Income Taxes

12 Months Ended

Jan. 30, 2015

Income Taxes

Income Taxes:

Substantially all of the Company’s income from continuing operations before income taxes for the three years ended January 30, 2015 was earned in the United States. The provision for income taxes related to continuing operations for each of the three years ended January 30, 2015 included the following:

	Year Ended
	January 30, 2015			January 31, 2014			January 31, 2013
	(in millions)
Current:
Federal and foreign	$	16		$	32		$	(52	)
State	(6		)	13			9
Deferred:
Federal and foreign	26			(28		)	55
State	11			(13		)	10
Total	$	47		$	4		$	22

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 each of the three years ended January 30, 2015 follows:

	Year Ended
	January 30, 2015			January 31, 2014			January 31, 2013
	(dollars in millions)
Amount computed at the statutory federal income tax rate (35%)	$	(99	)	$	31		$	121
State income taxes, net of federal tax benefit	3			—			10
Taxable conversion of subsidiary	(116		)	—			—
Change in valuation allowance for deferred tax assets	105			—			—
Change in accruals for uncertain tax positions	2			(5		)	(1		)
CityTime uncertain tax liability	—			—			(96		)
Research and development credits	(4		)	(3		)	(5		)
Dividends paid to employee stock ownership plan	(4		)	(22		)	(9		)
U.S. manufacturing activity benefit	—			(3		)	(1		)
Non-deductible penalties	—			4			—
Non-deductible goodwill	156			—			—
Other	4			2			3
Total	$	47		$	4		$	22
Effective income tax rate	(16.6		)%	4.5		%	6.4		%

The Company's effective tax rate in fiscal 2015 was negatively impacted by the goodwill impairment charge of $486 million, recorded in the three months ended August 1, 2014, which was mostly not deductible. The effective tax rate was also impacted favorably by Leidos’ conversion of a subsidiary treated as a corporation to a LLC regarded as a partnership for U.S. federal and state income tax purposes. The Company had not previously recorded a benefit for the excess tax basis over the investment in the stock of the domestic subsidiary. As a result of the conversion, the Company recognized a capital loss on its investment in stock and an ordinary gain on the subsidiary's assets. The capital loss of $160 million (tax effected) will be used to offset $58 million of capital gains recognized during fiscal 2015 and prior years with the remaining $102 million of capital losses recorded as a long term deferred tax asset. The Company may not generate capital gains to realize the benefit from the capital loss carryforward. In recognition of this uncertainty, the Company has recorded a $102 million valuation allowance on the deferred tax asset related to the capital loss carryforward. The conversion also created a $34 million (tax effected) ordinary gain recognized in fiscal 2015.

The Company’s lower effective income tax rate for fiscal 2014 when compared to fiscal 2013 was primarily due to lower earnings in fiscal 2014, the tax deductibility of the special dividend on shares held by the Leidos Retirement Plan (an employee stock ownership 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. The effective tax rate for fiscal 2013 benefited from a $96 million reduction in the provision for income tax as the result of an issue resolution agreement with the IRS with respect to the tax deductible portion of the CityTime payment which is described in Note 19.

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.

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.

On September 13, 2013, the Treasury Department and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of amounts paid to acquire, produce, improve, or dispose of tangible personal property. These regulations are generally effective for tax years beginning on or after January 1, 2014. The application of these regulations did not have a material impact on our consolidated financial statements.

Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting purposes and tax reporting purposes. Deferred tax assets (liabilities) were comprised of the following:

	Year Ended
	January 30, 2015			January 31, 2014
	(in millions)
Accrued vacation and bonuses	$	44		$	62
Investments	3			3
Deferred compensation	39			38
Vesting stock awards	28			34
Credits and net operating losses carryovers	9			27
Employee benefit contributions	4			3
Capital loss carryover	113			—
Reserves	41			51
Deferred rent and tenant allowances	15			14
Other	15			9
Total deferred tax assets	311			241
Valuation allowance	(120		)	(7		)
Deferred tax assets, net of valuation allowance	191			234
Deferred revenue	(47		)	(31		)
Fixed asset basis differences	—			(27		)
Purchased intangible assets	(121		)	(138		)
Partnership interest	(10		)	—
Other	(8		)	—
Total deferred tax liabilities	(186		)	(196		)
Net deferred tax assets	$	5		$	38

