Income Taxes

Earnings from continuing operations before income taxes were $4,923 million, $3,653 million, and $4,121 million during 2015, 2014, and 2013, including $373 million, $261 million, and $196 million earned by our foreign entities subject to tax outside of the U.S.



Tax Rate Reconciliation – Continuing Operations	2015		2014		2013
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of the federal tax benefit	3.0		2.2		2.4
International	(2.3	)	(2.3	)	(1.2	)
Change in valuation allowance	(2.3	)	—		—
Other	(0.9	)	(1.9	)	(1.6	)
Effective tax rate	32.5	%	33.0	%	34.6	%



Provision for Income Taxes (millions)	2015			2014			2013
Current:
Federal	$	1,652		$	1,074		$	1,206
State	265			116			150
International	7			7			13
Total current	1,924			1,197			1,369
Deferred:
Federal	(272		)	(2		)	56
State	(50		)	10			—
International	—			(1		)	2
Total deferred	(322		)	7			58
Total provision	$	1,602		$	1,204		$	1,427



Net Deferred Tax Asset/(Liability) (millions)	January 30, 2016			January 31, 2015
Gross deferred tax assets:
Accrued and deferred compensation	$	476		$	531
Accruals and reserves not currently deductible	323			316
Self-insured benefits	199			223
Prepaid store-in-store lease income	270			—
Other	90			176
Total gross deferred tax assets	1,358			1,246
Gross deferred tax liabilities:
Property and equipment	(1,790		)	(1,946		)
Inventory	(190		)	(307		)
Other	(168		)	(123		)
Total gross deferred tax liabilities	(2,148		)	(2,376		)
Total net deferred tax liability	$	(790	)	$	(1,130	)

In 2014, we incurred a tax effected capital loss of $112 million within discontinued operations from our exit from Canada. At that time, we neither had nor anticipated sufficient capital gains to absorb this capital loss, and established a full valuation allowance within discontinued operations. In 2015, we released the entire $112 million valuation allowance due to a capital gain resulting from the sale of our pharmacy and clinic businesses. The benefit of the valuation allowance release is recorded in continuing operations.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year the temporary differences are expected to be recovered or settled. Tax rate changes affecting deferred tax assets and liabilities are recognized in income at the enactment date.

We have not recorded deferred taxes when earnings from foreign operations are considered to be indefinitely invested outside the U.S. These accumulated net earnings relate to certain ongoing operations and were $685 million at January 30, 2016 and $328 million at January 31, 2015. It is not practicable to determine the income tax liability that would be payable if such earnings were repatriated.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 amended ASC 740, Income Taxes, to simplify the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. We have retrospectively adopted this ASU for the year ended January 30, 2016. As a result, $289 million and $188 million of current deferred tax assets from continuing operations have been reclassified from other current assets to deferred income taxes in our Consolidated Statements of Financial Position as of January 30, 2016 and January 31, 2015, respectively, and $74 million and $274 million of current deferred tax assets from discontinued operations have been reclassified from assets of discontinued operations to noncurrent assets of discontinued operations, respectively.

We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. The U.S. Internal Revenue Service has completed exams on the U.S. federal income tax returns for years 2012 and prior. With few exceptions, we are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2003.



Reconciliation of Liability for Unrecognized Tax Benefits (millions)	2015			2014			2013
Balance at beginning of period	$	155		$	183		$	216
Additions based on tax positions related to the current year	10			10			15
Additions for tax positions of prior years	14			17			28
Reductions for tax positions of prior years	(26		)	(42		)	(57		)
Settlements	—			(13		)	(19		)
Balance at end of period	$	153		$	155		$	183

If we were to prevail on all unrecognized tax benefits recorded, $99 million of the $153 million reserve would benefit the effective tax rate. In addition, the reversal of accrued penalties and interest would also benefit the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the years ended January 30, 2016, January 31, 2015, and February 1, 2014, we recorded a net expense/(benefit) from accrued penalties and interest of $5 million, $(12) million, and $(1) million, respectively. As of January 30, 2016, January 31, 2015, and February 1, 2014 total accrued interest and penalties were $44 million, $40 million, and $58 million, respectively.

It is reasonably possible that the amount of the unrecognized tax benefits with respect to our other unrecognized tax positions will increase or decrease during the next twelve months; however, an estimate of the amount or range of the change cannot be made at this time.