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INCOME TAXES | 12 Months Ended
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Dec. 28, 2013
INCOME TAXES | NOTE 9. INCOME TAXES The components of income (loss) before income taxes consisted of the following:
(In millions) |  | 2013 |  |  | 2012 |  |  | 2011 |
United States |  | $ | (230 | ) |  | $ | (129 | ) |  | $ | (4 | )
Foreign |  |  | 357 |  |  |  | 54 |  |  |  | 37 |
Total income (loss) before income taxes |  | $ | 127 |  |  | $ | (75 | ) |  | $ | 33 |
The income tax expense (benefit) related to income (loss) from operations consisted of the following:
(In millions) |  | 2013 |  |  | 2012 |  |  | 2011 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 15 |  |  | $ | (14 | ) |  | $ | (59 | )
State |  |  | 5 |  |  |  | 1 |  |  |  | (4 | )
Foreign |  |  | 125 |  |  |  | 14 |  |  |  | 15 |
Deferred : |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | (4 | ) |  |  | (5 | ) |  |  | — |
State |  |  | (1 | ) |  |  | — |  |  |  | — |
Foreign |  |  | 7 |  |  |  | 6 |  |  |  | (15 | )
Total income tax expense (benefit) |  | $ | 147 |  |  | $ | 2 |  |  | $ | (63 | )
The following is a reconciliation of income taxes at the U.S. Federal statutory rate to the provision (benefit) for income taxes:
(In millions) |  | 2013 |  |  | 2012 |  |  | 2011 |
Federal tax computed at the statutory rate |  | $ | 44 |  |  | $ | (26 | ) |  | $ | 11 |
State taxes, net of Federal benefit |  |  | 3 |  |  |  | 1 |  |  |  | 1 |
Foreign income taxed at rates other than Federal |  |  | (28 | ) |  |  | (15 | ) |  |  | (22 | )
Increase (decrease) in valuation allowance |  |  | 8 |  |  |  | (9 | ) |  |  | (8 | )
Non-deductible goodwill impairment |  |  | 15 |  |  |  | 0 |  |  |  | 0 |
Non-deductible Merger expenses |  |  | 13 |  |  |  | 0 |  |  |  | 0 |
Non-deductible foreign interest |  |  | 8 |  |  |  | 10 |  |  |  | 12 |
Change in unrecognized tax benefits |  |  | — |  |  |  | 1 |  |  |  | (77 | )
Tax expense from intercompany transactions |  |  | 2 |  |  |  | 2 |  |  |  | 5 |
Subpart F and dividend income, net of foreign tax credits |  |  | 75 |  |  |  | — |  |  |  | 10 |
Change in tax rate |  |  | 2 |  |  |  | 2 |  |  |  | 2 |
Non-taxable return of purchase price |  |  | — |  |  |  | (22 | ) |  |  | — |
Deferred taxes on undistributed foreign earnings |  |  | 5 |  |  |  | 68 |  |  |  | — |
Tax accounting method change ruling |  |  | — |  |  |  | (16 | ) |  |  | — |
Other items, net |  |  | — |  |  |  | 6 |  |  |  | 3 |
Income tax expense (benefit) |  | $ | 147 |  |  | $ | 2 |  |  | $ | (63 | )
The increase in income tax expense and the effective tax rate from 2012 to 2013 is primarily attributable to the sale of the Company’s investment in Office Depot de Mexico, which is discussed in Note 2. The Company paid $117 million of Mexican income tax upon the sale and incurred additional U.S. income tax expense of $23 million due to dividend income and Subpart F income in 2013 as a result of the sale, for total income tax expense of $140 million. In addition, the Company incurred charges related to goodwill impairment (discussed in Note 5) and certain Merger expenses that are not deductible for tax purposes, which increased the effective tax rate for 2013. The 2012 effective tax rate includes the accrued benefit related to the favorable settlement of the U.S. Internal Revenue Service (“IRS”) examination of the 2009 and 2010 tax years, as discussed below. The 2012 effective tax rate also includes the benefit from the recovery of purchase price that is treated as a purchase price adjustment for tax purposes. As discussed in Note 14, this recovery would have been a reduction of related goodwill