EXPRESS, INC. - 10-K filing on 2012-03-23

Income Taxes (Notes)

12 Months Ended

Jan. 28, 2012

Income Taxes

Prior to May 2, 2010, the Company was treated as a partnership for federal income tax purposes, and therefore had not been subject to federal and state income tax (subject to exception in a limited number of state and local jurisdictions). On May 12, 2010, the Company elected to be treated as a corporation under Subchapter C of Chapter 1 of the United States Internal Revenue Code ("IRC"), effective May 2, 2010 and was, therefore, subject to federal and state tax expense beginning May 2, 2010.

The Reorganization, for tax purposes, was deemed a contribution by Express Parent of its assets and liabilities to the Company, followed by the liquidation of Express Parent. The Reorganization resulted in a taxable gain to Express Parent. Except in those few jurisdictions where Express Parent was taxed directly, the taxable gain flowed through to the members due to Express Parent's partnership tax treatment. The taxable gain correspondingly increased the tax basis in the assets acquired by the Company in the Reorganization. Also, as a result of the Reorganization, the Company had a liability due to a management holding company totaling $0.8 million as of January 29, 2011. The Company settled this liability by making a final cash payment during the first quarter of 2011. Additionally, the Company settled a $4.8 million gross liability payable to a Golden Gate entity during the second quarter of 2011. The Company settled the liability due to Golden Gate by making a final cash payment during the second quarter of 2011.

The provision for income taxes consists of the following:



	2011			2010			2009
Current:	(in thousands)
U.S. federal	$	76,984		$	25,623		$	—
U.S. state and local	18,048			7,746			1,573
Foreign	156			—			—
Total	95,188			33,369			1,573
Deferred:
U.S. federal	714			(16,085		)	—
U.S. state and local	(949		)	(2,930		)	(337		)
Foreign	(85		)	—			—
Total	(320		)	(19,015		)	(337		)
Provision for income taxes	$	94,868		$	14,354		$	1,236

The following table provides a reconciliation between the statutory federal income tax rate and the effective tax rate:



	2011		2010		2009
Federal income tax rate	35.0	%	35.0	%	—	%
State income taxes, net of federal income tax effect	4.7	%	4.5	%	1.6	%
Entity status change from partnership	—	%	(22.5	)%	—	%
Partnership income not taxable	—	%	(7.6	)%	—	%
Other items, net	0.6	%	0.7	%	—	%
Effective tax rate	40.3	%	10.1	%	1.6	%

The following table provides the effect of temporary differences that created deferred income taxes as of January 28, 2012 and January 29, 2011. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carry-forwards at the end of the respective periods.



	January 28, 2012			January 29, 2011
	(in thousands)
Deferred tax assets:
Accrued expenses and deferred compensation	$	22,417		$	17,964
Property and equipment	—			—
Intangible assets	—			934
Rent	7,831			5,932
Inventory	1,946			—
Tax credits/carryforwards	114			—
Valuation allowance	(290		)	—
Total deferred tax assets	32,018			24,830

Deferred tax liabilities:
Inventory	—			1,653
Prepaid expenses	3,767			—
Intangible assets	1,764			—
Property and equipment	5,710			1,905
Other	829			1,644
Total deferred tax liabilities	12,070			5,202
Net deferred tax assets/(liabilities)	$	19,948		$	19,628

Net deferred tax assets are classified within the Consolidated Balance Sheets and are included in other current assets for current deferred tax assets and separately identified as deferred taxes for non-current deferred tax assets. Net deferred tax liabilities are classified within the Consolidated Balance Sheets and are included in accrued expenses for current deferred tax liabilities and other long-term liabilities for non-current deferred tax liabilities. The following table summarizes net deferred tax assets from the balance sheet:



	January 28, 2012		January 29, 2011
	(in thousands)
Current deferred taxes	$	7,486	$	14,115
Non-current deferred taxes	12,462		5,513
Net deferred tax asset	$	19,948	$	19,628

The Company has weighed all available evidence, both positive and negative, to determine whether a valuation allowance was needed and has recorded a valuation allowance against certain deferred tax assets arising from foreign subsidiaries. As of January 28, 2012 and January 29, 2011, the valuation allowance for net operating losses totaled $0.1 million. In addition, as of January 28, 2012, the valuation allowance for other noncurrent tax assets totaled $0.2 million. The Company has a net operating loss carryover related to operations in Canada that will expire in 2032. The amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence, such as the Company's projections for growth.

No other valuation allowances have been provided for deferred tax assets because management believes that it is more-likely-than-not that the full amount of the net deferred tax assets will be realized in the future.

Uncertain Tax Positions

The Company evaluates tax positions using a more-likely-than-not recognition criterion.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



	January 28, 2012			January 29, 2011
	(in thousands)
Unrecognized tax benefits, beginning of year	$	144		$	—
Gross addition as result of Reorganization	—			144
Gross addition for tax positions of the current year	382			—
Gross addition for tax positions of the prior year	1,034			—
Reductions of tax positions of prior years for:
Changes in judgement/excess reserve	(144		)	—
Settlements during the period	—			—
Lapses of applicable statutes of limitations	—			—
Unrecognized tax benefits, end of year	$	1,416		$	144

The amount of the above unrecognized tax benefits as of January 28, 2012 and January 29, 2011 that would impact the Company's effective tax rate, if recognized, is $1.4 million and $0.1 million, respectively.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The amount of net interest in tax expense related to interest and penalties for 2011 and 2010 was negligible.

The Company does not expect material adjustments to the total amount of unrecognized tax benefits within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur.

The Company is currently not under examination by the IRS. Tax returns are generally subject to examination for a period of three to five years after the filing of the respective return. The Company has one state income tax return in the process of examination or administrative appeals.

As of January 28, 2012, U.S. taxes had not been provided on unremitted earnings of subsidiaries operating outside of the United States due to an overall deficit position.