NOTE 8—INCOME TAXES

The components of Income (Loss) from Continuing Operations before Provision (Benefit) for Income Taxes are as follows (amounts in millions):

	Fiscal Year Ended
	January 31, 2016		February 1, 2015		February 2, 2014
United States	$	237	$	—	$	(207	)
Foreign		4		—		(1	)

Total	$	241	$	—	$	(208	)

The Provision (Benefit) for Income Taxes consisted of the following (amounts in millions):

	Fiscal Year Ended
	January 31, 2016			February 1, 2015			February 2, 2014
Current:
Federal	$	(165	)	$	9		$	8
State		(12	)		(1	)		4
Foreign		4			—			—

		(173	)		8			12
Deferred:
Federal		(829	)		31			29
State		(84	)		3			3
Foreign		1			—			—

		(912	)		34			32

Total	$	(1,085	)	$	42		$	44

The Company's combined federal, state and foreign effective tax rate for continuing operations for fiscal 2015, fiscal 2014, and fiscal 2013 was approximately (450.2%), was not meaningful since pretax income was zero, and 21%, respectively.

The Company's effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. The Company's fiscal 2015 was impacted by reversing substantially all of the valuation allowance on its net U.S. deferred income taxes and a decrease in the Company's unrecognized tax position. The Company's fiscal 2014 and fiscal 2013 effective tax rates were significantly impacted by the recording of a valuation allowance on its net U.S. deferred tax assets. The fiscal 2014 and fiscal 2013 valuation allowance was directly impacted by the increasing of the deferred tax liability for U.S. goodwill amortization for tax purposes. The deferred tax liability related to the Company's U.S. tax deductible goodwill must be considered as a liability related to an asset with an indefinite life. Therefore, the deferred tax liability does not amortize and is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences.

The reconciliation of the provision (benefit) for income taxes from continuing operations at the federal statutory rate of 35% to the actual tax provision (benefit) for fiscal 2015, fiscal 2014, and fiscal 2013 is as follows (amounts in millions):

	Fiscal Year Ended
	January 31, 2016			February 1, 2015		February 2, 2014
Income taxes at federal statutory rate	$	84		$	—	$	(73	)
State income taxes, net of federal income tax benefit		13			—		(7	)
Foreign rate differential		(1	)		—		(2	)
Non-deductible interest		14			—		—
Valuation allowance		(1,007	)		33		118
Adjustments to tax reserves		(189	)		7		8
Other, net		1			2		—

Total provision (benefit)	$	(1,085	)	$	42	$	44

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of January 31, 2016 and February 1, 2015 were as follows (amounts in millions):

	January 31, 2016			February 1, 2015
Deferred Tax Assets:
Accrued compensation	$	26		$	32
Accrued self-insurance liabilities		17			18
Other accrued liabilities		24			25
Deferred revenue		—			7
Restructuring liabilities		23			27
Net operating loss		751			960
Fixed assets		25			20
Allowance for doubtful accounts		6			7
Inventory		35			37
Tax credit carryforward		14			6
Other		5			24
Valuation allowance		(6	)		(1,013	)

Noncurrent deferred tax assets		920			150
Deferred Tax Liabilities:
Prepaid expense	$	(1	)	$	(1	)
Deferred financing costs		(9	)		(27	)
Software costs		(12	)		(17	)
Intangible assets		(166	)		(194	)
Income from discharge of indebtedness		(47	)		(63	)

Noncurrent deferred tax liabilities		(235	)		(302	)

Deferred tax assets (liabilities), net	$	685		$	(152	)

The Company reported $4 million of long-term deferred tax assets related to its Canadian business within other assets on its Consolidated Balance Sheet as of February 1, 2015.

At January 31, 2016, the Company's U.S. operations were in a position of cumulative consolidated pre-tax income for the most recent three-year period. Management concluded that as a consequence of the Company's three-year cumulative consolidated pre-tax income, generating taxable income in fiscal 2014 and 2015, the Company's long net operating loss carryforward periods, a significant reduction in the Company's recent interest expense, a projected further reduction in the Company's future interest expense, and the Company's business plan for fiscal 2016 and beyond showing continued profitability, that it is more likely than not that substantially all of the Company's U.S. deferred tax assets will be realized. Accordingly, in the fourth quarter of fiscal 2015, the Company reversed substantially all of its valuation allowance on its net U.S. deferred tax assets, resulting in a $1,007 million benefit in its provision for income taxes. The benefit from reversing the valuation allowance was partially offset by the utilization of $104 million of such deferred tax assets to offset current year income. At February 1, 2016, after the reverse of the valuation allowance, the Company's remaining valuation allowance on its U.S. deferred tax assets was approximately $6 million.

In fiscal 2014, the Company recorded a valuation allowance on its total U.S. operations of $33 million net income tax expense related to continuing operations and $4 million net income tax benefit related to discontinued operations. In fiscal 2013, the Company recorded a valuation allowance on its total U.S. operations of $118 million of net income tax expense related to continuing operations and $1 million of net income tax benefit for discontinued operations.

