Dillard's 2012 Annual Report Download - page 37

Fiscal 2011
Asset impairment and store closing charges for fiscal 2011 consisted of the write-down of a
property held for sale.
Fiscal 2010
Asset impairment and store closing charges for fiscal 2010 consisted of the write-down of one
property held for sale.
Income Taxes
The Company’s estimated federal and state effective income tax rate, inclusive of income on
(equity in losses of) joint ventures, was 30.2% in fiscal 2012, (15.6)% in fiscal 2011 and 32.0% in fiscal
2010. The Company expects the fiscal 2013 federal and state effective income tax rate to approximate
35%.
Fiscal 2012
During fiscal 2012, income taxes included the recognition of tax benefits of approximately
$19.7 million due to deductions for dividends paid to the Dillard’s, Inc. Investment and Employee
Stock Ownership Plan, $2.8 million related to federal tax credits, $1.2 million for the increase in the
cash surrender value of life insurance policies, $1.8 million due to net decreases in unrecognized tax
benefits, interest and penalties, $1.7 million for an amended return filed where capital gain income was
offset by a previously unrecognized capital loss carryforward available in the amended return year, and
$1.0 million related to decreases in valuation allowances related to state net operating loss
carryforwards. The Company is currently under examination by various state and local taxing
jurisdictions for various fiscal years. At this time, the Company does not expect the results from any
income tax audit to have a material impact on the Company’s financial statements.
Fiscal 2011
In January 2011, the Company formed a wholly-owned subsidiary intended to operate as a real
estate investment trust (‘‘REIT’’) and transferred certain properties to this subsidiary. The Company
entered into this transaction in order to enhance its financial flexibility by providing additional sources
of liquidity. At the time, the Company believed that a tax election might be available to the Company
that would result in a taxable gain on the transfer of these properties to the REIT. In May 2011, the
Company requested that the IRS review the transaction and the potential tax election available to the
Company, through the IRS’s voluntary Pre-Filing Agreement Program (‘‘PFA’’). Through the PFA, in
September 2011, the Company and the IRS entered into a Closing Agreement on Final Determination
Covering Specific Matters under which the IRS agreed with the Company regarding the tax treatment
of the transfer of the properties to the REIT and the availability of the tax election to the Company.
Based on the agreement with the IRS reached during fiscal 2011, the Company determined to make
the tax election in its tax return for the fiscal year ended January 29, 2011 (fiscal 2010). This tax
election increased the tax basis of the properties transferred to the REIT to their fair values at the
date of the transfer. The income tax that would otherwise be payable because of the gain recognized by
this election was largely reduced by the utilization of a capital loss carryforward, that would otherwise
have expired as of January 29, 2011, against a portion of the recognized gain. Because of the
Company’s past uncertainty regarding the incurrence of capital gain income, the deferred tax asset
associated with that capital loss carryforward had been offset by a full valuation allowance since its
recognition in fiscal 2005. During fiscal 2011, income taxes included the recognition of approximately
$201.6 million in tax benefit due to the reversal of the valuation allowance related to the amount of the
capital loss carryforward used to offset the capital gain income recognized on the taxable transfer of
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