Sears 2015 Annual Report Download - page 93

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.
We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax
overpayments as components of income tax expense. At January 30, 2016 and January€31, 2015, the total amount of
interest and penalties recognized within the related tax liability in our Consolidated Balance Sheet was $56 million
($36 million net of federal benefit) and $49 million ($32 million net of federal benefit), respectively. The total
amount of net interest expense recognized in our Consolidated Statement of Operations for 2015, 2014 and 2013
was $4 million, $4 million and $2 million, respectively.
We file income tax returns in both the United States and various foreign jurisdictions. The U.S. Internal
Revenue Service (“IRS”) has completed its examination of all federal tax returns of Holdings through the 2009
return, and all matters arising from such examinations have been resolved. In addition, Holdings and Sears are under
examination by various state, local and foreign income tax jurisdictions for the years 2003 through 2013, and Kmart
is under examination by such jurisdictions for the years 2006 through 2013.
NOTE 11—REAL ESTATE TRANSACTIONS
Gain on Sales of Assets
We recognized $743 million, $207 million and $667 million in gains on sales of assets during 2015, 2014 and
2013, respectively. These gains were primarily a function of several large real estate transactions.
On April 1, 2015, April 13, 2015, and April 30, 2015, Holdings and General Growth Properties, Inc. ("GGP"),
Simon Property Group, Inc. ("Simon") and The Macerich Company ("Macerich"), respectively, announced that they
entered into three distinct real estate joint ventures (collectively, the "JVs"). Holdings contributed 31 properties to
the JVs where Holdings currently operates stores (the "JV properties"), in exchange for a 50% interest in the JVs and
$429 million in cash ($426 million, net of closing costs) (the "JV transactions"). The JV transactions valued the JV
properties at $858 million in the aggregate.
On July 7, 2015, Holdings completed its rights offering and sale-leaseback transaction (the "Seritage
transaction") with Seritage Growth Properties ("Seritage"), a recently formed, independent publicly traded real estate
investment trust ("REIT"). As part of the Seritage transaction, Holdings sold 235 properties to Seritage (the "REIT
properties") along with Holdings' 50% interest in the JVs. Holdings received aggregate gross proceeds from the
Seritage transaction of $2.7 billion ($2.6 billion, net of closing costs). The Seritage transaction was partially
financed through the sale of common shares and limited partnership units, totaling $1.6 billion, including $745
million received from ESL and its affiliates and $297 million received from Fairholme and its affiliates as further
described in Note 15. The Seritage transaction was also partially financed by Seritage through mortgage and
mezzanine loan proceeds totaling $1.2 billion. Immediately prior to completing the Seritage transaction, subsidiaries
of Kmart and Sears obtained mortgage and mezzanine financing for the REIT properties. Upon completion of the
Seritage transaction, all obligations with respect to such financing were assumed by Seritage. The Seritage
transaction valued the REIT properties at $2.3 billion in the aggregate.
In connection with the Seritage transaction and JV transactions, Holdings has entered into agreements with
Seritage and the JVs under which Holdings leases 255 of the properties (the "Master Leases"), with the remaining
properties being leased by Seritage to third parties. The Master Leases generally are triple net leases with respect to
the space occupied by Holdings, and Holdings has the obligation to pay rent, costs and expenses of operation, repair,
and maintenance of the space occupied. The Master Leases have an initial term of 10 years. The Master Lease for
the REIT properties provides Holdings three options for five-year renewals of the term and a final option for a four-
year renewal. The Master Leases for the JV properties provide Holdings two options for five-year renewals of the
term. Seritage and the JVs have a recapture right with respect to approximately 50% of the space within the stores at
the REIT properties and JV properties (subject to certain exceptions), in addition to all of the automotive care
centers which are free-standing or attached as "appendages", and all outparcels or outlots, as well as certain portions
of parking areas and common areas, except as set forth in the Master Leases, for no additional consideration. With
respect to 21 stores identified in the Master Leases, Seritage has the further additional right to recapture 100% of the
space within the Holdings' main store, effectively terminating the Master Leases with respect to such properties.
SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
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