The Company has designated the undistributed earnings of certain aspects of its foreign operations as not permanently reinvested. As of January 31, 2016, deferred taxes have not been provided as the Company's tax basis exceeds its financial reporting book basis with respect to its foreign subsidiary. In fiscal 2015, the Company repatriated $92 million of cash and property to the U.S. which, to the extent of current earnings and profits, resulted in $10 million income tax expense in the U.S. In fiscal 2014, the Company did not repatriate cash from its foreign operations to the U.S. In fiscal 2014, if the Company had repatriated cash to the U.S., no additional income tax expense would have been generated.

As of January 31, 2016, the Company had tax-effected U.S. federal net operating loss carryforwards of $694 million which expire beginning in fiscal 2030. The Company also had $108 million of tax effected state net operating loss carryforwards which expire in various years between fiscal 2016 and fiscal 2035. The Company also had $9 million of U.S. federal alternative minimum tax credits which have an indefinite carryforward period, $2 million of U.S. federal research and development credits which expire between fiscal 2031 and fiscal 2035, and $3 million of tax-effected state tax credits which expire in various years between fiscal 2019 and fiscal 2024.

The future utilization of the Company's Net Operating Loss carryforwards could be limited if the Company experiences an "ownership change," as defined in Section 382 of the Internal Revenue Code of 1986, as amended. In general, an ownership change may result from transactions increasing the aggregate direct or indirect ownership of certain persons (or groups of persons) in the Company's stock by more than 50 percentage points over a testing period (generally 3 years). Future direct or indirect changes in the ownership of the Company's common stock, including sales or acquisitions of the Company's common stock by stockholders and purchases and issuances of the Company's common stock by the Company, some of which are not in our control, could result in an ownership change. Any resulting limitation on the use of the Company's NOL carryforwards could result in the payment of taxes above the amounts currently anticipated and have a negative effect on the Company's future results of operations and financial position.

Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises in fiscal 2015 and fiscal 2014. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant ("windfalls"). Although these additional tax benefits or "windfalls" are reflected in the Company's net operating taxable loss carryforwards, pursuant to ASC 718, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit did not reduce the Company's current taxes payable in fiscal 2015 or fiscal 2014 due to net operating loss carryforwards, these "windfall" tax benefits are not reflected in the Company's net operating losses in deferred tax assets for fiscal 2015 or fiscal 2014. Windfalls included in net operating loss carryforwards but not reflected in deferred tax assets for fiscal 2015 and fiscal 2014 were $48 million and $16 million, respectively.

For fiscal 2015, the Company recorded a $69 million net income tax expense related to its U.S. business and a $4 million net income tax expense related to its Canadian business in discontinued operations. For fiscal 2014, the Company recorded an $18 million net income tax expense related to its U.S. business and a $3 million net income tax expense related to its Canadian business in discontinued operations. For fiscal 2013, the Company recorded a $13 million net income tax expense related to its U.S. business and a $5 million net income tax expense related to its Canadian business in discontinued operations.

Federal, state and foreign income taxes net current receivable total $3 million and $3 million as of fiscal 2015 and fiscal 2014, respectively.

Accounting for uncertain tax positions

The Company follows the U.S. GAAP guidance for uncertain tax positions within ASC 740, Income Taxes. ASC 740 requires application of a "more likely than not" threshold to the recognition and de-recognition of tax positions. It further requires that a change in judgment related to prior years' tax positions be recognized in the quarter of such change. A reconciliation of the beginning and ending amount of unrecognized tax benefits for continuing operations for fiscal 2015, fiscal 2014, and fiscal 2013 is as follows (amounts in millions):

	Fiscal Year Ended
	January 31, 2016			February 1, 2015			February 2, 2014
Unrecognized Tax Benefits beginning of period	$	187		$	192		$	193
Gross increases for tax positions in current period		1			1			—
Gross increases for tax positions in prior period		5			—			—
Gross decreases for tax positions in prior period		(2	)		(1	)		—
Settlements		(181	)		(5	)		—
Lapse of statutes		(1	)		—			(1	)

Unrecognized Tax Benefits end of period	$	9		$	187		$	192

There are $9 million, $187 million, and $192 million of unrecognized tax benefits included in the balance at fiscal 2015, fiscal 2014, and fiscal 2013, respectively, whose resolution could affect the annual effective income tax rate.

The Company decreased its accrual for net interest and penalties related to unrecognized tax benefits by $29 million for fiscal 2015. The Company accrued $2 million and $5 million of net interest and penalties related to unrecognized tax benefits for fiscal 2014 and fiscal 2013, respectively. The Company's ending net accrual for interest and penalties related to unrecognized tax benefits at fiscal 2015, fiscal 2014, and fiscal 2013, was zero, $29 million, and $27 million, respectively. The Company's accounting policy is to classify interest and penalties as components of income tax expense. Accrued interest and penalties from unrecognized tax benefits are included as a component of other liabilities on the Consolidated Balance Sheet.

The Company is subject to audits and examinations of its tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service ("IRS"). Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of provisions for income taxes. Certain of the Company's tax years 2007 and forward remain open for audit by the IRS and various state governments.

The decrease in the Company's fiscal 2015 unrecognized U.S. federal and state tax benefits including gross interest accrual was driven by an income tax benefit of approximately $189 million from the approval and finalization of the Tentative Settlement (as defined in Note 13, Commitments and Contingencies).