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INCOME TAXES | 12 Months Ended
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Dec. 29, 2018
Income Tax Disclosure [Abstract] |
INCOME TAXES | NOTE 6. INCOME TAXES The components of income from continuing operations before income taxes consisted of the following:
(In millions) |  | 2018 |  |  | 2017 |  |  | 2016 |
United States |  | $ | 138 |  |  | $ | 295 |  |  | $ | 445 |
Foreign |  |  | 20 |  |  |  | 4 |  |  |  | 14 |
Total income from continuing operations before income taxes |  | $ | 158 |  |  | $ | 299 |  |  | $ | 459 |
The income tax expense related to income from continuing operations consisted of the following:
(In millions) |  | 2018 |  |  | 2017 |  |  | 2016 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 3 |  |  | $ | 4 |  |  | $ | 17 |
State |  |  | 7 |  |  |  | 3 |  |  |  | 6 |
Foreign |  |  | 9 |  |  |  | 9 |  |  |  | 3 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | 27 |  |  |  | 152 |  |  |  | (210 | )
State |  |  | 13 |  |  |  | (17 | ) |  |  | (37 | )
Foreign |  |  | — |  |  |  | 2 |  |  |  | 1 |
Total income tax expense (benefit) |  | $ | 59 |  |  | $ | 153 |  |  | $ | (220 | )
The following is a reconciliation of income taxes at the U.S. Federal statutory rate to the provision for income taxes:
(In millions) |  | 2018 |  |  | 2017 |  |  | 2016 |
Federal tax computed at the statutory rate |  | $ | 33 |  |  | $ | 105 |  |  | $ | 160 |
State taxes, net of Federal benefit |  |  | 10 |  |  |  | 12 |  |  |  | (20 | )
Foreign income taxed at rates other than Federal |  |  | 5 |  |  |  | 2 |  |  |  | — |
Decrease in valuation allowance |  |  | (3 | ) |  |  | (36 | ) |  |  | (349 | )
Non-deductible Merger expenses |  |  | — |  |  |  | 3 |  |  |  | — |
Other non-deductible expenses and settlements |  |  | 10 |  |  |  | — |  |  |  | 3 |
Tax basis differences in Investment in Subs |  |  | (4 | ) |  |  | — |  |  |  | — |
Non-taxable income and additional deductible expenses |  |  | (1 | ) |  |  | (4 | ) |  |  | (13 | )
Change in unrecognized tax benefits |  |  | 1 |  |  |  | — |  |  |  | (3 | )
Impact of Tax Reform |  |  | — |  |  |  | 68 |  |  |  | — |
Impact of stock compensation shortfall |  |  | 5 |  |  |  | 3 |  |  |  | — |
Repatriation of foreign earnings |  |  | — |  |  |  | 3 |  |  |  | — |
Subpart F and dividend income, net of foreign tax credits |  |  | — |  |  |  | — |  |  |  | 2 |
Other items, net |  |  | 3 |  |  |  | (3 | ) |  |  | — |
Income tax expense (benefit) |  | $ | 59 |  |  | $ | 153 |  |  | $ | (220 | )
The Company’s effective income tax rate in 2018 differs from the statutory rate of 21% enacted as part of the Tax Cuts and Jobs Act primarily due to the impact of excess tax deficiencies associated with stock-based compensation awards, a potential nondeductible legal settlement, the impact of state taxes and certain nondeductible items, and the mix of income and losses across U.S. and non-U.S. jurisdictions. As prior years’ equity awards granted at a higher fair value vest, previously recognized deferred tax benefits on the excess compensation expense are reversed, thus causing a tax deficiency. In addition, the Company completed several acquisitions and dispositions, some of which resulted in the recognition of gain or loss for tax purposes that differed from the amount recognized for GAAP purposes. The Company’s effective tax rate in 2017 varied considerably as a result of three primary factors, 1) the impact of the enactment of the Tax Cuts and Jobs Act, 2) the mix of income and losses across U.S. and non-U.S. jurisdictions, and 3) the reduction of previously established valuation allowances against deferred tax assets. The Company’s effective tax rate in 2016 varied considerably as a result of two primary factors, 1) the mix of income and losses across U.S. and non-U.S. jurisdictions, and 2) the reduction of previously established valuation allowances against deferred tax assets. During 2018 and 2017, the mix of income and losses across jurisdictions, although still applicable, has become less of a factor in influencing the Company’s effective tax rates due to the dispositions of the international businesses and improved operating results. In addition, during 2017 and 2016, a large portion of the Company’s deferred tax assets that previously were not realizable, became realizable, thereby, causing significant reductions in previously established valuation allowances. As a result, the Company’s effective tax rates were 37% in 2018, 51% in 2017 and (48%) in 2016. On December 22, 2017, the Tax Cuts and Jobs Act was enacted and includes, but is not limited to, significant changes to U.S. federal tax law including a U.S. federal corporate tax rate reduction from 35% to 21% effective January 1, 2018, changes to the U.S. federal taxation of foreign sourced earnings and a one-time deemed repatriation transition tax. In accordance with ASC 740, “Income Taxes”, the impact of a change in tax law is recorded in the period of enactment. During the fourth quarter of 2017, the Company recorded a material, non-cash, change in its deferred income tax balances of approximately $68 million related to the U.S. federal