Wendy's 2010 Annual Report Download - page 119

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
operating loss carryforwards. Valuation allowances (decreased) increased ($181) and $12,494 in 2010 and 2009,
respectively, principally related to changes in state net operating losses. In making our determination of the need for
valuation allowances, we reviewed available positive and negative evidence as well as prudent and feasible tax planning
strategies regarding our ability to realize the benefit of the related deferred tax assets.
For U.S. Federal income tax purposes during the years prior to 2009, we deducted $117,939 relating to the
exercise of stock options and vesting of restricted stock. Wendy’s/Arby’s has not recognized the $42,661 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 and credit carryforwards. When such benefits are realized against future income
taxes payable by Wendy’s/Arby’s, 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.”
U.S. income taxes and foreign withholding taxes are provided on unremitted earnings of foreign subsidiaries,
primarily Canadian, which are not essentially permanent in duration. As of January 2, 2011, the Companies have
unremitted earnings of $1,600 with a corresponding U.S. deferred income tax liability of $200.
The Wendy’s Merger qualified as a tax-free reorganization. Based on the merger exchange ratio, the former
shareholders of Wendy’s owned 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, for U.S. Federal tax
purposes there was an ownership change at Wendy’s/Arby’s which places a limit on the amount of a company’s net
operating losses that can be deducted annually.
The reconciliation of income tax computed at the U.S. Federal statutory rate to reported income tax is set forth
below:
Wendy’s/Arby’s
2010 2009 2008
Income tax benefit at the U.S. Federal statutory rate ............. $ 7,699 $ 7,047 $203,438
State income tax (provision) benefit, net of U.S. Federal income
tax effect ........................................ (1,489) 2,505 6,884
Previously unrecognized state net operating losses, net of related
valuation allowance (a) ............................. — 9,629 —
Foreign and U.S. tax effects of foreign operations (b) ......... 7,692 623 9,241
Impairment of non-deductible goodwill .................. — — (99,696)
Canadian tax rate changes ............................. — 2,000 —
Loss on DFR common stock with no tax benefit ............ — — (20,259)
Jobs tax credits, net .................................. 3,469 3,792 1,805
Valuation allowance changes ........................... (198) 1,165 —
Non-deductible expenses .............................. (1,162) (1,354) (1,921)
Adjustments related to prior year tax matters ............... 1,035 (1,603) (706)
Other, net ......................................... 624 (155) 508
$17,670 $23,649 $ 99,294
(a) In connection with the fourth quarter 2009 dissolution of our captive insurance company, the likelihood of
realization of certain previously unrecognized state net operating losses is no longer remote. Accordingly, an
$18,152 deferred tax asset and related $8,523 partial valuation allowance was recognized.
(b) Includes previously unrecognized benefit in 2010 and 2008 of foreign tax credits, net of foreign income and
withholding taxes on the repatriation of foreign earnings.
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