RITE AID CORP | 2013 | FY |

5. Income Taxes

        The provision for income taxes was as follows:

        A reconciliation of the expected statutory federal tax and the total income tax benefit was as follows:

        Net Income for fiscal 2013 included income tax benefit of $110,600 primarily comprised of adjustments to unrecognized tax benefits for the appellate settlements of the Brooks Eckerd IRS Audit for the fiscal years 2004 - 2007 and the Commonwealth of Massachusetts Audit for fiscal years 2005 - 2007 as well as for the lapse of statute of limitations. The settlements resulted in the resolution of tax contingencies associated with these tax years which impacted the fiscal 2013 effective rate. Furthermore, the settlements with the IRS and the Commonwealth of Massachusetts do not impact the net financial position, results of operations or cash flows because this amount was offset by the reversal of the tax indemnification asset which was recorded in selling, general and administrative expenses. The income tax benefit was recorded net of adjustments to maintain a full valuation allowance against our net deferred tax assets. Additionally, the decrease to the valuation allowance recorded in fiscal 2013 included the impact of IRS adjustments made to tax attributes as well as reductions for the expiration of tax credits. ASC 740, "Income Taxes" requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, ASC 740 precludes relying on projections of future taxable income to support the recognition of deferred tax assets.

        Net loss for fiscal 2012 included income tax benefit of $23,686 and was primarily comprised of adjustments to unrecognized tax benefits due to the lapse of statute of limitations. The fiscal 2011 income tax expense was primarily comprised of an accrual for state and local taxes, adjustments to unrecognized tax benefits and the need for an accrual of additional state taxes resulting from the receipt of a final audit determination.

        The tax effect of temporary differences that gave rise to significant components of deferred tax assets and liabilities consisted of the following at March 2, 2013 and March 3, 2012:

        A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:

        The amount of the above unrecognized tax benefits at March 2, 2013, March 3, 2012 and February 26, 2011 which would impact the Company's effective tax rate, if recognized, was $14,651, $83,804 and $109,030, respectively. Additionally, any impact on the effective rate may be mitigated by the valuation allowance that is maintained against the Company's net deferred tax assets.

        The Company is indemnified by Jean Coutu Group for certain tax liabilities incurred for all years ended up to and including the acquisition date of June 4, 2007, related to the 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 March 2, 2013, March 3, 2012 and February 26, 2011, the Company had a corresponding recoverable indemnification asset of $30,710, $156,797 and $158,209 from Jean Coutu Group, included in the "Other Assets" line of the Consolidated Balance Sheets, to reflect the indemnification for such liabilities.

        Over the next 12 months, the Company believes that it is reasonably possible that the unrecognized tax positions reflected in the table above could decrease by $13,775, all of which would impact the effective tax rate if its tax positions are sustained upon audit, the controlling statute of limitations expires or the Company agrees to a disallowance.

        The Company recognizes interest and penalties related to tax contingencies as income tax expense. Prior to the adoption of ASC 740, "Income Taxes," the Company included interest as income tax expense and penalties as an operating expense. The Company recognized (benefit)/expense for interest and penalties in connection with tax matters of $(43,069), $(2,113) and $8,937 for fiscal years 2013, 2012 and 2011, respectively. As of March 2, 2013 and March 3, 2012 the total amount of accrued income tax-related interest and penalties was $22,197 and $65,266, respectively.

        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, including the Brooks Eckerd pre-acquisition periods. However, any net operating losses that were generated in these prior closed years may be subject to examination by the IRS upon utilization. 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 2005.

• Net Operating Losses and Tax Credits

        At March 2, 2013, the Company had federal net operating loss (NOL) carryforwards of approximately $3,799,118, the majority of which will expire, if not utilized, between fiscal 2019 and 2022.

        At March 2, 2013, the Company had state NOL carryforwards of approximately $5,015,041, the majority of which will expire between fiscal 2018 and 2026.

        At March 2, 2013, the Company had federal business tax credit carryforwards of $50,080, the majority of which will expire between 2019 and 2021. In addition to these credits, the Company had alternative minimum tax credit carryforwards of $3,221.

• Valuation Allowances

        The valuation allowances as of March 2, 2013 and March 3, 2012 apply to the net deferred tax assets of the Company. The Company maintained a full valuation allowance of $2,223,675 and $2,317,425 against net deferred tax assets at March 2, 2013 and March 3, 2012, respectively.