NOTE 14: INCOME TAXES

Income tax expense consists of the following:


Fiscal year	2011	2010	2009
Current income taxes:
Federal	$359	$324	$275
State and local	63	52	38
Total current income tax expense	422	376	313
Deferred income taxes:
Current	7	2	(28)
Non-current	7	–	(30)
Total deferred income tax expense (benefit)	14	2	(58)
Total income tax expense	$436	$378	$255

A reconciliation of the statutory Federal income tax rate to the effective tax rate on earnings before income taxes is as follows:


Fiscal year	2011	2010	2009
Statutory rate	35.0%	35.0%	35.0%
State and local income taxes, net of federal income taxes	3.6	3.4	3.5
Non-taxable acquisition-related items	0.6	–	–
Deferred tax adjustment	–	–	(1.8)
Permanent differences	0.1	(0.2)	(0.6)
Other, net	(0.3)	–	0.5
Effective tax rate	39.0%	38.2%	36.6%

In 2009, the IRS completed its routine examination of our federal filings for 2007. As a result of adjustments identified in the IRS examinations and revisions of estimates, we increased our deferred tax assets, which resulted in a reduction in our effective tax rate in 2009.

In 2011, we acquired HauteLook in a tax-free merger transaction. The non-taxability of certain acquisition-related items, including goodwill impairment, resulted in an increase in our effective tax rate in 2011.

The major components of deferred tax assets and liabilities are as follows:


	January 28, 2012	January 29, 2011
Compensation and benefits accruals	$167	$146
Accrued expenses	86	75
Merchandise inventories	22	25
Gift cards and gift certificates	17	18
Loyalty reward certificates	17	17
Allowance for credit losses	45	56
Federal benefit of state taxes	6	9
Gain on sale of interest rate swap	29	–
Other	17	14
Total deferred tax assets	406	360
Land, buildings and equipment basis and depreciation differences	(63)	(4)
Total deferred tax liabilities	(63)	(4)
Net deferred tax assets	$343	$356

A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2011, 2010 and 2009 is as follows:


Fiscal year	2011	2010	2009
Unrecognized tax benefit at beginning of year	$43	$43	$28
Gross increase to tax positions in prior periods	14	3	18
Gross decrease to tax positions in prior periods	(14)	(3)	(3)
Gross increase to tax positions in current period	2	3	3
Settlements	(24)	(3)	(3)
Unrecognized tax benefit at end of year	$21	$43	$43

Settlement activity in 2011 includes amounts paid for a state tax matter and to close our 2008 IRS audit.

At the end of 2011, 2010 and 2009, $11, $21 and $18 of the ending gross unrecognized tax benefit relates to items which, if recognized, would affect the effective tax rate.

Our income tax expense included a decrease to expense of $4 in 2011 and an increase to expense of $5 in 2010 and $2 in 2009 for tax-related interest and penalties. At the end of 2011, 2010 and 2009, our liability for interest and penalties was $5, $11 and $7.

We file income tax returns in the U.S. and a limited number of foreign jurisdictions. With few exceptions, we are no longer subject to federal, state and local, or non-U.S. income tax examinations for years before 2007. Unrecognized tax benefits related to federal, state and local tax positions may decrease by $3 by February 2, 2013, due to the completion of examinations and the expiration of various statutes of limitations.