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Income Taxes
 11 Months Ended
Jan. 01, 2016
Income Taxes
Income Taxes:
Substantially all of the Company’s income from continuing operations before income taxes for the 11-month period ended January 1, 2016, and years ended January 30, 2015, and January 31, 2014, was earned in the United States. The provision for income taxes related to continuing operations for the 11-month period ended January 1, 2016, and years ended January 30, 2015, and January 31, 2014, included the following:
 
11 Months Ended
 
12 Months Ended
 
January 1,
2016
 
January 30,
2015
 
January 31,
2014
 
(in millions)
Current:
 
 
 
 
 
Federal and foreign
$
71

 
$
16

 
$
32

State
14

 
(6
)
 
13

Deferred:
 
 
 
 
 
Federal and foreign
20

 
26

 
(28
)
State
7

 
11

 
(13
)
Total
$
112

 
$
47

 
$
4


A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income from continuing operations before income taxes for the 11-month period ended January 1, 2016, and years ended January 30, 2015, and January 31, 2014, follows:
 
11 Months Ended
 
12 Months Ended
 
January 1,
2016
 
January 30,
2015
 
January 31,
2014
 
(dollars in millions)
Amount computed at the statutory federal income tax rate (35%)
$
124

 
$
(99
)
 
$
31

State income taxes, net of federal tax benefit
14

 
3

 
—

Taxable conversion of subsidiary
—

 
(116
)
 
—

Change in valuation allowance for deferred tax assets
(21
)
 
105

 
—

Change in accruals for uncertain tax positions
(4
)
 
2

 
(5
)
Research and development credits
(4
)
 
(4
)
 
(3
)
Dividends paid to employee stock ownership plan
(3
)
 
(4
)
 
(22
)
U.S. manufacturing activity benefit
—

 
—

 
(3
)
Non-deductible penalties
—

 
—

 
4

Non-deductible goodwill
—

 
156

 
—

Other
6

 
4

 
2

Total
$
112

 
$
47

 
$
4

Effective income tax rate
31.5
%
 
(16.6
)%
 
4.5
%

The Company's effective tax rate for the 11-month period ended January 1, 2016, was favorably impacted by the release of the valuation allowance related to the utilization of a capital loss carryforward for capital gains recognized during the current year and the favorable resolution of certain tax contingencies with the tax authorities. In addition, the Company's effective tax rate was favorably impacted by the research tax credit as well as the tax deduction for dividends on shares held by the Leidos Retirement Plan (an employee stock ownership plan).
The Company's effective tax rate in fiscal 2015 was negatively impacted by the goodwill impairment charge of $486 million, recorded in the quarter ended August 1, 2014, which was mostly not deductible. The effective tax rate was also impacted favorably by the tax benefit of a capital loss resulting from the conversion of one of our domestic subsidiaries to a Limited Liability Company ("LLC").
The Company’s effective income tax rate for fiscal 2014 was favorably impacted by lower earnings in fiscal 2014, the tax deductibility of the special dividend on shares held by the Leidos Retirement Plan and the resolution of certain tax contingencies with the tax authorities resulting in the recognition of an income tax benefit of approximately $7 million.
In fiscal 2015, discontinued operations reflect a tax benefit of $18 million due to the conversion of one of the Company's domestic subsidiaries held in discontinued operations. This conversion resulted in a deemed liquidation for U.S. tax purposes and triggered tax deductions and an income tax benefit.
In fiscal 2014, the Company benefited from the dividends paid to New SAIC's employees participating in the plan up to the date of the spin-off and the special dividend of $7 million and $11 million, respectively.
Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting purposes and tax reporting purposes. Deferred tax (liabilities) assets were comprised of the following:
 
January 1,
2016
 
January 30,
2015
 
(in millions)
Accrued vacation and bonuses
$
45

 
$
44

Investments
3

 
3

Deferred compensation
39

 
39

Vesting stock awards
21

 
28

Credits and net operating losses carryovers
15

 
9

Employee benefit contributions
—

 
4

Capital loss carryover
91

 
113

Reserves
31

 
41

Deferred rent and tenant allowances
14

 
15

Other
13

 
15

Total deferred tax assets
272

 
311

Valuation allowance
(102
)
 
(120
)
Deferred tax assets, net of valuation allowance
170

 
191


 
 
 
Deferred revenue
(36
)
 
(47
)
Fixed asset basis differences
(1
)
 
—

Purchased intangible assets
(138
)
 
(121
)
Partnership interest
(11
)
 
