12.  Income Taxes 

   

The provision for income taxes is based on the current estimate of the annual effective tax rate adjusted to reflect the impact of items discrete to the three and nine months ended October 27, 2012. The effective tax rate for the three months ended October 27, 2012 was (41.7)% compared to (36.7)% for the three months ended October 29, 2011.  The effective tax rate from continuing operations for the nine months ended October 27, 2012 was (41.0)% compared to (34.3)% for the nine months ended October 29, 2011.  Our income tax benefit for the nine months ended October 27, 2012 was positively impacted by federal wage tax credits, state law changes, state audit settlements and the sales and redemption of non-operating assets and negatively impacted by the discontinuation of our quarterly dividend.

   

The total amount of unrecognized tax benefits as of October 27, 2012 was $86 million compared to $110 million as of January 28, 2012.  The decrease included $24 million primarily due to settlements reached with tax authorities. As of the end of the third quarter of 2012, the uncertain tax position balance included $58 million that, if recognized, would lower the effective tax rate and would be reduced upon settlement by $20 million 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. Due to deferred tax accounting, other than any interest or penalties incurred, the disallowance of the shorter deductibility period would not impact the effective tax rate, but would accelerate payment to the taxing authority.

   

Over the next 12 months, it is reasonably possible that the amount of unrecognized tax benefits could be reduced by approximately $2 million if our tax position is sustained upon audit, the controlling statute of limitations expires or we agree to a disallowance.

   

Accrued interest and penalties related to unrecognized tax benefits was $4 million as of October 27, 2012 and $4 million as of January 28, 2012.