Net deferred tax assets (liabilities) were as follows:

	Year Ended
	January 30, 2015			January 31, 2014
	(in millions)
Net current deferred tax assets	$	12		$	89
Net non-current deferred tax assets	14			15
Net non-current deferred tax liabilities	(21		)	(66		)
Total net deferred tax assets	$	5		$	38

At January 30, 2015, the Company had no federal net operating loss (NOL) carryforwards and has $12 million of state tax credits at January 30, 2015, which expire in fiscal 2018 to fiscal 2029. The Company expects to utilize $8 million of these state tax credits.

As of January 30, 2015, the Company has a capital loss carryforward of $292 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 in fiscal 2015.

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:

	Year Ended
	January 30, 2015			January 31, 2014			January 31, 2013
	(in millions)
Unrecognized tax benefits at beginning of year	$	14		$	21		$	129
Additions for tax positions related to current year	2			—			—
Additions for tax positions related to prior years	11			2			2
Reductions for tax positions related to prior years	(5		)	—			(107		)
Settlements with taxing authorities	(1		)	—			(1		)
Lapse of statute of limitations	(4		)	(9		)	(2		)
Unrecognized tax benefits at end of year	$	17		$	14		$	21
Unrecognized tax benefits that, if recognized, would affect the effective income tax rate	$	5		$	6		$	10

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. In fiscal 2013, the Company’s unrecognized tax benefits decreased primarily due to the issue resolution agreement with the IRS with respect to the CityTime loss provision recorded in the prior year.

At each of January 30, 2015 and January 31, 2014, accrued interest and penalties totaled $2 million and $2 million, respectively. A negligible amount of interest and penalties were recognized in the consolidated statements of income in fiscal 2015, 2014, and 2013.

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 consolidated balance sheet. 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 consolidated balance sheet.

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 2014. With a few exceptions, as of January 30, 2015, the Company is no longer subject to state, local, or foreign examinations by the tax authorities for years before fiscal 2012.

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 $14 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 three years ended January 30, 2015 was earned in the United States. The provision for income taxes related to continuing operations for each of the three years ended January 30, 2015 included the following:

	Year Ended
	January 30, 2015			January 31, 2014			January 31, 2013
	(in millions)
Current:
Federal and foreign	$	16		$	32		$	(52	)
State	(6		)	13			9
Deferred:
Federal and foreign	26			(28		)	55
State	11			(13		)	10
Total	$	47		$	4		$	22

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 each of the three years ended January 30, 2015 follows:

	Year Ended
	January 30, 2015			January 31, 2014			January 31, 2013
	(dollars in millions)
Amount computed at the statutory federal income tax rate (35%)	$	(99	)	$	31		$	121
State income taxes, net of federal tax benefit	3			—			10
Taxable conversion of subsidiary	(116		)	—			—
Change in valuation allowance for deferred tax assets	105			—			—
Change in accruals for uncertain tax positions	2			(5		)	(1		)
CityTime uncertain tax liability	—			—			(96		)
Research and development credits	(4		)	(3		)	(5		)
Dividends paid to employee stock ownership plan	(4		)	(22		)	(9		)
U.S. manufacturing activity benefit	—			(3		)	(1		)
Non-deductible penalties	—			4			—
Non-deductible goodwill	156			—			—
Other	4			2			3
Total	$	47		$	4		$	22
Effective income tax rate	(16.6		)%	4.5		%	6.4		%

The Company's effective tax rate in fiscal 2015 was negatively impacted by the goodwill impairment charge of $486 million, recorded in the three months ended August 1, 2014, which was mostly not deductible. The effective tax rate was also impacted favorably by Leidos’ conversion of a subsidiary treated as a corporation to a LLC regarded as a partnership for U.S. federal and state income tax purposes. The Company had not previously recorded a benefit for the excess tax basis over the investment in the stock of the domestic subsidiary. As a result of the conversion, the Company recognized a capital loss on its investment in stock and an ordinary gain on the subsidiary's assets. The capital loss of $160 million (tax effected) will be used to offset $58 million of capital gains recognized during fiscal 2015 and prior years with the remaining $102 million of capital losses recorded as a long term deferred tax asset. The Company may not generate capital gains to realize the benefit from the capital loss carryforward. In recognition of this uncertainty, the Company has recorded a $102 million valuation allowance on the deferred tax asset related to the capital loss carryforward. The conversion also created a $34 million (tax effected) ordinary gain recognized in fiscal 2015.

