Old COPPER Company, Inc. - 10-K filing on 2015-03-23

Income Taxes

12 Months Ended

Jan. 31, 2015

The components of our income tax expense/(benefit) were as follows:



($ in millions)	2014			2013			2012
Current
Federal and foreign	$	12		$	(16	)	$	(95	)
State and local	8			(8		)	79
Total current	20			(24		)	(16		)
Deferred
Federal and foreign	9			(428		)	(465		)
State and local	(6		)	(46		)	(70		)
Total deferred	3			(474		)	(535		)
Total	$	23		$	(498	)	$	(551	)

A reconciliation of the statutory federal income tax rate to our effective rate is as follows:



(percent of pre-tax income/(loss))	2014		2013		2012
Federal income tax at statutory rate	(35.0	)%	(35.0	)%	(35.0	)%
State and local income tax, less federal income tax benefit	(4.2	)	(4.1	)	(3.7	)
Increase in valuation allowance federal and state	41.6		28.6		4.3
Tax benefit resulting from OCI allocation	—		(16.1	)	—
Tax effect of dividends on ESOP shares	—		—		(0.1	)
Other, including permanent differences and credits	0.7		0.2		(1.4	)
Effective tax rate	3.1	%	(26.4	)%	(35.9	)%

Our deferred tax assets and liabilities were as follows:



($ in millions)	2014			2013
Assets
Merchandise inventory	$	35		$	49
Accrued vacation pay	24			28
Gift cards	76			69
Stock-based compensation	76			69
State taxes	25			36
Workers’ compensation/general liability	87			93
Accrued rent	35			32
Mirror savings plan	18			21
Net operating loss and tax credit carryforwards	1,100			918
Other	51			68
Total deferred tax assets	1,527			1,383
Valuation allowance	(784		)	(304		)
Total net deferred tax assets	743			1,079
Liabilities
Depreciation and amortization	(851		)	(973		)
Pension and other retiree obligations	(3		)	(172		)
Tax benefit transfers	(59		)	(63		)
Long-lived intangible assets	(21		)	(13		)
Total deferred tax liabilities	(934		)	(1,221		)
Total net deferred tax liabilities	$	(191	)	$	(142	)

Deferred tax assets and liabilities included in our Consolidated Balance Sheets were as follows:



($ in millions)	2014			2013
Other current assets	$	172		$	193
Other long-term liabilities	(363		)	(335		)
Total net deferred tax liabilities	$	(191	)	$	(142	)

As of January 31, 2015, a valuation allowance of $784 million has been recorded against our deferred tax assets. In assessing the need for the valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our assessment, we concluded that, beginning in the second quarter of 2013, our estimate of the realization of deferred tax assets would be based solely on the future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to accelerate taxable income to utilize expiring net operating loss (NOL) and tax credit carryforwards.

In accordance with accounting standards, we are required to allocate a portion of our tax provision between operating losses and Accumulated other comprehensive income/(loss). As a result, for the year ended February 1, 2014, we recorded a $303 million tax benefit in the Consolidated Statements of Operations offset by income tax expense on actuarial gains recorded in Other comprehensive income/(loss). For the year ended January 31, 2015, the company did not benefit any of its operating loss and incurred an actuarial loss in Other comprehensive income/(loss), the tax benefit on which was fully offset by a valuation allowance within Other comprehensive income/(loss).

For U.S. federal income tax purposes, we have $2.6 billion of gross NOL carryforwards that expire in 2032 through 2034 and $53 million of tax credit carryforwards that expire at various dates through 2034. These NOL carryforwards include an unrealized gross tax deduction of $23 million (tax effect $9 million) related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized.

These carryforwards have a potential to be used to offset future taxable income and reduce future cash tax liabilities by approximately $1.1 billion. The Company’s ability to utilize these carryforwards will depend upon the availability of future taxable income during the carryforward period and, as such, there is no assurance the Company will be able to realize such tax savings.

The Company’s ability to utilize NOL carryforwards could be further limited if it were to experience an “ownership change,” as defined in Section 382 of the Code and similar state provisions. An ownership change can occur whenever there is a cumulative shift in the ownership of a company by more than 50 percentage points by one or more “5% stockholders” within a three-year period. The occurrence of such a change generally limits the amount of NOL carryforwards a company could utilize in a given year to the aggregate fair market value of the company’s common stock immediately prior to the ownership change, multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change.

As discussed in Note 11, on January 27, 2014, the Board adopted the Amended Rights Agreement to help prevent acquisitions of the Company’s common stock that could result in an ownership change under Section 382 which helps preserve the Company’s ability to use its NOL and tax credit carryforwards. The Amended Rights Agreement was ratified by the shareholder vote on May 16, 2014 and remains effective through January 26, 2017. Approval required an affirmative vote of the shares of common stock present in person or by proxy at the Annual Meeting. At a later date, the Company’s Board of Directors may consider resubmitting the Amended Rights Agreement for stockholder approval of a subsequent term.

The Amended Rights Agreement is designed to prevent acquisitions of the Company’s common stock that would result in a stockholder owning 4.9% or more of the Company’s common stock (as calculated under Section 382), or any existing holder of 4.9% or more of the Company’s common stock acquiring additional shares, by substantially diluting the ownership interest of any such stockholder unless the stockholder obtains an exemption from the Board.

A reconciliation of unrecognized tax benefits is as follows:



($ in millions)	2014			2013			2012
Beginning balance	$	70		$	76		$	110
Additions for tax positions of prior years	10			6			5
Reductions for tax positions of prior years	—			(1		)	(11		)
Settlements and effective settlements with tax authorities	(16		)	(9		)	(24		)
Expirations of statute	(2		)	(2		)	(4		)
Balance at end of year	$	62		$	70		$	76

Unrecognized tax benefits included in our Consolidated Balance Sheets were as follows:



($ in millions)	2014		2013
Deferred taxes (current assets) (Note 3)	$	49	$	—
Accounts payable and accrued expenses (Note 6)	5		2
Other liabilities (Note 7)	8		68
Total	$	62	$	70

As of the end of 2014, 2013 and 2012, the unrecognized tax benefits balance included $36 million, $49 million and $54 million, respectively, that, if recognized, would be a benefit in the income tax provision after giving consideration to the offsetting effect of $13 million, $17 million and $19 million, respectively, related to the federal tax deduction of state taxes. The remaining amounts reflect tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing. Accrued interest and penalties related to unrecognized tax benefits included in income tax expense as of the end of 2014, 2013 and 2012 were $3 million, $6 million and $4 million, respectively.

We file income tax returns in U.S. federal and state jurisdictions and certain foreign jurisdictions. Our U.S. federal returns have been examined through 2012. We are audited by the taxing authorities of many states and certain foreign countries and are subject to examination by these taxing jurisdictions for years generally after 2008. The tax authorities may have the right to examine prior periods where federal and state NOL and tax credit carryforwards were generated, and make adjustments up to the amount of the NOL and credit carryforward amounts.