corporate tax rate reduction. The Company estimates that its deemed repatriation transition tax liability will not be material due to its limited international operations. Also, on December 22, 2017, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act. SAB 118 provides a measurement period not to exceed twelve months for companies to complete this accounting. In 2018, the Company concluded that the remeasurement of deferred income tax balances recorded in 2017 did not materially change. Additionally, the Company reaffirmed its estimate of deemed repatriation transition tax liability will not be material due to its limited international operations. During the third quarter of 2017 and 2016, the Company concluded that it was more likely than not that a benefit from a significant portion of its U.S. federal and state deferred tax assets would be realized. This conclusion was based on detailed evaluations of all available positive and negative evidence and the weight of such evidence, the current financial position and results of operations for the current and preceding years, and the expectation of continued earnings. The Company determined that its U.S. federal and state valuation allowance should be reduced by approximately $40 million in 2017, with approximately $37 million in the third quarter of 2017 as a discrete non-cash income tax benefit and the remainder as an adjustment to the estimated annual effective tax rate. The Company determined that approximately $382 million of its U.S. federal and state valuation allowance should be reduced in 2016. The Company operates in several foreign jurisdictions with income tax rates that differ from the U.S. Federal statutory rate, which resulted in an expense for 2018 and 2017 presented in the effective tax rate reconciliation. Significant foreign tax jurisdictions for which the Company realized such expense are Canada and Puerto Rico after the sale of the other international operations. The components of deferred income tax assets and liabilities consisted of the following:
|  | December 29, |  |  | December 30, |
(In millions) |  | 2018 |  |  | 2017 |
U.S. and foreign loss carryforwards |  | $ | 253 |  |  | $ | 253 |
Deferred rent credit |  |  | 35 |  |  |  | 33 |
Pension and other accrued compensation |  |  | 65 |  |  |  | 50 |
Accruals for facility closings |  |  | 5 |  |  |  | 8 |
Inventory |  |  | 11 |  |  |  | 13 |
Self-insurance accruals |  |  | 21 |  |  |  | 24 |
Deferred revenue |  |  | 17 |  |  |  | 20 |
U.S. and foreign income tax credit carryforwards |  |  | 227 |  |  |  | 237 |
Allowance for bad debts |  |  | 4 |  |  |  | 4 |
Accrued expenses |  |  | 20 |  |  |  | 19 |
Basis difference in fixed assets |  |  | 30 |  |  |  | 46 |
Gross deferred tax assets |  |  | 688 |  |  |  | 707 |
Valuation allowance |  |  | (142 | ) |  |  | (144 | )
Deferred tax assets |  |  | 546 |  |  |  | 563 |
Internal software |  |  | 11 |  |  |  | 6 |
Installment gain on sale of timberlands |  |  | 172 |  |  |  | 172 |
Intangibles |  |  | 96 |  |  |  | 96 |
Undistributed foreign earnings |  |  | 4 |  |  |  | 5 |
Deferred tax liabilities |  |  | 283 |  |  |  | 279 |
Net deferred tax assets |  | $ | 263 |  |  | $ | 284 |
As of December 29, 2018, and December 30, 2017, deferred income tax liabilities amounting to $20 million and $21 million, respectively, are included in Deferred income taxes and other long-term liabilities. As of December 29, 2018, the Company has utilized all of its U.S. Federal net operating loss (“NOL”) carryforwards with the exception the NOLs acquired as part of the CompuCom acquisition. The Company has $106 million of Federal, $102 million of foreign and $1.2 billion of state NOL carryforwards. Of the Federal NOL carryforwards, none will expire in 2019 with the remainder expiring between 2020 and 2033. Of the foreign NOL carryforwards, $47 million can be carried forward indefinitely, none will expire in 2019 and the remaining balance will expire between 2020 and 2038. Of the state NOL carryforwards, $23 million will expire in 2019, and the remaining balance will expire between 2020 and 2038. The Company has Federal capital loss carryover available to offset future capital gains generated of $609 million which expires in 2021, 2022 and 2023, and state capital loss carryforwards of $548 million which expire in 2021, 2022 and 2023. The Company also has $89 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. In addition, due to the enactment of new legislation, a portion of the credits can be refunded in future tax years. Additionally, the Company has $125 million of U.S. Federal foreign tax credit carryforwards, which expire between 2019 and 2028, and $14 million of state and foreign tax credit carryforwards, $2 million of which can be carried forward indefinitely, and the remaining balance will expire between 2023 and 2028. As of December 29, 2018, 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, the Company did acquire certain NOLs and other credit carryforwards that may be limited as a result of the purchase. 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. Deferred income taxes have been provided on all undistributed earnings of foreign subsidiaries. The following summarizes the activity related to valuation allowances for deferred tax assets:
