Income Taxes

9 Months Ended

Dec. 01, 2012

Income Taxes

Income Taxes

4. Income Taxes

        The Company recorded an income tax expense of $777 and an income tax expense of $972 for the thirteen week periods and an income tax benefit of $63,818 and an income tax expense of $533 for the thirty-nine week periods ended December 1, 2012 and November 26, 2011, respectively. The income tax expense or benefit is recorded net of adjustments to maintain a full valuation allowance against the Company's net deferred tax assets.

        The income tax expense for the thirteen week period ended December 1, 2012 is primarily attributable to an accrual of federal, state and local taxes and adjustments to unrecognized tax benefits offset by adjustments to the valuation allowance of $24,717.

        The income tax benefit for the thirty-nine week period ended December 1, 2012 is primarily attributable to the recognition of previously unrecognized tax benefits resulting from the appellate settlements of the Brooks Eckerd Internal Revenue Service (IRS) Audit of fiscal years 2004 - 2007 as well as the Commonwealth of Massachusetts Audit of fiscal years 2005 - 2007. The appellate settlement as well as the Commonwealth of Massachusetts Audit amounts are completely offset by a reversal of the related tax indemnification asset which was recorded in selling, general and administrative expenses as these audits were related to pre-acquisition periods. The accrual of federal, state and local taxes for the thirty-nine week period ended December 1, 2012 includes adjustments to the valuation allowance of $18,128.

        The income tax expense for the thirteen and thirty-nine week periods ended November 26, 2011 is primarily attributable to an accrual of state and local taxes and adjustments to unrecognized tax benefits including a benefit for discrete items related to the recognition of previously unrecognized tax benefits. The accrual of federal, state and local taxes for the thirteen and thirty-nine week periods ended November 26, 2011 includes adjustments to the valuation allowance of $17,896 and $73,187, respectively.

        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 December 1, 2012 and March 3, 2012 the Company had corresponding recoverable indemnification assets of $61,787 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 primarily from the settlements of the IRS and Commonwealth of Massachusetts audits.

        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 $41,265, 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 potential decrease is primarily contingent upon the lapse of the statute of limitations. The corresponding indemnification asset will reverse concurrently in selling, general and administrative expenses.

        The valuation allowances as of December 1, 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 $2,335,553 and $2,317,425 against net deferred tax assets at December 1, 2012 and March 3, 2012, respectively.