Circuit City 2008 Annual Report Download - page 58

Table of Contents
result of additional losses incurred in foreign and state jurisdictions. Valuation allowances decreased $.7 million in 2008 for carryforward
losses utilized for which valuation allowances had been previously provided. As of December 31, 2007, the valuation allowances of $7.4
million included $6.0 million related to net operating loss carryforwards in foreign jurisdictions, $1.2 million for state net operating loss
carryforwards and $0.2 million for other state deductible temporary differences. During 2007, valuation allowances decreased $10.5 million
primarily as a result of the reversal of the valuation allowance in the United Kingdom, utilization of net operating losses and timing
differences in the United Kingdom and utilization of state net operating loss deductions in the United States. During 2006, valuation
allowances increased $2.6 million as a result of additional losses incurred in certain state jurisdictions and adjustments of prior year’s
allowances in foreign jurisdictions.
The Company is routinely audited by federal, state and foreign tax authorities with respect to its income taxes. The Company regularly
reviews and evaluates the likelihood of audit assessments and believes it has adequately accrued for exposures for tax liabilities resulting
from future tax audits. To the extent the Company would be required to pay amounts in excess of reserves or prevail on matters for which
accruals have been established, the Company’s effective tax rate in a given period may be materially impacted. The Company’s federal
income tax returns for fiscal years 2005 and 2006 are currently under audit by the Internal Revenue Service. The Company does not expect
the outcome of the audit to have a material impact on the Company’s consolidated financial statements. The Company has not signed any
consents to extend the statute of limitations for any subsequent years. The Company’s significant state tax returns have been audited
through 2005. The Company considers its significant tax jurisdictions in foreign locations to be the United Kingdom, Canada, France, Italy
and Germany. The Company remains subject to examination in the United Kingdom for years after 2001, in
Canada for years after 2000, in France for years after 2004, in Italy for years after 2002. Audits are currently ongoing in the Netherlands for
2006 and in Germany for 2005 and 2006.
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a
comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. At January 1, 2007, the Company had a liability for unrecognized tax benefits of $3,379,000
(including interest and penalties of $731,000) of which $283,000 was charged to retained earnings at January 1, 2007. Of this total,
$2,586,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would
favorably affect the effective income tax rate in any future periods. At December 31, 2007 the Company had a liability for unrecognized tax
benefits of $1,547,000 (including interest and penalties of $631,000). Of this total, $1,467,000 (net of the federal benefit on state issues)
represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future
periods. The following table details activity of the Company’s uncertain tax positions during 2008 and 2007:
Interest and penalties of approximately $46,000 and $69,000 related to unrecognized tax benefits were expensed in 2008 and 2007 and are
included in income tax expense. Additionally, included in income tax expense in 2008 is an interest and penalty reserves reversal of
approximately $399,000 related to a state tax audit that was settled favorably. Within the next twelve months the Company believes it
reasonably possible that these tax positions, related to foreign tax audits, will be reduced.
9.
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Leases - The Company is obligated under operating lease agreements for the rental of certain office and warehouse facilities and equipment
which expire at various dates through September 2026. The Company currently leases its headquarters office/warehouse facility in New
York from an entity owned by the Company’s three principal shareholders and senior executive officers. The Company believes that these
payments were no higher than would be paid to an unrelated lessor for comparable space. The Company also acquires certain computer and
communications equipment pursuant to capital lease obligations.
53
December 31,
2008 2007
Balance beginning of year
$
916
$
2,648
Decreases related to settlements with taxing authorities
—
(
1,732
)
Balance end of year
$
916
$
916