Sears 2015 Annual Report Download - page 91

and February€1, 2014. 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 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. For the year ended January 30,
2016, the valuation allowance increased by $279 million of which $63 million was recorded through other
comprehensive income and paid in capital.
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 of 2014 as part
of the Sears Canada de-consolidation.
At January 30, 2016 and January€31, 2015, we had a valuation allowance of $4.8 billion and $4.5 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 2015 and 2014, we had a federal and state net operating loss ("NOL") deferred tax asset of $1.6
billion and $1.8 billion, respectively, which will expire predominately between 2019 and 2036. We have credit
carryforwards of $832 million, which will expire between 2016 and 2036.
On July 7, 2015, Holdings completed its rights offering and sale-leaseback transaction with Seritage, a
recently formed independent publicly traded REIT. As part of the transaction, Holdings sold 235 properties to
Seritage along with Holdings' 50% interests in joint ventures with each of Simon Property Group, Inc., General
Growth Properties, Inc., and The Macerich Company, which together hold an additional 31 properties (See Note 11).
In connection with the sale-leaseback transaction with Seritage in the second quarter of 2015, along with the
Simon Property Group, Inc., General Growth Properties, Inc., and The Macerich Company joint venture transactions
in the first quarter of 2015, the Company realized a tax benefit of $229 million on the deferred taxes related to the
indefinite-life assets associated with the property sold in the transaction with Seritage and respective joint venture
transactions. In addition, the Company incurred a taxable gain of approximately $2.2 billion, taking into account any
related party loss disallowance, on these transactions. There was no federal income tax payable resulting from the
taxable gain due to the utilization of NOL tax attributes of approximately $856 million with a valuation allowance
release of the same amount. However, there was a minor amount of state and city income tax payable of $4 million
after the utilization of state and city tax attributes. As a result of all the effects from the JV transactions and Seritage
transaction in the first and second quarter of 2015, the impact to the net valuation allowance was a release of
approximately $500 million.
SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
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