(10
)
Employee benefit contributions
(1
)
 
—

Other
(9
)
 
(8
)
Total deferred tax liabilities
(196
)
 
(186
)
Net deferred tax (liabilities) assets
$
(26
)
 
$
5


Net deferred tax (liabilities) assets were as follows:
 
January 1,
2016
 
January 30,
2015
 
(in millions)
Net current deferred tax assets
$
—

 
$
12

Net non-current deferred tax assets
8

 
14

Net non-current deferred tax liabilities
(34
)
 
(21
)
Total net deferred tax (liabilities) assets
$
(26
)
 
$
5


Pursuant to ASU 2015-17, current deferred taxes have been classified as non-current deferred taxes. See Note 1—Summary of Significant Accounting Policies.
At January 1, 2016, the Company had no federal net operating loss ("NOL") carryforwards and $9 million of state net operating losses, which will begin to expire in calendar year 2016. The Company also has $12 million of state tax credits, which will begin to expire in calendar year 2018. The Company expects to utilize $7 million and $2 million of these state tax credits and state net operating losses, respectively.
As of January 1, 2016, the Company had a capital loss carryforward of $232 million, which will expire in 2020. The Company does not believe it will be able to generate capital gains to realize the benefit from the capital loss carryforward. As a result, a full valuation allowance has been provided as of January 1, 2016.
The Company’s unrecognized tax benefits are primarily related to certain recurring deductions customary for the Company’s industry. The changes in the unrecognized tax benefits, excluding accrued interest and penalties, were as follows:
 
11 Months Ended
 
12 Months Ended
 
January 1,
2016
 
January 30,
2015
 
January 31,
2014
 
(in millions)
Unrecognized tax benefits at beginning of year
$
17

 
$
14

 
$
21

Additions for tax positions related to current year
5

 
2

 
—

Additions for tax positions related to prior years
4

 
11

 
2

Reductions for tax positions related to prior years
(15
)
 
(5
)
 
—

Settlements with taxing authorities
—

 
(1
)
 
—

Lapse of statute of limitations
—

 
(4
)
 
(9
)
Unrecognized tax benefits at end of year
$
11

 
$
17

 
$
14

Unrecognized tax benefits that, if recognized, would affect the effective income tax rate
$
7

 
$
5

 
$
6


In the 11-month period ended January 1, 2016, the Company's unrecognized tax benefits decreased primarily due to the resolution of the uncertain portion of the deferral of certain revenues, the resolution of the research and development tax credit and certain state claims with the tax authorities, which were offset by an increase due to the uncertain characterization of certain gains. In fiscal 2015, the Company's unrecognized tax benefits increased primarily due to the uncertain portion of the deferral of certain revenues, certain affirmative state claims and the research and development tax credit offset by a decrease due to the expiration of federal and several states statutes of limitations and the termination of certain state credits. In fiscal 2014, the Company's unrecognized tax benefits decreased primarily due to the expiration of the fiscal 2009 statute of limitations.
At January 1, 2016, January 30, 2015, and January 31, 2014, accrued interest and penalties totaled $1 million, $2 million and $2 million, respectively. A negligible amount of interest and penalties were recognized in the Company's consolidated statements of income in the 11-month period ended January 1, 2016, fiscal 2015 and fiscal 2014.
At January 1, 2016, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $12 million, $5 million of which were classified as other long-term liabilities on the Company's consolidated balance sheets. At January 30, 2015, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $19 million, $6 million of which were classified as other long-term liabilities on the Company's consolidated balance sheets. The balance of unrecognized tax benefits at January 31, 2014, included liabilities for uncertain tax positions of $16 million, $12 million of which were classified as other long-term liabilities on the Company's consolidated balance sheets.
The Company files income tax returns in the United States and various state and foreign jurisdictions and is subject to routine compliance reviews by the IRS and other taxing authorities. The Company has effectively settled with the IRS for all fiscal years prior to the 11-month period ended January 1, 2016, except for a certain item related to fiscal 2015 that is under administrative review. With a few exceptions, as of January 1, 2016, the Company is no longer subject to state, local, or foreign examinations by the tax authorities for years before fiscal 2013.
During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to $7 million of the Company’s unrecognized tax benefits, depending on the timing of ongoing examinations, any litigation and expiration of statute of limitations, either because the Company’s tax positions are sustained or because the Company agrees to their disallowance and pays the related income tax. While the Company believes it has adequate accruals for uncertain tax positions, the tax authorities may determine that the Company owes taxes in excess of recorded accruals or the recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities.
Leidos, Inc.  
Income Taxes
Income Taxes:
Substantially all of the Company’s income from continuing operations before income taxes for the 11-month period ended January 1, 2016, and years ended January 30, 2015, and January 31, 2014, was earned in the United States. The provision for income taxes related to continuing operations for the 11-month period ended January 1, 2016, and years ended January 30, 2015, and January 31, 2014, included the following:
 
