Foot Locker 2007 Annual Report Download - page 66

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The Company’s U.S. Federal income tax filings have been examined by the Internal Revenue Service (the “IRS”)
through 2006. The Company is participating in the IRS’s Compliance Assurance Process (“CAP”) for 2007, which is
expected to conclude during 2008. The Company has started the CAP for 2008. Due to the recent utilization of net
operating loss carryforwards, the Company is subject to state and local tax examinations effectively including years
from 1993 to the present. The Company is currently under examination in the Netherlands for tax years 2002-2005.
To date, no adjustments have been proposed in any audits that will have a material effect on the Company’s financial
position or results of operations.
As of February 2, 2008, the Company has a valuation allowance of $14 million to reduce its deferred tax assets
to an amount that is more likely than not to be realized. The valuation allowance primarily relates to the deferred tax
assets arising from state tax loss carryforwards and tax credits. The valuation allowance for state tax loss carryforwards
increased, principally due to changes in taxable income projections offset by anticipated expirations of those losses.
Valuation allowances for Canadian tax loss carryforwards and tax depreciation totaling $79 million were released as
a result of the simplification of the structure of our Canadian operations offset by $3 million relating to Canadian
rate changes. As a consequence of this simplification, we were also required to write-off $11 million of deferred costs
related to the former Canadian structure.
Based upon the level of historical taxable income and projections for future taxable income over the periods in
which the temporary differences are anticipated to reverse, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences, net of the valuation allowances at February 2, 2008.
However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of
taxable income are revised.
At February 2, 2008, the Company’s tax loss/credit carryforwards include international operating loss carryforwards
with a potential tax benefit of $12 million. Those expiring between 2008 and 2017 total $9 million and those that do
not expire total $3 million. The Company also has state net operating loss carryforwards with a potential tax benefit of
$21 million, which principally relate to the 16 states where the Company does not file combined or consolidated returns.
These loss carryforwards expire between 2008 and 2028. The Company has state credit carryforwards of approximately
$2 million that expire between 2010 and 2013. The Company also has: federal foreign tax credits totaling $28 million,
$4 million of which can be carried back to 2006 and $24 million of which can be carried forward for 10 years, expiring in
2018; a federal net operating loss of $4 million, all of which can be carried back to 2006; and general business credits
of $1 million, which also can be carried back to 2006.
The Company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes” effective February 4, 2007, that
resulted in the recognition of an additional $1 million of previously unrecognized tax benefits, which was reflected
as an adjustment to opening retained earnings. The Company had $33 million of gross unrecognized tax benefits,
$30 million of net unrecognized tax benefits, as of February 4, 2007. The Company has classified certain income tax
liabilities as current or noncurrent based on management’s estimate of when these liabilities will be settled. Interest
expense and penalties related to unrecognized tax benefits are classified as income tax expense. During the year
ended February 2, 2008, the Company recognized $1 million of interest expense. The total amount of accrued interest
and penalties was $5 million and $4 million of interest and no penalties in 2007 and 2006, respectively.
The following table summarizes the activity related to unrecognized tax benefits:
( in millions)
Balance as of February 4, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33
Increases related to current year tax positions .................. 4
Increases related to prior period tax positions . . . . . . . . . . . . . . . . . . 35
Decreases related to prior period tax positions .................. —
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
Balance as of February 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71