was de-recognized in the third quarter as part of the
Sears Canada de-consolidation.
At January 31, 2015 and February 1, 2014, we had a valuation allowance of $4.5 billion and $3.4 billion,
respectively, to record only the portion of the deferred tax asset that more likely than not will be realized. The
amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future
taxable income during the carryforward period are reduced or increased, or if the 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. We will continue to evaluate our valuation allowance in future years for any change in
circumstances that causes a change in judgment about the realizability of the deferred tax asset.
At the end of 2014 and 2013, we had a federal and state net operating loss ("NOL") deferred tax asset of $1.8
billion and $1.2 billion, respectively, which will expire predominately between 2019 and 2035. We have credit
carryforwards of $791 million, which will expire between 2015 and 2035.
On April 4, 2014, Holdings and Lands' End entered into a tax sharing agreement in connection with the spin-
off. Pursuant to this agreement, Holdings is responsible for all pre-separation U.S. federal, state and local income
taxes attributable to the Lands’ End business, and Lands’ End is responsible for all other income taxes attributable to
its business, including all foreign taxes.
In connection with the Sears Canada Rights Offering in fiscal 2014, the Company incurred a taxable gain of
approximately $107 million on the subscription rights exercised and common shares sold during the fiscal year.
There was no income tax payable balance resulting from the taxable gain due to the utilization of NOL attributes of
approximately $38 million and a valuation allowance release of the same amount. In addition, a foreign tax credit
carryover of $15 million was generated and the valuation allowance increased by the same amount.
In connection with Sears Canada’s sale of real estate during 2013, Sears Canada declared an extraordinary
dividend of $5 Canadian per share on November 19, 2013. The Company received a taxable dividend of $260
million Canadian or $243 million resulting in a taxable income inclusion of $280 million, which includes a Section
78 Gross-up of $37 million. The amount of taxes otherwise payable resulting from the taxable dividend was reduced
by the utilization of $59 million of net deferred tax assets, primarily NOL carryforwards. As the Company had
previously recorded a valuation allowance against these NOL carryforwards, $59 million of the related valuation
allowance was released upon their utilization.