11 Months Ended
 
12 Months Ended
 
January 1,
2016
 
January 30,
2015
 
January 31,
2014
 
(in millions)
Current:
 
 
 
 
 
Federal and foreign
$
71

 
$
16

 
$
32

State
14

 
(6
)
 
13

Deferred:
 
 
 
 
 
Federal and foreign
20

 
26

 
(28
)
State
7

 
11

 
(13
)
Total
$
112

 
$
47

 
$
4


A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income from continuing operations before income taxes for the 11-month period ended January 1, 2016, and years ended January 30, 2015, and January 31, 2014, follows:
 
11 Months Ended
 
12 Months Ended
 
January 1,
2016
 
January 30,
2015
 
January 31,
2014
 
(dollars in millions)
Amount computed at the statutory federal income tax rate (35%)
$
124

 
$
(99
)
 
$
31

State income taxes, net of federal tax benefit
14

 
3

 
—

Taxable conversion of subsidiary
—

 
(116
)
 
—

Change in valuation allowance for deferred tax assets
(21
)
 
105

 
—

Change in accruals for uncertain tax positions
(4
)
 
2

 
(5
)
Research and development credits
(4
)
 
(4
)
 
(3
)
Dividends paid to employee stock ownership plan
(3
)
 
(4
)
 
(22
)
U.S. manufacturing activity benefit
—

 
—

 
(3
)
Non-deductible penalties
—

 
—

 
4

Non-deductible goodwill
—

 
156

 
—

Other
6

 
4

 
2

Total
$
112

 
$
47

 
$
4

Effective income tax rate
31.5
%
 
(16.6
)%
 
4.5
%

The Company's effective tax rate for the 11-month period ended January 1, 2016, was favorably impacted by the release of the valuation allowance related to the utilization of a capital loss carryforward for capital gains recognized during the current year and the favorable resolution of certain tax contingencies with the tax authorities. In addition, the Company's effective tax rate was favorably impacted by the research tax credit as well as the tax deduction for dividends on shares held by the Leidos Retirement Plan (an employee stock ownership plan).
The Company's effective tax rate in fiscal 2015 was negatively impacted by the goodwill impairment charge of $486 million, recorded in the quarter ended August 1, 2014, which was mostly not deductible. The effective tax rate was also impacted favorably by the tax benefit of a capital loss resulting from the conversion of one of our domestic subsidiaries to a Limited Liability Company ("LLC").
The Company’s effective income tax rate for fiscal 2014 was favorably impacted by lower earnings in fiscal 2014, the tax deductibility of the special dividend on shares held by the Leidos Retirement Plan and the resolution of certain tax contingencies with the tax authorities resulting in the recognition of an income tax benefit of approximately $7 million.
In fiscal 2015, discontinued operations reflect a tax benefit of $18 million due to the conversion of one of the Company's domestic subsidiaries held in discontinued operations. This conversion resulted in a deemed liquidation for U.S. tax purposes and triggered tax deductions and an income tax benefit.
In fiscal 2014, the Company benefited from the dividends paid to New SAIC's employees participating in the plan up to the date of the spin-off and the special dividend of $7 million and $11 million, respectively.
Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting purposes and tax reporting purposes. Deferred tax (liabilities) assets were comprised of the following:
 
January 1,
2016
 
January 30,
2015
 
(in millions)
Accrued vacation and bonuses
$
45

 
$
44

Investments
3

 
3

Deferred compensation
39

 
39

Vesting stock awards
21

 
28

Credits and net operating losses carryovers
15

 
9

Employee benefit contributions
—

 
4

Capital loss carryover
91

 
113

Reserves
31

 
41

Deferred rent and tenant allowances
14

 
15

Other
13

 
15

Total deferred tax assets
272

 
311

Valuation allowance
(102
)
 
(120
)
Deferred tax assets, net of valuation allowance
170

 
191


 
 
 
Deferred revenue
(36
)
 
(47
)
Fixed asset basis differences
(1
)
 
—

Purchased intangible assets
(138
)
 
(121
)
Partnership interest
(11
)
 
(10
)
Employee benefit contributions
(1
)
 
