Dollar Tree 2007 Annual Report Download - page 40

38 DOLLAR TREE, INC. • 2007 ANNUAL REPORT
Notes to Consolidated Financial Statements continued
A valuation allowance of $2.1 million, net of
Federal tax benefits, has been provided principally for
certain state net operating losses and credit carryfor-
wards. In assessing the realizability of deferred tax
assets, management considers whether it is more likely
than not that some portion or all of the deferred taxes
will not be realized. Based upon the availability of car-
rybacks of future deductible amounts to the past two
years’ taxable income and management’s projections
for future taxable income over the periods in which
the deferred tax assets are deductible, management
believes it is more likely than not the remaining exist-
ing deductible temporary differences will reverse dur-
ing periods in which carrybacks are available or in
which the Company generates net taxable income.
The Internal Revenue Service completed its
examination of the 1999 to 2003 consolidated federal
income tax returns during 2006. In addition, several
states completed their examination of fiscal years prior
to 2005. In general, fiscal years 2004 and forward are
within the statute of limitations for Federal and state
tax purposes. The statute of limitations is still open
prior to 2004 for some states.
In June 2006, the Financial Accounting Standards
Board issued FIN 48. This Interpretation clarifies
accounting for income tax uncertainties recognized in
an enterprise’s financial statements in accordance with
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recog-
nition threshold and measurement attribute for a tax
position taken or expected to be taken in a tax return.
Under the guidelines of FIN 48, an entity should rec-
ognize a financial statement benefit for a tax position
if it determines that it is more likely than not that the
position will be sustained upon examination.
The Company adopted the provisions of FIN 48
on February 4, 2007. As a result, the Company recog-
nized a $0.6 million decrease to retained earnings. The
balance for unrecognized tax benefits at February 4,
2007, was $19.1 million. The total amount of unrec-
ognized tax benefits at February 4, 2007, that, if rec-
ognized, would affect the effective tax rate was $12.4
million (net of the federal tax benefit). The following
is a reconciliation of Dollar Tree’s total gross unrecog-
nized tax benefits for the year-to-date period ended
February 2, 2008:
(in millions)
Balance at February 4, 2007 $19.1
Additions, based on tax positions
related to current year 8.1
Additions for tax positions of prior years 29.2
Reductions for tax positions of
prior years settlements (0.1)
Lapses in statute of limitations (1.3)
Balance at February 2, 2008 $55.0
The total amount of unrecognized tax benefits at
February 2, 2008, that, if recognized, would affect the
effective tax rate was $15.4 million (net of the federal
tax benefit).
During fiscal 2007, the Company accrued poten-
tial interest of $4.4 million, related to these unrecog-
nized tax benefits. No potential penalties were
accrued during 2007 related to the unrecognized tax
benefits. As of February 2, 2008, the Company has
recorded a liability for potential penalties and interest
of $0.1 million and $7.3 million, respectively.
During the next 12 months, it is reasonably possi-
ble the Company’s reserve for uncertain tax positions
will decrease between $34.0 million and $42.0 mil-
lion. Most of this reduction relates to temporary dif-
ferences and the related interest expense for which
accounting method changes have been filed at the
beginning of fiscal year 2008 with the Internal
Revenue Service. Voluntarily filing accounting method
changes provides audit protection for the issues
involved for the open periods in exchange for agreeing
to pay the tax over a prescribed period of time. In
addition, it is possible that state tax reserves will be
reduced for audit settlements and statute expirations
within the next 12 months. At this point it is not pos-
sible to estimate a range associated with these audits.
NOTE 4 – COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
Future minimum lease payments under noncancelable
stores and distribution center operating leases are as
follows:
(in millions)
2008 $319.0
2009 284.3
2010 238.4
2011 185.8
2012 129.9
Thereafter 205.8
Total minimum lease payments $1,363.2
The above future minimum lease payments
include amounts for leases that were signed prior to
February 2, 2008 for stores that were not open as of
February 2, 2008.
Minimum rental payments for operating leases do
not include contingent rentals that may be paid under
certain store leases based on a percentage of sales in
excess of stipulated amounts. Future minimum lease
payments have not been reduced by expected future
minimum sublease rentals of $2.6 million under oper-
ating leases.