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INCOME TAXES | 12 Months Ended
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Dec. 26, 2015
INCOME TAXES | NOTE 9. INCOME TAXES The components of income (loss) before income taxes consisted of the following:
(In millions) |  | 2015 |  |  | 2014 |  |  | 2013 |
United States |  | $ | 136 |  |  | $ | (264 | ) |  | $ | (230 | )
Foreign |  |  | (89 | ) |  |  | (76 | ) |  |  | 357 |
Total income (loss) before income taxes |  | $ | 47 |  |  | $ | (340 | ) |  | $ | 127 |
The income tax expense related to income (loss) from operations consisted of the following:
(In millions) |  | 2015 |  |  | 2014 |  |  | 2013 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 18 |  |  | $ | (2 | ) |  | $ | 15 |
State |  |  | 4 |  |  |  | (1 | ) |  |  | 5 |
Foreign |  |  | 10 |  |  |  | 15 |  |  |  | 125 |
Deferred : |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | (1 | ) |  |  | — |  |  |  | (4 | )
State |  |  | 2 |  |  |  | 3 |  |  |  | (1 | )
Foreign |  |  | 6 |  |  |  | (3 | ) |  |  | 7 |
Total income tax expense |  | $ | 39 |  |  | $ | 12 |  |  | $ | 147 |
The following is a reconciliation of income taxes at the U.S. Federal statutory rate to the provision for income taxes:
(In millions) |  | 2015 |  |  | 2014 |  |  | 2013 |
Federal tax computed at the statutory rate |  | $ | 16 |  |  | $ | (119 | ) |  | $ | 44 |
State taxes, net of Federal benefit |  |  | 5 |  |  |  | 4 |  |  |  | 3 |
Foreign income taxed at rates other than Federal |  |  | (10 | ) |  |  | (10 | ) |  |  | (28 | )
Increase (decrease) in valuation allowance |  |  | (3 | ) |  |  | 112 |  |  |  | 8 |
Non-deductible goodwill impairment |  |  | — |  |  |  | — |  |  |  | 15 |
Non-deductible Merger expenses |  |  | 11 |  |  |  | — |  |  |  | 13 |
Non-deductible foreign interest |  |  | 11 |  |  |  | 13 |  |  |  | 8 |
Other non-deductible expenses |  |  | 5 |  |  |  | 12 |  |  |  | 4 |
Non-taxable income and additional deductible expenses |  |  | (4 | ) |  |  | — |  |  |  | — |
Change in unrecognized tax benefits |  |  | — |  |  |  | (2 | ) |  |  | — |
Tax expense from intercompany transactions |  |  | 7 |  |  |  | 2 |  |  |  | 2 |
Subpart F and dividend income, net of foreign tax credits |  |  | 1 |  |  |  | 2 |  |  |  | 75 |
Change in tax rate |  |  | 1 |  |  |  | — |  |  |  | 2 |
Deferred taxes on undistributed foreign earnings |  |  | — |  |  |  | — |  |  |  | 5 |
Other items, net |  |  | (1 | ) |  |  | (2 | ) |  |  | (4 | )
Income tax expense |  | $ | 39 |  |  | $ | 12 |  |  | $ | 147 |
The increase in income tax expense from 2014 to 2015 is primarily related to the transition of the U.S. business from a loss jurisdiction with valuation allowance to a profitable tax-paying jurisdiction with valuation allowance. The Company also incurred charges related to certain Staples Acquisition expenses that are not deductible for tax purposes, which increased the effective tax rate for 2015. In addition, the 2015 effective tax rate includes U.S. income tax expense on a foreign exchange gain associated with the restructuring of certain intercompany financing. 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 significant income tax expense in 2013 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 15) and certain Merger expenses that are not deductible for tax purposes. 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. This benefit in 2015 is primarily attributable to earnings in the Netherlands. Significant foreign tax jurisdictions for which the Company realized such benefit in 2014 and 2013 also included 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 initially recognized in the 2015, 2014, or 2013 Consolidated Statement of Operations related to stock-based compensation expense. However, due to the profitable tax-paying position in the U.S. in 2015 and 2013, the Company realized an income tax benefit of $3 million and $5 million, respectively, 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 $7 million and $3 million for excess stock-based compensation deductions resulting from the exercise and vesting of equity awards during 2015 and 2013, respectively. These income tax benefits were recorded as increases to additional paid-in capital in 2015 and 2013. The income tax benefits recorded in 2013 were primarily attributable to the sale of Office Depot de Mexico. The components of deferred income tax assets and liabilities consisted of the following:
(In millions) |  | December 26, 2015 |  |  | December 27, 2014 |
U.S. and foreign net operating loss carryforwards |  | $ | 324 |  |  | $ | 322 |
Deferred rent credit |  |  | 68 |  |  |  | 80 |
Pension and other accrued compensation |  |  | 181 |  |  |  | 184 |
Accruals for facility closings |  |  | 43 |  |  |  | 45 |
Inventory |  |  | 20 |  |  |  | 23 |
Self-insurance accruals |  |  | 33 |  |  |  | 33 |
Deferred revenue |  |  | 39 |  |  |  | 39 |
U.S. and foreign income tax credit carryforwards |  |  | 232 |  |  |  | 246 |
Allowance for bad debts |  |  | 6 |  |  |  | 5 |
Accrued expenses |  |  | 43 |  |  |  | 80 |
Basis difference in fixed assets |  |  | 81 |  |  |  | 59 |
Other items, net |  |  | 8 |  |  |  | 8 |
Gross deferred tax assets |  |  | 1,078 |  |  |  | 1,124 |
Valuation allowance |  |  | (763 | ) |  |  | (804 | )
Deferred tax assets |  |  | 315 |  |  |  | 320 |
Internal software |  |  | 5 |  |  |  | 8 |
Installment gain on sale of timberlands |  |  | 260 |  |  |  | 251 |
Deferred Subpart F income |  |  | 27 |  |  |  | 27 |
Undistributed foreign earnings |  |  | 2 |  |  |  | 2 |
Deferred tax liabilities |  |  | 294 |  |  |  | 288 |
Net deferred tax assets |  | $ | 21 |  |  | $ | 32 |
