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INCOME TAXES | 12 Months Ended
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Dec. 27, 2014
INCOME TAXES | NOTE 9. INCOME TAXES The components of income (loss) before income taxes consisted of the following:
(In millions) |  | 2014 |  |  | 2013 |  |  | 2012 |
United States |  | $ | (264 | ) |  | $ | (230 | ) |  | $ | (129 | )
Foreign |  |  | (76 | ) |  |  | 357 |  |  |  | 54 |
Total income (loss) before income taxes |  | $ | (340 | ) |  | $ | 127 |  |  | $ | (75 | )
The income tax expense related to income (loss) from operations consisted of the following:
(In millions) |  | 2014 |  |  | 2013 |  |  | 2012 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (2 | ) |  | $ | 15 |  |  | $ | (14 | )
State |  |  | (1 | ) |  |  | 5 |  |  |  | 1 |
Foreign |  |  | 15 |  |  |  | 125 |  |  |  | 14 |
Deferred : |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | — |  |  |  | (4 | ) |  |  | (5 | )
State |  |  | 3 |  |  |  | (1 | ) |  |  | — |
Foreign |  |  | (3 | ) |  |  | 7 |  |  |  | 6 |
Total income tax expense |  | $ | 12 |  |  | $ | 147 |  |  | $ | 2 |
The following is a reconciliation of income taxes at the U.S. Federal statutory rate to the provision for income taxes:
(In millions) |  | 2014 |  |  | 2013 |  |  | 2012 |
Federal tax computed at the statutory rate |  | $ | (119 | ) |  | $ | 44 |  |  | $ | (26 | )
State taxes, net of Federal benefit |  |  | 4 |  |  |  | 3 |  |  |  | 1 |
Foreign income taxed at rates other than Federal |  |  | (10 | ) |  |  | (28 | ) |  |  | (15 | )
Increase (decrease) in valuation allowance |  |  | 112 |  |  |  | 8 |  |  |  | (9 | )
Non-deductible goodwill impairment |  |  | — |  |  |  | 15 |  |  |  | — |
Non-deductible Merger expenses |  |  | — |  |  |  | 13 |  |  |  | — |
Non-deductible foreign interest |  |  | 13 |  |  |  | 8 |  |  |  | 10 |
Other non-deductible expenses |  |  | 12 |  |  |  | 4 |  |  |  | 3 |
Change in unrecognized tax benefits |  |  | (2 | ) |  |  | — |  |  |  | 1 |
Tax expense from intercompany transactions |  |  | 2 |  |  |  | 2 |  |  |  | 2 |
Subpart F and dividend income, net of foreign tax credits |  |  | 2 |  |  |  | 75 |  |  |  | — |
Change in tax rate |  |  | — |  |  |  | 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 |  |  | (2 | ) |  |  | (4 | ) |  |  | 3 |
Income tax expense |  | $ | 12 |  |  | $ | 147 |  |  | $ | 2 |
In 2014, the Company recognized income tax expense on a pretax loss due to deferred tax benefits not being recognized on pretax losses in certain tax jurisdictions with valuation allowances, while income tax expense was recognized in tax jurisdictions with pretax income. The decrease in income tax expense from 2013 to 2014 is primarily attributable to the 2013 sale of the Company’s investment in Office Depot de Mexico, which is discussed in Note 2. In 2013, the Company paid $117 million of Mexican income tax upon the sale and recognized additional U.S. income tax expense of $23 million due to dividend income and Subpart F income as a result of the sale, for total income tax expense of $140 million. The sale of the Company’s interest in Grupo OfficeMax during 2014 did not generate a similar gain or income tax expense. The 2013 effective tax rate also includes charges related to goodwill impairment (refer to Note 5) and certain Merger expenses that are not deductible for tax purposes. The 2012 effective tax rate includes benefits related to the $16 million favorable settlement of the U.S. Internal Revenue Service (“IRS”) examination of the 2009 and 2010 tax years, as well as 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 Company operates in several foreign jurisdictions with income tax rates that differ from the U.S. Federal statutory rate, which resulted in a benefit for all years presented in the effective tax rate reconciliation. Significant foreign tax jurisdictions for which the Company realized such benefit include the Netherlands, the UK, and France. Additionally, Mexico is included for 2013 due to the sale of Office Depot de Mexico. Due to valuation allowances against the Company’s deferred tax assets, no income tax benefit was recognized in the 2014 Consolidated Statement of Operations related to stock-based compensation. In addition, no income tax benefit was initially recognized in the 2012 and 2013 Consolidated Statement of Operations related to stock-based compensation. 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. The Company also 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 27, 2014 |  |  | December 28, 2013 |