The Company’s lower effective income tax rate for fiscal 2014 when compared to fiscal 2013 was primarily due to lower earnings in fiscal 2014, the tax deductibility of the special dividend on shares held by the Leidos Retirement Plan (an employee stock ownership 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. The effective tax rate for fiscal 2013 benefited from a $96 million reduction in the provision for income tax as the result of an issue resolution agreement with the IRS with respect to the tax deductible portion of the CityTime payment which is described in Note 19.

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.

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.

On September 13, 2013, the Treasury Department and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of amounts paid to acquire, produce, improve, or dispose of tangible personal property. These regulations are generally effective for tax years beginning on or after January 1, 2014. The application of these regulations did not have a material impact on our consolidated financial statements.

Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting purposes and tax reporting purposes. Deferred tax assets (liabilities) were comprised of the following:

	Year Ended
	January 30, 2015			January 31, 2014
	(in millions)
Accrued vacation and bonuses	$	44		$	62
Investments	3			3
Deferred compensation	39			38
Vesting stock awards	28			34
Credits and net operating losses carryovers	9			27
Employee benefit contributions	4			3
Capital loss carryover	113			—
Reserves	41			51
Deferred rent and tenant allowances	15			14
Other	15			9
Total deferred tax assets	311			241
Valuation allowance	(120		)	(7		)
Deferred tax assets, net of valuation allowance	191			234
Deferred revenue	(47		)	(31		)
Fixed asset basis differences	—			(27		)
Purchased intangible assets	(121		)	(138		)
Partnership interest	(10		)	—
Other	(8		)	—
Total deferred tax liabilities	(186		)	(196		)
Net deferred tax assets	$	5		$	38

Net deferred tax assets (liabilities) were as follows:

	Year Ended
	January 30, 2015			January 31, 2014
	(in millions)
Net current deferred tax assets	$	12		$	89
Net non-current deferred tax assets	14			15
Net non-current deferred tax liabilities	(21		)	(66		)
Total net deferred tax assets	$	5		$	38

At January 30, 2015, the Company had no federal net operating loss (NOL) carryforwards and has $12 million of state tax credits at January 30, 2015, which expire in fiscal 2018 to fiscal 2029. The Company expects to utilize $8 million of these state tax credits.

As of January 30, 2015, the Company has a capital loss carryforward of $292 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 in fiscal 2015.

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:

	Year Ended
	January 30, 2015			January 31, 2014			January 31, 2013
	(in millions)
Unrecognized tax benefits at beginning of year	$	14		$	21		$	129
Additions for tax positions related to current year	2			—			—
Additions for tax positions related to prior years	11			2			2
Reductions for tax positions related to prior years	(5		)	—			(107		)
Settlements with taxing authorities	(1		)	—			(1		)
Lapse of statute of limitations	(4		)	(9		)	(2		)
Unrecognized tax benefits at end of year	$	17		$	14		$	21
Unrecognized tax benefits that, if recognized, would affect the effective income tax rate	$	5		$	6		$	10

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. In fiscal 2013, the Company’s unrecognized tax benefits decreased primarily due to the issue resolution agreement with the IRS with respect to the CityTime loss provision recorded in the prior year.

At each of January 30, 2015 and January 31, 2014, accrued interest and penalties totaled $2 million and $2 million, respectively. A negligible amount of interest and penalties were recognized in the consolidated statements of income in fiscal 2015, 2014, and 2013.

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 consolidated balance sheet. 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 consolidated balance sheet.

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 2014. With a few exceptions, as of January 30, 2015, the Company is no longer subject to state, local, or foreign examinations by the tax authorities for years before fiscal 2012.

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 $14 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.