Sears 2014 Annual Report Download - page 106

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
106
In connection with the separation of SHO in 2012, 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-off of approximately 45 percent of the Company's common shares in Sears
Canada Inc. in 2012, 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 January 31,
2015 February 1, 2014 February 2, 2013
Gross UTB Balance at Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . $ 150 $ 161 $ 192
Tax positions related to the current period:
Gross increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15 21
Gross decreases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (8)
Tax positions related to prior periods:
Gross increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ———
Gross decreases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27)(17)(33)
Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)(1)(1)
Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4)(6)(10)
Exchange rate fluctuations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2(2) —
Gross UTB Balance at End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 131 $ 150 $ 161
At the end of 2014, we had gross unrecognized tax benefits of $131 million. Of this amount, $85 million
would, if recognized, impact our effective tax rate, with the remaining amount being comprised of unrecognized tax
benefits related to indirect tax benefits. During fiscal year 2014, the gross unrecognized tax benefits decreased by
$25 million due to the Lands’ End spin-off and Sears Canada’s de-consolidation. We expect that our unrecognized
tax benefits could decrease up to $6 million over the next 12 months for tax audit settlements and the expiration of
the statute of limitations for certain jurisdictions.