Income Taxes

3 Months Ended

Jun. 02, 2012

Income Taxes

Income Taxes

4. Income Taxes

        The Company recorded an income tax benefit of $61,729 and an income tax expense of $2,273 for the thirteen week periods ended June 2, 2012 and May 28, 2011, respectively. The income tax benefit for the thirteen week period ended June 2, 2012 is primarily attributable to the recognition of previously unrecognized tax benefits resulting from the appellate settlement of the Brooks Eckerd Internal Revenue Service (IRS) Audit for the periods leading up to the acquisition which include fiscal years 2004 - 2007. This amount is completely offset by a reversal of the related tax indemnification asset which was recorded in selling, general and administrative expenses. The income tax expense for the thirteen week period ended May 28, 2011 is primarily attributable to the accrual of state and local taxes and adjustments to unrecognized tax benefits.

        The Company is indemnified by Jean Coutu Group for certain tax liabilities incurred for all years ended up to and including June 4, 2007, related to the June 2007 Brooks Eckerd acquisition. Although the Company is indemnified by Jean Coutu Group, the Company remains the primary obligor to the tax authorities with respect to any tax liability arising for the years prior to the acquisition. Accordingly, as of June 2, 2012 and March 3, 2012 the Company had corresponding recoverable indemnification assets of $71,891 and $156,797 from Jean Coutu Group, respectively, included in the 'Other Assets' line of the Consolidated Balance Sheets, to reflect the indemnification for such liabilities. The reduction of the indemnification assets contains the corresponding reversal of income and non-income tax reserves resulting from the settlement of the IRS audit.

        The Company files U.S. federal income tax returns as well as income tax returns in those states where it does business. The consolidated federal income tax returns have been subject to examination by the IRS through fiscal 2008. However, any net operating losses that were generated in these prior closed years may be subject to examination by the IRS upon utilization. In the first quarter of FY 2013 the Company reached an agreement with the IRS Appellate Division settling the examination of the Brooks Eckerd periods 2004-2007. The IRS settlement does not impact the Company's net financial position, results of operations or cash flows. Furthermore, the IRS settlement results in the resolution of tax contingencies associated with these tax years. Tax examinations by various state taxing authorities could generally be conducted for a period of three to five years after filing of the respective return. However, as a result of filing amended returns, the Company has statutes open in some states from fiscal year 2004. Pursuant to the tax indemnification referenced above, Jean Coutu Group is required to reimburse the Company for any assessment that may arise relating to certain tax liabilities for the years ended up to and including June 4, 2007.

        The Company recognizes tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

        Over the next 12 months, the Company believes that it is reasonably possible that the amount of unrecognized tax positions including interest and penalties could decrease tax liabilities by approximately $51,886, which would impact the effective tax rate if the Company's tax positions are sustained upon audit or the controlling statute of limitations expires. The primary driver of the decrease is contingent upon the statute of limitations expiring and the conclusion of the pre-acquisition period's state audits for Brooks Eckerd. The corresponding tax indemnification asset will reverse concurrently in selling, general and administrative expenses.

        The valuation allowances as of June 2, 2012 and March 3, 2012 apply to the net deferred tax assets of the Company. The Company continues to maintain a full valuation allowance of $2,345,212 and $2,317,425 against net deferred tax assets at June 2, 2012 and March 3, 2012, respectively.