As of December 26, 2015 and December 27, 2014, deferred income tax liabilities amounting to $3 million and $4 million, respectively, are included in Deferred income taxes and other long-term liabilities. During the fourth quarter of 2015, the Company early adopted the new accounting standard that requires that all deferred taxes be presented as noncurrent on the Consolidated Balance Sheets. Refer to Basis of Presentation in Note 1 for further information. As of December 26, 2015, the Company has utilized all of its U.S. Federal net operating loss (“NOL”) carryforwards. The Company has $903 million of foreign and $1.5 billion of state NOL carryforwards. Of the foreign NOL carryforwards, $737 million can be carried forward indefinitely, $7 million will expire in 2016, and the remaining balance will expire between 2017 and 2035. Of the state NOL carryforwards, $48 million will expire in 2016, and the remaining balance will expire between 2017 and 2035. The Company also has $102 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 $117 million of U.S. Federal foreign tax credit carryforwards, which expire between 2016 and 2025, 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 of December 26, 2015, the Company has not triggered an “ownership change” as defined in Internal Revenue Code Section 382 or other similar provisions that would limit the use of NOL and tax credit carryforwards. However, if the Company were to experience an 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 $204 million as of December 26, 2015. 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) |  | 2015 |  |  | 2014 |  |  | 2013 |
Beginning balance |  | $ | 804 |  |  | $ | 683 |  |  | $ | 583 |
Additions, charged to expense |  |  | — |  |  |  | 121 |  |  |  | 26 |
Additions, due to the Merger |  |  | — |  |  |  | — |  |  |  | 84 |
Reductions |  |  | (41 | ) |  |  | — |  |  |  | (10 | )
Ending balance |  | $ | 763 |  |  | $ | 804 |  |  | $ | 683 |
The Company has significant deferred tax assets in the U.S. and in certain foreign jurisdictions against which valuation allowances have been established to reduce such deferred tax assets to the 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 the deferred tax assets in these jurisdictions, it is not considered sufficient to outweigh the objectively verifiable negative evidence, including the cumulative 36-month pre-tax loss history, as of December 26, 2015. The Company’s total valuation allowance decreased by $41 million during 2015, of which $27 million was attributable to foreign currency translation adjustments. In addition, the Company recognized income tax expense of $4 million associated with the establishment of valuation allowances in certain foreign jurisdictions in 2015 because the realizability of the related deferred tax assets was no longer more likely than not. Valuation allowances were released in certain foreign jurisdictions in 2014 due to the existence of sufficient positive evidence, which resulted in an income tax benefit of $4 million. As of 2015, 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. Given the current earnings trend in the U.S., sufficient positive evidence may become available for the Company to release all or a portion of the U.S. valuation allowance in a future period. Of the $493 million U.S. valuation allowance remaining at December 26, 2015, it is reasonably possible that $265-$360 million may be released in 2016, which would result in a non-cash income tax benefit in the period of release. In addition, if positive evidence develops, the Company may also release valuation allowances in certain foreign jurisdictions in 2016, which would result in an income tax benefit of $3 million in the period of release. However, the exact timing and amount of the valuation allowance releases are subject to change based on the level of profitability actually achieved in future periods. 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) |  | 2015 |  |  | 2014 |  |  | 2013 |
Beginning balance |  | $ | 23 |  |  | $ | 15 |  |  | $ | 5 |
Increase related to current year tax positions |  |  | 1 |  |  |  | 7 |  |  |  | 4 |
Increase related to prior year tax positions |  |  | 1 |  |  |  | 4 |  |  |  | — |
Decrease related to prior year tax positions |  |  | (6 | ) |  |  | (2 | ) |  |  | — |
Decrease related to lapse of statute of limitations |  |  | (1 | ) |  |  | — |  |  |  | — |
Decrease related to settlements with taxing authorities |  |  | — |  |  |  | (1 | ) |  |  | — |
Increase related to the Merger |  |  | — |  |  |  | — |  |  |  | 6 |
Ending balance |  | $ | 18 |  |  | $ | 23 |  |  | $ | 15 |
Due to the completion of the Internal Revenue Service (“IRS”) examination for 2013, the Company’s balance of unrecognized tax benefits decreased by $4 million during 2015, which did not impact income tax expense due to an offsetting change in valuation allowance. Included in the balance of $18 million at December 26, 2015, are $6 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. The difference of $12 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 would decrease the Company’s balance of unrecognized tax benefits by $5 million but would not affect the effective tax rate due to an offsetting change in valuation allowance. 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 interest and penalty expense of $2 million and $1 million in 2015 and 2013, respectively. The Company recognized a net interest and penalty benefit of $9 million in 2014 due to settlements reached with certain taxing authorities. The Company had approximately $3 million accrued for the payment of interest and penalties as of December 26, 2015, 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 2014 and 2009, respectively. During 2015, the IRS examination of the OfficeMax 2012 U.S. federal income tax return concluded, which resulted in a $6 million decrease in tax credit carryforwards. Such decrease had no impact on income tax expense due to an offsetting change in valuation allowance. 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 2013 and 2006, respectively. The U.S. federal income tax returns for 2014 and 2015 are currently under 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 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 2: 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 Reference 3: 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 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 + Details
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