TAXES BASED ON INCOME

12 Months Ended

Feb. 02, 2013

TAXES BASED ON INCOME

TAXES BASED ON INCOME

4. TAXES BASED ON INCOME

The provision for taxes based on income consists of:

	2012		2011			2010
Federal
Current	$	563	$	146		$	697
Deferred	154		78			(136		)
	717		224			561
State and local
Current	46		42			95
Deferred	31		(19		)	(55		)
	77		23			40
Total	$	794	$	247		$	601

A reconciliation of the statutory federal rate and the effective rate follows:

	2012		2011		2010
Statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	2.2	%	1.8	%	1.5	%
Credits	(1.4	)%	(3.6	)%	(1.3	)%
Favorable resolution of issues	(0.5	)%	(3.4	)%	(.8	)%
Other changes, net	(0.8	)%	(0.5	)%	0.3	%
	34.5	%	29.3	%	34.7	%

The 2011 effective tax rate was significantly lower than 2012 and 2010 due to the effect on pre-tax income of the UFCW consolidated pension plan charge of $953 ($591 after-tax) in 2011.  The effect of the UFCW consolidated pension plan charge reduced pre-tax income thereby increasing the effect of  credits and of the favorable resolution of tax issues on our 2011 effective tax rate.

The tax effects of significant temporary differences that comprise tax balances were as follows:

	2012			2011
Current deferred tax assets:
Net operating loss and credit carryforwards	$	4		$	1
Compensation related costs	79			171
Total current deferred tax assets	83			172
Current deferred tax liabilities:
Insurance related costs	(116		)	(111		)
Inventory related costs	(234		)	(220		)
Other	(17		)	(31		)
Total current deferred tax liabilities	(367		)	(362		)
Current deferred taxes	$	(284	)	$	(190	)
Long-term deferred tax assets:
Compensation related costs	$	564		$	749
Lease accounting	87			93
Closed store reserves	56			66
Insurance related costs	77			76
Net operating loss and credit carryforwards	82			86
Other	2			23
Subtotal	868			1,093
Valuation allowance	(32		)	(42		)
Total long-term deferred tax assets	836			1,051
Long-term deferred tax liabilities:
Depreciation	(1,636		)	(1,698		)
Long-term deferred taxes	$	(800	)	$	(647	)

At February 2, 2013, the Company had net operating loss carryforwards for state income tax purposes of $1,275.  These net operating loss carryforwards expire from 2014 through 2032.  The utilization of certain of the Company’s net operating loss carryforwards may be limited in a given year.  Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its net operating losses.

At February 2, 2013, the Company had state credit carryforwards of $24, some of which expire from 2013 through 2027.  The utilization of certain of the Company’s credits may be limited in a given year.

The Company regularly reviews all deferred tax assets on a tax filer and jurisdictional basis to estimate whether these assets are more likely than not to be realized based on all available evidence.  This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies.  Projected future taxable income is based on expected results and assumptions as to the jurisdiction in which the income will be earned.  The expected timing of the reversals of existing temporary differences is based on current tax law and the Company’s tax methods of accounting.  Unless deferred tax assets are more likely than not to be realized, a valuation allowance is established to reduce the carrying value of the deferred tax asset until such time that realization becomes more likely than not.  Increases and decreases in these valuation allowances are included in “Income tax expense” in the Consolidated Statements of Operations.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, including positions impacting only the timing of tax benefits, is as follows:

	2012			2011			2010
Beginning balance	$	310		$	285		$	544
Additions based on tax positions related to the current year	45			24			38
Reductions based on tax positions related to the current year	(9		)	—			(273		)
Additions for tax positions of prior years	1			24			13
Reductions for tax positions of prior years	(27		)	(11		)	(21		)
Settlements	(21		)	(12		)	(16		)
Ending balance	$	299		$	310		$	285

In prior periods, the above table included state net operating losses which the Company believed would expire unused.  These net operating losses are no longer included in the above table.  Instead, the tax benefit of these losses has been included in the deferred tax table shown above and a valuation allowance has been recorded against them as described above.

The Company does not anticipate that changes in the amount of unrecognized tax benefits over the next twelve months will have a significant impact on its results of operations or financial position.

As of February 2, 2013, January 28, 2012 and January 29, 2011, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $70, $81 and $85 respectively.  The Company’s disclosure of these amounts for 2011 and 2010 has changed due to the Company reclassifying state operating losses as described above.

To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense.  During the years ended February 2, 2013, January 28, 2012 and January 29, 2011, the Company recognized approximately $(8), $(24) and $(2), respectively, in interest and penalties (recoveries).  The Company had accrued approximately $33 and $54 for the payment of interest and penalties as of February 2, 2013 and January 28, 2012, respectively.

As of February 2, 2013, the Internal Revenue Service had concluded its field examination of the Company’s 2008 and 2009 federal tax returns and is currently auditing years 2010 and 2011.  The 2010 and 2011 audit is expected to be completed in 2014.  The Company has filed an administrative appeal within the Internal Revenue Service protesting certain adjustments proposed by the Internal Revenue Service as a result of their field work.