U.S. and foreign net operating loss carryforwards |  | $ | 322 |  |  | $ | 314 |
Deferred rent credit |  |  | 80 |  |  |  | 97 |
Pension and other accrued compensation |  |  | 184 |  |  |  | 170 |
Accruals for facility closings |  |  | 45 |  |  |  | 38 |
Inventory |  |  | 23 |  |  |  | 25 |
Self-insurance accruals |  |  | 33 |  |  |  | 33 |
Deferred revenue |  |  | 39 |  |  |  | 34 |
U.S. and foreign income tax credit carryforwards |  |  | 246 |  |  |  | 234 |
Allowance for bad debts |  |  | 5 |  |  |  | 8 |
Accrued expenses |  |  | 80 |  |  |  | 60 |
Basis difference in fixed assets |  |  | 59 |  |  |  | 15 |
Other items, net |  |  | 8 |  |  |  | 6 |
Gross deferred tax assets |  |  | 1,124 |  |  |  | 1,034 |
Valuation allowance |  |  | (804 | ) |  |  | (683 | )
Deferred tax assets |  |  | 320 |  |  |  | 351 |
Internal software |  |  | 8 |  |  |  | 22 |
Installment gain on sale of timberlands |  |  | 251 |  |  |  | 258 |
Deferred Subpart F income |  |  | 27 |  |  |  | 23 |
Undistributed foreign earnings |  |  | 2 |  |  |  | 12 |
Deferred tax liabilities |  |  | 288 |  |  |  | 315 |
Net deferred tax assets |  | $ | 32 |  |  | $ | 36 |
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 27, 2014 |  |  | December 28, 2013 |
Deferred tax assets: |  |  |  |  |  |  |  |
Included in Prepaid and other current assets |  | $ | 87 |  |  | $ | 114 |
Deferred income taxes — noncurrent |  |  | 32 |  |  |  | 35 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Included in Accrued expenses and other current liabilities |  |  | 3 |  |  |  | 3 |
Included in Deferred income taxes and other long-term liabilities |  |  | 84 |  |  |  | 110 |
Net deferred tax asset |  | $ | 32 |  |  | $ | 36 |
As of December 27, 2014, the Company has $39 million of U.S. Federal net operating loss (“NOL”) carryforwards, $9 million of which resulted from excess stock-based compensation deductions that will increase additional paid-in capital by $3 million if realized in future periods. The Company has $852 million of foreign and $1.7 billion of state NOL carryforwards. Of the foreign NOL carryforwards, $668 million can be carried forward indefinitely, $8 million will expire in 2015, and the remaining balance will expire between 2016 and 2034. Of the state NOL carryforwards, $23 million will expire in 2015, and the remaining balance will expire between 2016 and 2034. The Company also has $109 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 $125 million of U.S. Federal foreign tax credit carryforwards, which expire between 2015 and 2024, and $17 million of state and foreign tax credit carryforwards, $5 million of which can be carried forward indefinitely, and the remaining balance will expire between 2023 and 2027. As a result of the Merger in 2013, 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, in 2013, the Company reduced the impacted deferred tax assets by this amount, which was fully offset by a corresponding change in the valuation allowance. If the Company were to experience another ownership change in future periods, the Company’s deferred tax assets and income tax expense may be negatively impacted. U.S. deferred income taxes have not been provided on certain undistributed earnings of foreign subsidiaries, which were approximately $416 million as of December 27, 2014. The determination of the amount of the related unrecognized deferred tax liabilities is not practicable because of the complexities associated with the hypothetical calculations. The Company has historically reinvested such earnings overseas in foreign operations and expects that future earnings will also be indefinitely reinvested overseas, with the exception of certain foreign subsidiaries acquired as a result of the Merger. Accordingly, the Company has recorded the deferred tax liabilities associated with the undistributed earnings of such foreign subsidiaries. The following summarizes the activity related to valuation allowances for deferred tax assets:
(In millions) |  | 2014 |  |  | 2013 |  |  | 2012 |
Beginning balance |  | $ | 683 |  |  | $ | 583 |  |  | $ | 622 |
Additions, charged to expense |  |  | 121 |  |  |  | 26 |  |  |  | — |
Additions, due to the Merger |  |  | — |  |  |  | 84 |  |  |  | — |
Deductions |  |  | — |  |  |  | (10 | ) |  |  | (39 | )
Ending balance |  | $ | 804 |  |  | $ | 683 |  |  | $ | 583 |
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 2014, the Company released valuation allowances in certain foreign jurisdictions due to the existence of sufficient positive evidence, which resulted in an income tax benefit of $4 million. Valuation allowances were established in certain foreign jurisdictions in 2012 because the realizability of the related deferred tax assets was no longer more likely than not. As of 2014, valuation allowances remain in the U.S. and 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 certain foreign jurisdictions, the Company may release all or a portion of the remaining valuation allowances in these jurisdictions as early as the first half of 2015. The Company will continue to assess the realizability of its deferred tax assets in the U.S. and remaining foreign jurisdictions. The following table summarizes the activity related to unrecognized tax benefits:
(In millions) |  | 2014 |  |  | 2013 |  |  | 2012 |
Beginning balance |  | $ | 15 |  |  | $ | 5 |  |  | $ | 7 |
Increase related to current year tax positions |  |  | 7 |  |  |  | 4 |  |  |  | — |
Increase related to prior year tax positions |  |  | 4 |  |  |  | — |  |  |  | 3 |
Decrease related to prior year tax positions |  |  | (2 | ) |  |  | — |  |  |  | (1 | )
Decrease related to lapse of statute of limitations |  |  | — |  |  |  | — |  |  |  | — |
Decrease related to settlements with taxing authorities |  |  | (1 | ) |  |  | — |  |  |  | (4 | )
Increase related to the Merger |  |  | — |  |  |  | 6 |  |  |  | — |
Ending balance |  | $ | 23 |  |  | $ | 15 |  |  | $ | 5 |
Due to settlements with certain tax authorities in 2014, the Company’s balance of unrecognized tax benefits decreased by $3 million, which resulted in an income tax benefit of $2 million. Included in the balance of $23 million at December 27, 2014, are $7 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. The difference of $16 million primarily results from tax positions which if sustained would be offset by changes in valuation allowance. It is reasonably possible that certain tax positions will be resolved 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. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in the provision for income taxes. The Company recognized a net interest and penalty benefit of $9 million in 2014 due to settlements reached with certain taxing authorities. The Company recognized interest and penalty expense of $1 million and $2 million in 2013 and 2012, respectively. The Company had approximately $1 million accrued for the payment of interest and penalties as of December 27, 2014, which is not included in the table above. 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 and state and local income tax examinations for years before 2013 and 2009, respectively. The acquired OfficeMax U.S. consolidated group is no longer subject to U.S. federal and state and local income tax examinations for years before 2010 and 2006, respectively. The U.S. federal income tax return for 2013 is under concurrent year review. Generally, the Company is subject to routine examination for years 2008 and forward in its international tax jurisdictions.

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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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