Taxes
Income tax expense is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| Current | | Deferred | | Total | | Current | | Deferred | | Total | | Current | | Deferred | | Total |
| (millions) |
Federal | $ | 859 |
| | $ | (98 | ) | | $ | 761 |
| | $ | 697 |
| | $ | 2 |
| | $ | 699 |
| | $ | 519 |
| | $ | 144 |
| | $ | 663 |
|
State and local | 107 |
| | (64 | ) | | 43 |
| | 70 |
| | (2 | ) | | 68 |
| | 43 |
| | 6 |
| | 49 |
|
| $ | 966 |
| | $ | (162 | ) | | $ | 804 |
| | $ | 767 |
| | $ | — |
| | $ | 767 |
| | $ | 562 |
| | $ | 150 |
| | $ | 712 |
|
The income tax expense reported differs from the expected tax computed by applying the federal income tax statutory rate of 35% for 2013, 2012 and 2011 to income before income taxes. The reasons for this difference and their tax effects are as follows:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| (millions) |
Expected tax | $ | 801 |
| | $ | 736 |
| | $ | 689 |
|
State and local income taxes, net of federal income tax benefit | 45 |
| | 47 |
| | 34 |
|
Historic rehabilitation tax credit | (16 | ) | | — |
| | — |
|
Change in valuation allowance | (16 | ) | | (2 | ) | | (3 | ) |
Other | (10 | ) | | (14 | ) | | (8 | ) |
| $ | 804 |
| | $ | 767 |
| | $ | 712 |
|
The Company participates in the Internal Revenue Service (“IRS”) Compliance Assurance Program ("CAP"). As part of the CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The IRS has completed examinations of 2011 and all prior tax years.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
|
| | | | | | | |
| February 1,
2014 | | February 2,
2013 |
| (millions) |
Deferred tax assets | | | |
Post employment and postretirement benefits | $ | 392 |
| | $ | 476 |
|
Accrued liabilities accounted for on a cash basis for tax purposes | 289 |
| | 237 |
|
Long-term debt | 90 |
| | 96 |
|
Unrecognized state tax benefits and accrued interest | 84 |
| | 71 |
|
State operating loss and credit carryforwards | 79 |
| | 60 |
|
Other | 160 |
| | 177 |
|
Valuation allowance | (23 | ) | | (39 | ) |
Total deferred tax assets | 1,071 |
| | 1,078 |
|
Deferred tax liabilities | | | |
Excess of book basis over tax basis of property and equipment | (1,569 | ) | | (1,665 | ) |
Merchandise inventories | (587 | ) | | (577 | ) |
Intangible assets | (263 | ) | | (230 | ) |
Post employment benefits | (28 | ) | | — |
|
Other | (297 | ) | | (251 | ) |
Total deferred tax liabilities | (2,744 | ) | | (2,723 | ) |
Net deferred tax liability | $ | (1,673 | ) | | $ | (1,645 | ) |
The valuation allowance at February 1, 2014 and February 2, 2013 relates to net deferred tax assets for state net operating loss and credit carryforwards. The net change in the valuation allowance amounted to a decrease of $16 million for 2013 and a decrease of $2 million for 2012.
As of February 1, 2014, the Company had no federal net operating loss carryforwards and state net operating loss and credit carryforwards of $608 million, which will expire between 2014 and 2033.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| February 1,
2014 | | February 2,
2013 | | January 28,
2012 |
| (millions) |
Balance, beginning of year | $ | 170 |
| | $ | 179 |
| | $ | 205 |
|
Additions based on tax positions related to the current year | 37 |
| | 18 |
| | 23 |
|
Additions for tax positions of prior years | — |
| | 18 |
| | — |
|
Reductions for tax positions of prior years | (1 | ) | | (19 | ) | | (21 | ) |
Settlements | (1 | ) | | (9 | ) | | (15 | ) |
Statute expirations | (16 | ) | | (17 | ) | | (13 | ) |
Balance, end of year | $ | 189 |
| | $ | 170 |
| | $ | 179 |
|
Amounts recognized in the Consolidated Balance Sheets at February 1, 2014, February 2, 2013 and January 28, 2012 | | | | | |
Current income taxes | $ | 31 |
| | $ | 20 |
| | $ | 18 |
|
Long-term deferred income taxes | 11 |
| | 23 |
| | 27 |
|
Other liabilities | 147 |
| | 127 |
| | 134 |
|
| $ | 189 |
| | $ | 170 |
| | $ | 179 |
|
As of February 1, 2014 and February 2, 2013, the amount of unrecognized tax benefits, net of deferred tax assets, that, if recognized would affect the effective income tax rate, was $123 million and $111 million, respectively.
The Company classifies unrecognized tax benefits not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets.
The Company classifies federal, state and local interest and penalties not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets and follows a policy of recognizing all interest and penalties related to unrecognized tax benefits in income tax expense. Federal, state and local interest and penalties, which amounted to an expense of $9 million for 2013, a credit of $10 million for 2012, and a credit of $2 million for 2011, are reflected in income tax expense.
The Company had $63 million and $55 million accrued for the payment of federal, state and local interest and penalties at February 1, 2014 and February 2, 2013, respectively. The accrued federal, state and local interest and penalties primarily relates to state tax issues and the amount of penalties paid in prior periods, and the amount of penalties accrued at February 1, 2014 and February 2, 2013 are insignificant. At February 1, 2014, $51 million of federal, state and local interest and penalties is included in other liabilities and $12 million is included in current income taxes on the Consolidated Balance Sheets.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2010. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years before 2004. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been accrued for any adjustments that are expected to result from the years still subject to examination.
