Baskin Robbins 2011 Annual Report Download - page 112

are recorded because it is more likely than not that there will not be sufficient capital gain income in future
periods to utilize the capital loss carryforwards. Any future reversal of the valuation allowance related to these
capital loss carryforwards will be recorded to the provision for income taxes in the consolidated statements of
operations. The capital loss carryforwards will expire in 2012.
The Company has not recognized a deferred tax liability of $6.1 million for the undistributed earnings of foreign
operations, net of foreign tax credits, relating to our foreign joint ventures that arose in fiscal year 2011 and prior
years because the Company currently does not expect those unremitted earnings to reverse and become taxable to
the Company in the foreseeable future. A deferred tax liability will be recognized when the Company is no
longer able to demonstrate that it plans to permanently reinvest undistributed earnings. As of December 31, 2011
and December 25, 2010, the undistributed earnings of these joint ventures were approximately $108.2 million
and $97.9 million, respectively.
At December 31, 2011 and December 25, 2010, the total amount of unrecognized tax benefits related to uncertain
tax positions was $41.4 million and $17.5 million, respectively. At December 31, 2011 and December 25, 2010,
the Company had approximately $16.9 million and $12.1 million, respectively, of accrued interest and penalties
related to uncertain tax positions. During fiscal years 2011, 2010, and 2009, the Company recorded $3.1 million,
$0.6 million, and $6.2 million, respectively, in income tax expense to accrue for potential interest and penalties
related to uncertain tax positions. At December 31, 2011, December 25, 2010, and December 26, 2009, there
were $17.4 million, $13.5 million, and $23.6 million, respectively, of unrecognized tax benefits that if recognized
would impact the annual effective tax rate.
The Company’s major tax jurisdictions are the United States and Canada. For Canada, the Company has open tax years
dating back to tax years ended August 2003. In the United States, the Company is currently under audits in certain state
jurisdictions for tax periods after August 2003. The audits are in various stages as of December 31, 2011. It is uncertain
that these audits will conclude in 2012 and quantification of an estimated impact on the total amount of unrecognized
tax benefits cannot be made at this time. For U.S. federal taxes, the Company has open tax years dating back to 2006.
In addition, the Internal Revenue Service ( “IRS”) is conducting an examination of certain tax positions related to the
utilization of capital losses. During 2010, the Company made a payment of approximately $6.0 million to the IRS for
this issue. The payment did not have a material impact on the Company’s financial position.
The federal income tax returns of the Company for fiscal years 2006 through 2009 are currently under audit by
the IRS, and the IRS has proposed adjustments for fiscal years 2006 and 2007 to increase our taxable income as it
relates to our gift card program, specifically to record taxable income upon the activation of gift cards. We have
filed a protest to the IRS’ proposed adjustments. If the IRS were to prevail in this matter the proposed
adjustments would result in additional taxable income of approximately $58.9 million for fiscal years 2006 and
2007 and approximately $26.8 million of additional federal and state taxes and interest owed, net of federal and
state benefits. If the IRS prevails, a cash payment would be required, and the additional taxable income would
represent temporary differences that will be deductible in future years. Therefore, the potential tax expense
attributable to the IRS adjustments for 2006 and 2007 would be limited to $3.1 million, consisting of federal and
state interest, net of federal and state benefits. In addition, if the IRS were to prevail in respect of fiscal years
2006 and 2007, it is likely to make similar claims for years subsequent to fiscal 2007 and the potential additional
federal and state taxes and interest owed, net of federal and state benefits, for fiscal years 2008 through 2010,
computed on a similar basis to the IRS method used for fiscal years 2006 and 2007, and factoring in the timing of
our gift card uses and activations, would be approximately $19.7 million. The corresponding potential tax
expense impact attributable to these later fiscal years, 2008 through 2010, would be approximately $0.8 million.
During the fourth quarter of 2011, representatives of the Company met with the IRS appeals officer. Based on
that meeting, the Company proposed a settlement related to this issue and is awaiting a response from the IRS. If
our settlement proposal is accepted as presented, we expect to make a cash tax payment in an amount that is less
than the amounts proposed by the IRS to cumulatively adjust our tax method of accounting for our gift card
program through the tax year ended December 25, 2010. No assurance can be made that a settlement can be
reached, or that we will otherwise prevail in the final resolution of this matter. An unfavorable outcome from any
-102-