for financial reporting purposes, but the related goodwill was impaired in 2008. The 2011 effective tax rate includes the tax benefit associated with the decrease in unrecognized tax benefits due to the lapse of statute of limitations and settlements reached with certain taxing authorities. Upon the sale of Office Depot de Mexico, $5 million of income tax expense was reclassified from accumulated other comprehensive income to the Consolidated Statement of Operations to remove the residual income tax effects associated with currency translation on the Company’s investment in Office Depot de Mexico. Such income tax effects had been recorded in the cumulative translation account, which is a component of accumulated other comprehensive income, due to intraperiod allocations required in 2012 when the Company removed its indefinite reinvestment assertion with respect to certain foreign earnings accumulated at Office Depot de Mexico. As a result of the Company incurring a pre-tax loss in the U.S. and recognizing a current year gain in other comprehensive income attributable to its pension plan assets and benefit obligations, the Company recorded a net deferred tax benefit of $10 million from the release of valuation allowance. The significant tax jurisdictions related to the line item foreign income taxed at rates other than Federal include Mexico, the UK, the Netherlands, Germany, and France. No income tax benefit was initially recognized in the Consolidated Statement of Operations related to stock-based compensation for 2011, 2012, and 2013 due to valuation allowances against the Company’s deferred tax assets. However, due to the sale of Office Depot de Mexico in 2013, the Company realized an income tax benefit of $5 million for the utilization of net operating loss carryforwards that had resulted from excess stock-based compensation deductions for which no benefit was previously recorded. In addition, the Company realized an income tax benefit of $3 million for excess stock-based compensation deductions resulting from the exercise and vesting of equity awards during 2013. These income tax benefits were recorded as increases to additional paid-in capital in 2013. The components of deferred income tax assets and liabilities consisted of the following:
(In millions) |  | December 28, 2013 |  |  | December 29, 2012 |
U.S. and foreign net operating loss carryforwards |  | $ | 314 |  |  | $ | 367 |
Deferred rent credit |  |  | 97 |  |  |  | 95 |
Pension and other accrued compensation |  |  | 170 |  |  |  | 61 |
Accruals for facility closings |  |  | 38 |  |  |  | 21 |
Inventory |  |  | 25 |  |  |  | 14 |
Self-insurance accruals |  |  | 33 |  |  |  | 19 |
Deferred revenue |  |  | 34 |  |  |  | 7 |
U.S. and foreign income tax credit carryforwards |  |  | 234 |  |  |  | 8 |
Allowance for bad debts |  |  | 8 |  |  |  | 3 |
Accrued expenses |  |  | 60 |  |  |  | 24 |
Basis difference in fixed assets |  |  | 15 |  |  |  | 40 |
Other items, net |  |  | 6 |  |  |  | 41 |
Gross deferred tax assets |  |  | 1,034 |  |  |  | 700 |
Valuation allowance |  |  | (683 | ) |  |  | (583 | )
Deferred tax assets |  |  | 351 |  |  |  | 117 |
Internal software |  |  | 22 |  |  |  | 3 |
Installment gain on sale of timberlands |  |  | 258 |  |  |  | — |
Deferred Subpart F income |  |  | 23 |  |  |  | 11 |
Undistributed foreign earnings |  |  | 12 |  |  |  | 72 |
Deferred tax liabilities |  |  | 315 |  |  |  | 86 |
Net deferred tax assets |  | $ | 36 |  |  | $ | 31 |
For financial reporting purposes, a jurisdictional netting process is applied to deferred tax assets and deferred tax liabilities, resulting in the balance sheet classification shown below.