—

Other
(9
)
 
(8
)
Total deferred tax liabilities
(196
)
 
(186
)
Net deferred tax (liabilities) assets
$
(26
)
 
$
5


Net deferred tax (liabilities) assets were as follows:
 
January 1,
2016
 
January 30,
2015
 
(in millions)
Net current deferred tax assets
$
—

 
$
12

Net non-current deferred tax assets
8

 
14

Net non-current deferred tax liabilities
(34
)
 
(21
)
Total net deferred tax (liabilities) assets
$
(26
)
 
$
5


Pursuant to ASU 2015-17, current deferred taxes have been classified as non-current deferred taxes. See Note 1—Summary of Significant Accounting Policies.
At January 1, 2016, the Company had no federal net operating loss ("NOL") carryforwards and $9 million of state net operating losses, which will begin to expire in calendar year 2016. The Company also has $12 million of state tax credits, which will begin to expire in calendar year 2018. The Company expects to utilize $7 million and $2 million of these state tax credits and state net operating losses, respectively.
As of January 1, 2016, the Company had a capital loss carryforward of $232 million, which will expire in 2020. The Company does not believe it will be able to generate capital gains to realize the benefit from the capital loss carryforward. As a result, a full valuation allowance has been provided as of January 1, 2016.
The Company’s unrecognized tax benefits are primarily related to certain recurring deductions customary for the Company’s industry. The changes in the unrecognized tax benefits, excluding accrued interest and penalties, were as follows:
 
11 Months Ended
 
12 Months Ended
 
January 1,
2016
 
January 30,
2015
 
January 31,
2014
 
(in millions)
Unrecognized tax benefits at beginning of year
$
17

 
$
14

 
$
21

Additions for tax positions related to current year
5

 
2

 
—

Additions for tax positions related to prior years
4

 
11

 
2

Reductions for tax positions related to prior years
(15
)
 
(5
)
 
—

Settlements with taxing authorities
—

 
(1
)
 
—

Lapse of statute of limitations
—

 
(4
)
 
(9
)
Unrecognized tax benefits at end of year
$
11

 
$
17

 
$
14

Unrecognized tax benefits that, if recognized, would affect the effective income tax rate
$
7

 
$
5

 
$
6


In the 11-month period ended January 1, 2016, the Company's unrecognized tax benefits decreased primarily due to the resolution of the uncertain portion of the deferral of certain revenues, the resolution of the research and development tax credit and certain state claims with the tax authorities, which were offset by an increase due to the uncertain characterization of certain gains. In fiscal 2015, the Company's unrecognized tax benefits increased primarily due to the uncertain portion of the deferral of certain revenues, certain affirmative state claims and the research and development tax credit offset by a decrease due to the expiration of federal and several states statutes of limitations and the termination of certain state credits. In fiscal 2014, the Company's unrecognized tax benefits decreased primarily due to the expiration of the fiscal 2009 statute of limitations.
At January 1, 2016, January 30, 2015, and January 31, 2014, accrued interest and penalties totaled $1 million, $2 million and $2 million, respectively. A negligible amount of interest and penalties were recognized in the Company's consolidated statements of income in the 11-month period ended January 1, 2016, fiscal 2015 and fiscal 2014.
At January 1, 2016, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $12 million, $5 million of which were classified as other long-term liabilities on the Company's consolidated balance sheets. At January 30, 2015, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $19 million, $6 million of which were classified as other long-term liabilities on the Company's consolidated balance sheets. The balance of unrecognized tax benefits at January 31, 2014, included liabilities for uncertain tax positions of $16 million, $12 million of which were classified as other long-term liabilities on the Company's consolidated balance sheets.
The Company files income tax returns in the United States and various state and foreign jurisdictions and is subject to routine compliance reviews by the IRS and other taxing authorities. The Company has effectively settled with the IRS for all fiscal years prior to the 11-month period ended January 1, 2016, except for a certain item related to fiscal 2015 that is under administrative review. With a few exceptions, as of January 1, 2016, the Company is no longer subject to state, local, or foreign examinations by the tax authorities for years before fiscal 2013.
During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to $7 million of the Company’s unrecognized tax benefits, depending on the timing of ongoing examinations, any litigation and expiration of statute of limitations, either because the Company’s tax positions are sustained or because the Company agrees to their disallowance and pays the related income tax. While the Company believes it has adequate accruals for uncertain tax positions, the tax authorities may determine that the Company owes taxes in excess of recorded accruals or the recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities.