Wendy's 2008 Annual Report Download - page 139

assigned values in the purchase price allocation (see note 3) and the tax basis of the net assets acquired partially
offset by increases in deferred tax assets resulting from our impairment of deductible goodwill and other than
temporary losses to the extent a benefit could be realized (see notes 18 and 20).
U.S. income taxes and foreign withholding taxes are provided on undistributed earnings of foreign
subsidiaries, primarily Canadian, that are not essentially permanent in duration. There were no undistributed
earnings at December 28, 2008.
The Wendy’s Merger qualified as a reorganization under Section 368(a)(2)(E) of the Internal Revenue
Code. Based on the merger exchange ratio, the former shareholders of Wendy’s own approximately 80% of the
total stock of Wendy’s/Arby’s outstanding immediately after the Wendy’s Merger. Therefore, the Wendy’s
Merger was treated as a reverse acquisition for U.S. Federal income tax purposes. As a result of the reverse
acquisition, Wendy’s/Arby’s and its subsidiaries became part of the Wendy’s consolidated group with
Wendy’s/Arby’s as its new parent. In addition, Wendy’s/Arby’s had a short taxable year in 2008 ending on the
date of the Wendy’s Merger. Also as a result of the Wendy’s Merger, there was an ownership change at
Wendy’s/Arby’s as defined in Section 382 of the Code which places a limit, as defined in the Code, on the
amount of a Company’s net operating losses that can be deducted for tax purposes once there has been an
ownership change.
As of December 28, 2008, the Company had net operating loss carryforwards for U.S. Federal income tax
purposes of approximately $318,000 which expire beginning in 2022. The utilization of loss carryforwards in
future federal income tax returns is subject to an annual limitation of approximately $29,000 under IRC
Section 382 although it could be higher in the 5 year period following the Wendy’s Merger under certain
circumstance allowed by IRC Section 382. The net operating losses reflect deductions for federal income tax
purposes of $117,939 relating to the exercise of stock options and vesting of restricted stock. In accordance
with SFAS 123(R), the Company was unable to recognize the $42,660 tax benefit relating to these deductions
because it has no income taxes currently payable against which the benefits can be realized as a result of its net
operating loss carryforward position. When such benefits are realized against future income taxes payable by
the Company, it will recognize them in future periods as a reduction of current income taxes payable with an
equal offsetting increase in “Additional paid-in capital”.
Additionally, the Company has carryforwards other than Federal net operating losses principally
consisting of:
(1) A $209,860 capital loss resulting from Wendy’s sale of Fresh Enterprises, Inc. & Subsidiaries “Baja
Fresh” in 2006. U.S. Federal capital losses may be carried forward for five years.
(2) $18,675 of tax credits, principally consisting of foreign tax credits generated in 2008. The tax credits
may be carried forward for periods of 10 years or more.
(3) State net operating loss carryforwards subject to various limitations and carryforward periods.
The Company has provided deferred tax valuation allowances after reviewing available evidence in
accordance with FAS 109 including tax planning strategies that are prudent and feasible. As of December 28,
2008, the Company had valuation allowances of $80,886 resulting from uncertainties regarding the future
realization of the capital loss carryforward and certain of our state net operating loss carryforwards.
A reconciliation of the difference between the reported benefit from (provision for) income taxes and the
respective benefit (tax) that would result from applying the 35% U.S. Federal statutory rate to the (loss)
income from continuing operations before income taxes and minority interests is as follows:
131
Wendy’s/Arby’s Group, Inc. and Subsidiaries
(Formerly Triarc Companies, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)