Restoration Hardware 2012 Annual Report Download - page 155

provided assurance that its future tax benefits more likely than not would be realized. Accordingly, in fiscal
2012, the Company released all of its U.S. valuation allowance of $57.2 million against net deferred tax assets.
As of February 2, 2013, the Company has retained a valuation allowance totaling $0.3 million against
deferred tax assets for its Shanghai operations.
As of February 2, 2013, the Company had federal and state net operating loss carryovers of $28.3 million
and $31.6 million, respectively. The federal and state net operating loss carryovers will expire between 2014 and
2031. Internal Revenue Code Section 382 and similar state rules place a limitation on the amount of taxable
income which can be offset by net operating loss carryforwards after a change in ownership (generally greater
than 50% change in ownership). The Company cannot give any assurances that it will not undergo an ownership
change in the future resulting in further limitations on utilization of net operating losses.
A reconciliation of the exposures related to unrecognized tax benefits is as follows (in thousands):
Year Ended
February 2,
2013
January 28,
2012
January 29,
2011
Balance at beginning of fiscal year $2,505 $ 9,015 $8,261
Gross (decreases) increases—prior period tax
positions (57) — —
Gross increases (decreases)—current period tax
positions — (14) 1,048
Consent for accounting method change — (6,496) —
Lapses in statute of limitations (607) — (294)
Balance at end of fiscal year $1,841 $ 2,505 $9,015
As of February 2, 2013 and January 28, 2012, $1.8 million and $2.5 million, respectively, of the exposures
related to unrecognized tax benefits would affect the effective tax rate if realized and are included in other long-
term obligations on the consolidated balance sheets. These amounts are primarily associated with foreign tax
exposures that would, if realized, reduce the amount of net operating losses that would ultimately be utilized. As
of February 2, 2013, $0.3 million of the exposures related to unrecognized tax benefits are expected to decrease
in the next 12 months due to the lapse of the statute of limitations.
Adjustments required upon adoption of accounting for uncertainty in income taxes related to deferred tax
asset accounts were offset by the related valuation allowance. Future changes to the Company’s assessment of
the realizability of those deferred tax assets will impact the effective tax rate. The Company accounts for interest
and penalties related to exposures as a component of income tax expense. The Company has accrued $0.5 million
and $1.3 million of interest associated with exposures as of February 2, 2013, and January 28, 2012, respectively.
A significant portion of the Company’s unrecognized tax benefits as of January 29, 2011 was related to an
uncertain tax position for advanced payments for the sale of gift cards. The Company filed a request to change its
accounting method for advanced payments for the sale of gift cards with the IRS in fiscal 2011 and, during the
fourth quarter of fiscal 2011, the IRS approved the Company’s request. This approval allowed the Company to
increase its tax liability for the impact of the change over a four-year period beginning with its January 28, 2012
tax return. The Company reduced its balance of unrecognized tax benefits by $6.5 million for the impact of the
approval on this uncertain tax position.
This Company is subject to tax in the United States, Canada, Shanghai and Hong Kong. The Company could
be subject to United States federal and state tax examinations for years 2001 and forward by virtue of net
99
Form 10-K