(In millions) |  | December 28, 2013 |  |  | December 29, 2012 |
Deferred tax assets: |  |  |  |  |  |  |  |
Included in Prepaid and other current assets |  | $ | 114 |  |  | $ | 37 |
Deferred income taxes — noncurrent |  |  | 35 |  |  |  | 33 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Included in Accrued expenses and other current liabilities |  |  | 3 |  |  |  | 5 |
Included in Deferred income taxes and other long-term liabilities |  |  | 110 |  |  |  | 34 |
Net deferred tax asset |  | $ | 36 |  |  | $ | 31 |
As of December 28, 2013, the Company has utilized all of its U.S. Federal net operating loss (“NOL”) carryforwards as a consequence of the disposition of Office Depot de Mexico. The Company has $858 million of foreign and $1.6 billion of state NOL carryforwards. Of the foreign NOL carryforwards, $666 million can be carried forward indefinitely, $11 million will expire in 2014, and the remaining balance will expire between 2015 and 2033. Of the state NOL carryforwards, $34 million will expire in 2014, and the remaining balance will expire between 2015 and 2033. The Company also has $107 million of U.S. Federal alternative minimum tax credit carryforwards, which can be used to reduce future regular federal income tax, if any, over an indefinite period. Additionally, the Company has $114 million of U.S. Federal foreign tax credit carryforwards, which expire between 2015 and 2023, and $13 million of state and foreign tax credit carryforwards, which expire between 2023 and 2027. As a result of the Merger, the Company triggered an “ownership change” as defined in Internal Revenue Code Section 382 and related provisions. Sections 382 and 383 place a limitation on the amount of taxable income which can be offset by carryforward tax attributes, such as net operating losses or tax credits, after a change in control. Generally, after a change in control, a loss corporation cannot deduct carryforward tax attributes in excess of the limitation prescribed by Section 382 and 383. Therefore, certain of the Company’s carryforward tax attributes may be subject to an annual limitation regarding their utilization against taxable income in future periods. The Company estimates that at least $15 million of deferred tax assets related to carryforward tax attributes will not be realized because of Section 382 and related provisions. Accordingly, the Company has reduced the impacted deferred tax assets by this amount, which was fully offset by a corresponding change in the valuation allowance. U.S. deferred income taxes have not been provided on certain undistributed earnings of foreign subsidiaries, which were approximately $472 million as of December 28, 2013. The determination of the amount of the related unrecognized deferred tax liability is not practicable because of the complexities associated with the hypothetical calculations. The Company has historically reinvested such earnings overseas in foreign operations indefinitely and expects that future earnings will also be reinvested overseas indefinitely except as follows. The Company does not consider the earnings of certain foreign subsidiaries acquired as a result of the Merger to be permanently reinvested. The Company has recorded the associated deferred tax liabilities accordingly. The following summarizes the activity related to valuation allowances for deferred tax assets:
(In millions) |  | 2013 |  |  | 2012 |  |  | 2011 |
Beginning balance |  | $ | 583 |  |  | $ | 622 |  |  | $ | 649 |
Additions, charged to expense |  |  | 26 |  |  |  | — |  |  |  | — |
Additions, due to the Merger |  |  | 84 |  |  |  | — |  |  |  | — |
Deductions |  |  | (10 | ) |  |  | (39 | ) |  |  | (27 | )
Ending balance |  | $ | 683 |  |  | $ | 583 |  |  | $ | 622 |
The Company has significant deferred tax assets in the U.S. and in foreign jurisdictions against which valuation allowances have been established to reduce such deferred tax assets to an amount that is more likely than not to be realized. The establishment of valuation allowances requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. An accumulation of recent pre-tax losses is considered strong negative evidence in that evaluation. While the Company believes positive evidence exists with regard to the realizability of these deferred tax assets, it is not considered sufficient to outweigh the objectively verifiable negative evidence, including the cumulative 36-month pre-tax loss history. In 2012, valuation allowances were established in certain foreign jurisdictions because the realizability of the related deferred tax assets was no longer more likely than not. Valuation allowances in certain other foreign jurisdictions were removed in 2011 because sufficient positive evidence existed, resulting in a tax benefit of $10 million. As of 2013, valuation allowances remain in certain foreign jurisdictions where the Company believes it is necessary to see further positive evidence, such as sustained achievement of cumulative profits, before these valuation allowances can be released. If such positive evidence develops in 2014, the Company may release all or a portion of the remaining valuation allowances in these jurisdictions as early as the first half of 2014. The Company will continue to assess the realizability of its deferred tax assets. The following table summarizes the activity related to unrecognized tax benefits:
