Shake Shack 2016 Annual Report Download - page 97

Table of Contents
As of December 30, 2015 , our federal net operating loss carryforwards for income tax purposes was $334 . If not utilized, the federal net operating loss
carryforward will begin to expire in 2035.
As described in Notes 1 and 11, we acquired an aggregate of 19,789,259 LLC Interests during fiscal 2015 in connection with the IPO, Organizational Transactions,
settlement of outstanding UARs, redemptions of LLC Interests and the USC Merger. We recognized a deferred tax asset in the amount of $154,649 associated with
the basis difference in our investment in SSE Holdings upon acquiring these LLC Interests. However, a portion of the basis difference will only reverse upon the
eventual sale of our interest in SSE Holdings, which we expect would result in a capital loss. As such, we established a valuation allowance in the amount of
$23,155 against the deferred tax asset to which this portion relates.
During fiscal 2015 , we also recognized $69,513 of deferred tax assets related to additional tax basis increases generated from expected future payments under the
Tax Receivable Agreement and related deductions for imputed interest on such payments. See "—Tax Receivable Agreement" for more information.
We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of
a deferred tax asset may not be realized. As of December 30, 2015 , we concluded, based on the weight of all available positive and negative evidence, that all of
our deferred tax assets (except for those deferred tax assets described above relating to basis differences that are expected to result in a capital loss upon the
eventual sale of our interest in SSE Holdings) are more likely than not to be realized. As such, no additional valuation allowance was recognized. The net change in
valuation allowance for fiscal 2015 was $23,155 . There was no net change in valuation allowance in fiscal 2014 .
In the fourth quarter of fiscal 2015 , we corrected certain immaterial errors relating to prior fiscal 2015 interim periods for our deferred income taxes and liabilities
under the Tax Receivable Agreement after determining that our prior computations of our liabilities under the Tax Receivable Agreement utilized inappropriate
assumptions and incorrectly applied certain provisions of the Tax Receivable Agreement. Additionally, we did not recognize certain deferred tax assets related to
historical tax attributes we acquired upon our acquisition of the Former SSE Equity Owners. As a result, in fiscal 2015, we recognized a $15,043 increase in
deferred income taxes, a $12,045 increase to liabilities under tax receivable agreement and a $4,026 increase to additional paid-in capital relating to these errors
from prior interim periods. The corrections had no impact on our Consolidated Statements of Income or Cash Flows for the affected interim periods.
Uncertain Tax Positions
No uncertain tax positions existed as of December 30, 2015 and December 31, 2014 . Shake Shack Inc. was formed in September 2014 and did not engage in any
operations prior to the IPO and Organizational Transactions. Shake Shack Inc. first filed tax returns for tax year 2014, which is the first tax year subject to
examination by taxing authorities for U.S. federal and state income tax purposes. Additionally, although SSE Holdings is treated as a partnership for U.S. federal
and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue
Service ("IRS"). The statute of limitations has expired for tax years through 2011 for SSE Holdings.
Tax Receivable Agreement
Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets
of SSE Holdings when LLC Interests are redeemed or exchanged by the Continuing SSE Equity Owners and other qualifying transactions. We plan to make an
election under Section 754 of Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intend to treat any redemptions and
exchanges of LLC Interests by the Continuing SSE Equity Owners as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in
tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future
dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On February 4, 2015, we entered into a tax receivable agreement with the Continuing SSE Equity Owners (the "Tax Receivable Agreement") that provides for the
payment by us to the Continuing SSE Equity Owners of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a
result of (i) increases in our share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis
increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax
95 | Shake Shack Inc. Form 10-K