Sears 2015 Annual Report Download - page 92

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.
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. 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, our estimated range of impact on the balance of unrecognized tax benefits for
2016 is a change of $2 million to $12 million, which would impact the effective tax rate by $1 million to $8 million.
A€reconciliation of the beginning and ending amount of gross unrecognized tax benefits ("UTB") is as follows:
Federal,€State,€and€Foreign€Tax
millions
January 30,
2016
January 31,
2015
February 1,
2014
Gross UTB Balance at Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . $131 $150 $161
Tax positions related to the current period:
Gross increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 15 15
Gross decreases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ———
Tax positions related to prior periods:
Gross increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ———
Gross decreases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (27)(17)
Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (5)(1)
Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8)(4)(6)
Exchange rate fluctuations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2 (2)
Gross UTB Balance at End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $137 $131 $150
At the end of 2015, we had gross unrecognized tax benefits of $137 million. Of this amount, $89 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 2015, the gross unrecognized tax benefits increased by
$14 million due to current year accruals for existing tax positions. During fiscal year 2014, the gross unrecognized
SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
92