(In millions) |  | 2013 |  |  | 2012 |  |  | 2011 |
Beginning balance |  | $ | 5 |  |  | $ | 7 |  |  | $ | 111 |
Increase related to current year tax positions |  |  | 4 |  |  |  | — |  |  |  | — |
Increase related to prior year tax positions |  |  | — |  |  |  | 3 |  |  |  | 471 |
Decrease related to prior year tax positions |  |  | — |  |  |  | (1 | ) |  |  | (40 | )
Decrease related to lapse of statute of limitations |  |  | — |  |  |  | — |  |  |  | (60 | )
Decrease related to settlements with taxing authorities |  |  | — |  |  |  | (4 | ) |  |  | (475 | )
Increase related to the Merger |  |  | 6 |  |  |  | — |  |  |  | — |
Ending balance |  | $ | 15 |  |  | $ | 5 |  |  | $ | 7 |
Included in the balance of $15 million at December 28, 2013, are $9 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. The difference of $6 million primarily results from tax positions which if sustained would be offset by carryforward tax attributes and changes in valuation allowance. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in the provision for income taxes. Accordingly, such amounts are not included in the table above. The Company recognized interest and penalty expense of $1 million and $2 million in 2013 and 2012, respectively. The Company recognized a net interest benefit of $30 million and a net penalty benefit of $9 million in 2011 due to the lapse of statute of limitations and settlements reached with certain taxing authorities. The Company had approximately $10 million accrued for the payment of interest and penalties as of December 28, 2013. The Company files a U.S. federal income tax return and other income tax returns in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations for years before 2010. The Company has reached a settlement with the IRS Appeals Division to close the previously-disclosed IRS deemed royalty assessment relating to 2009 and 2010 foreign operations. The settlement was subject to the Congressional Joint Committee on Taxation approval, which was received in 2013. The resolution of this matter has closed all known disputes with the IRS relating to tax years 2009 and 2010 and resulted in a refund of approximately $14 million, which was received in 2013, from a previously approved carryback of a tax accounting method change. In 2013, the Company also received final resolution of the IRS deemed royalty assessment relating to 2011 foreign operations, which resulted in no change to the Company’s 2011 U.S. federal income tax return. The U.S. federal income tax return for 2012 is under concurrent year review. The acquired OfficeMax U.S. consolidated group is no longer subject to U.S. federal and state income tax examinations for years before 2010 and 2006, respectively. Generally, the Company is subject to routine examination for years 2006 and forward in its international tax jurisdictions. It is reasonably possible that certain of these audits will close within the next 12 months, which the Company does not believe would result in a material change in its unrecognized tax benefits. Additionally, the Company anticipates that it is reasonably possible that new issues will be raised or resolved by tax authorities that may require changes to the balance of unrecognized tax benefits; however, an estimate of such changes cannot reasonably be made. On September 13, 2013, the IRS and U.S. Treasury Department issued final regulations addressing the deduction and capitalization of tangible property expenditures, which are generally effective beginning with the 2014 tax year and may be adopted in earlier years. The Company has decided to early adopt the tax treatment of certain asset dispositions as of January 1, 2013. The resulting tax impacts have been reflected in the consolidated balance sheet and income statement as of December 28, 2013. The Company will be making additional tax accounting method changes required by these regulations as of January 1, 2014, but does not expect them to have a material impact on the Company’s consolidated financial statements.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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