(In millions) |  | 2018 |  |  | 2017 |  |  | 2016 |
Beginning balance |  | $ | 144 |  |  | $ | 140 |  |  | $ | 522 |
Additions, charged to expense |  |  | — |  |  |  | 4 |  |  |  | — |
Acquired via Merger |  |  | — |  |  |  | 1 |  |  |  | — |
Impact of Tax Reform |  |  | — |  |  |  | 40 |  |  |  | — |
Reductions |  |  | (2 | ) |  |  | (41 | ) |  |  | (382 | )
Ending balance |  | $ | 142 |  |  | $ | 144 |  |  | $ | 140 |
During 2018, the Company released a small portion of its valuation allowance related to certain credits that are expected to be utilized prior to expiration. As of December 29, 2018, the Company continues to have a U.S. valuation allowance for certain U.S. federal credits and certain state tax attributes, which relate to deferred tax assets that require certain types of income or for income to be earned in certain jurisdictions in order to be realized. The Company will continue to assess the realizability of its deferred tax assets in the U.S. and remaining foreign jurisdictions in future periods. Changes in pretax income projections could impact this evaluation in future periods. The Company’s total valuation allowance increased during 2017 due to several factors. A portion of the deferred assets acquired as part of the CompuCom deal had existing valuation allowances that increased the Company’s balance. The Company recognized a net income tax benefit of $36 million associated with the reduction of valuation allowances in the U.S. federal and state jurisdictions offset by the establishment of valuation allowances in the U.S. and certain jurisdictions that the Company does not expect to be profitable. As a result of enacted legislation, the Company reestablished a valuation allowance of $40 million on certain of its Federal credits offset by a reduction in the required valuation allowances due to the statutory rate change. During 2016, the Company concluded that it was more likely than not that a benefit from a substantial portion of its U.S. federal and state deferred tax assets would be realized. This conclusion was based on a detailed evaluation of all available positive and negative evidence and the weight of such evidence, the current financial position and results of operations for the current and preceding years, and the expectation of continued earnings. The Company determined that approximately $382 million of its U.S. federal and state valuation allowance should be reduced in 2016. The following table summarizes the activity related to unrecognized tax benefits:
(In millions) |  | 2018 |  |  | 2017 |  |  | 2016 |
Beginning balance |  | $ | 20 |  |  | $ | 14 |  |  | $ | 18 |
Increase related to current year tax positions |  |  | — |  |  |  | — |  |  |  | 1 |
Increase related to merger |  |  | — |  |  |  | 8 |  |  |  | — |
Increase (decrease) related to prior year tax positions |  |  | 1 |  |  |  | (1 | ) |  |  | — |
Decrease related to lapse of statute of limitations |  |  | — |  |  |  | — |  |  |  | — |
Decrease related to settlements with taxing authorities |  |  | (1 | ) |  |  | (1 | ) |  |  | (5 | )
Ending balance |  | $ | 20 |  |  | $ | 20 |  |  | $ | 14 |
Included in the balance of $20 million at December 29, 2018, are $10 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. The difference of $10 million primarily results from tax positions which if sustained would be offset by changes in deferred tax assets. It is not anticipated that certain tax positions will be resolved within the next 12 months, which would decrease the Company’s balance of 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. As part of the CompuCom acquisition, the Company’s unrecognized tax benefits increased by $8 million in 2017. Approximately, $3 million of the unrecognized tax benefit is currently covered under an indemnification agreement with a predecessor owner of CompuCom. Due to the completion of the Internal Revenue Service (“IRS”) examination for 2014, the Company’s balance of unrecognized tax benefits decreased by $4 million during 2016, which did impact income tax expense by $3 million due to an offsetting change in valuation allowance. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in the provision for income taxes. The Company recognized immaterial interest and penalty expense in 2018 and 2017 and interest and penalty expense of $3 million in 2016. The Company had approximately $7 million accrued for the payment of interest and penalties as of December 29, 2018, including $1 million acquired as part of the CompuCom merger, 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 2017 and 2013, respectively. The acquired OfficeMax U.S. consolidated group is no longer subject to U.S. federal income tax examination and with few exceptions, is no longer subject to U.S. state and local income tax examinations for years before 2013. The U.S. federal income tax return for 2017 is currently under review. Generally, the Company is subject to routine examination for years 2012 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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