Income Taxes

The following is a reconciliation of the federal statutory income tax rate to income tax expense in fiscal 2015, 2014 and 2013 (11-month) ($ in millions):



	12-Month			12-Month			11-Month
	2015			2014			2013
Federal income tax at the statutory rate	$	485		$	379		$	1
State income taxes, net of federal benefit	43			26			(2		)
(Benefit) expense from foreign operations	(23		)	(23		)	45
Other	(11		)	6			5
Legal entity reorganization	(353		)	—			—
Goodwill impairments (non-deductible)	—			—			214
Income tax expense	$	141		$	388		$	263
Effective income tax rate	10.1		%	35.8		%	7,152.3		%

In the fourth quarter of fiscal 2012, we purchased CPW’s interest in the Best Buy Mobile profit share agreement for $1.3 billion (the “Mobile buy-out”). The Mobile buy-out completed by our U.K. subsidiary resulted in the $1.3 billion purchase price being assigned, for U.S. tax purposes only, to an intangible asset. The Mobile buy-out did not, however, result in a similar intangible asset in the U.K., as the Mobile buy-out was considered part of a tax-free equity transaction for U.K. tax purposes.

Because the U.S. tax basis in the intangible asset was considered under U.S. tax law to be held by our U.K. subsidiary, which is regarded as a foreign corporation for U.S. tax purposes, ASC 740, Income Taxes, requires that no deferred tax asset may be recorded in respect of the intangible asset. ASC 740-30-25-9 also precludes the recording of a deferred tax asset on the outside basis difference of the U.K. subsidiary. As a result, the amortization of the U.S. tax basis in the intangible asset only resulted in a periodic income tax benefit by reducing the amount of the U.K. subsidiary’s income, if any, that would otherwise have been subject to U.S. income taxes.

In the first quarter of fiscal 2015, we filed an election with the Internal Revenue Service to treat the U.K. subsidiary as a disregarded entity such that its assets are now deemed to be assets held directly by a U.S. entity for U.S. tax purposes. This tax-only election, which results in the liquidation of the U.K. subsidiary for U.S. tax purposes, resulted in the elimination of the Company’s outside basis difference in the U.K. subsidiary. Additionally, the election resulted in the recognition of a deferred tax asset (and corresponding income tax benefit) for the remaining unrecognized inside tax basis in the intangible, in a manner similar to a change in tax status as provided in ASC 740-10-25-32.

Earnings from continuing operations before income tax expense by jurisdiction was as follows in fiscal 2015, 2014 and 2013 (11-month) ($ in millions):



	12-Month		12-Month		11-Month
	2015		2014		2013
United States	$	1,201	$	699	$	286
Outside the United States	186		384		(282		)
Earnings from continuing operations before income tax expense	$	1,387	$	1,083	$	4

Income tax expense was comprised of the following in fiscal 2015, 2014 and 2013 (11-month) ($ in millions):



	12-Month			12-Month			11-Month
	2015			2014			2013
Current:
Federal	$	354		$	305		$	211
State	51			46			(3		)
Foreign	33			55			49
	438			406			257
Deferred:
Federal	(275		)	(22		)	25
State	(26		)	1			(1		)
Foreign	4			3			(18		)
	(297		)	(18		)	6
Income tax expense	$	141		$	388		$	263

Deferred taxes are the result of differences between the bases of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities were comprised of the following ($ in millions):



	January 31, 2015			February 1, 2014
Accrued property expenses	$	129		$	162
Other accrued expenses	91			133
Deferred revenue	93			81
Compensation and benefits	103			114
Stock-based compensation	94			110
Goodwill and intangibles	287			—
Loss and credit carryforwards	156			176
Other	88			103
Total deferred tax assets	1,041			879
Valuation allowance	(143		)	(158		)
Total deferred tax assets after valuation allowance	898			721
Property and equipment	(251		)	(286		)
Goodwill and intangibles	—			(75		)
Inventory	(54		)	(60		)
Other	(27		)	(16		)
Total deferred tax liabilities	(332		)	(437		)
Net deferred tax assets	$	566		$	284

Deferred tax assets and liabilities included in our Consolidated Balance Sheets were as follows ($ in millions):



	January 31, 2015			February 1, 2014
Other current assets	$	252		$	261
Current assets held for sale	3			—
Other assets	322			44
Other current liabilities	—			—
Other long-term liabilities	—			(21		)
Long-term liabilities held for sale	(11		)	—
Net deferred tax assets	$	566		$	284

At January 31, 2015, we had total net operating loss carryforwards from international operations of $118 million, of which $110 million will expire in various years through 2025 and the remaining amounts have no expiration. Additionally, we had acquired U.S. federal net operating loss carryforwards of $21 million which expire between 2023 and 2030, U.S. federal foreign tax credit carryforwards of $1 million which expire between 2022 and 2024, state credit carryforwards of $12 million which expire in 2024, and state capital loss carryforwards of $4 million which expire in 2019.

At January 31, 2015, a valuation allowance of $143 million had been established, of which $1 million is against U.S. federal foreign tax credit carryforwards, $11 million is against U.S. federal and state capital loss carryforwards, $6 million is against state credit carryforwards and other state deferred tax assets, and $125 million is against certain international net operating loss carryforwards and other international deferred tax assets. The $15 million decrease from February 1, 2014, is primarily due to the decrease in the valuation allowance against the U.S. federal foreign tax credit carryforward.

We have not provided deferred taxes on unremitted earnings attributable to foreign operations that have been considered to be reinvested indefinitely. These earnings relate to ongoing operations and were $770 million at January 31, 2015. It is not practicable to determine the income tax liability that would be payable if such earnings were not indefinitely reinvested.

The following table provides a reconciliation of changes in unrecognized tax benefits for fiscal 2015, 2014 and 2013 (11-month) ($ in millions):



	12-Month			12-Month			11-Month
	2015			2014			2013
Balance at beginning of period	$	370		$	383		$	387
Gross increases related to prior period tax positions	33			38			10
Gross decreases related to prior period tax positions	(88		)	(67		)	(22		)
Gross increases related to current period tax positions	114			34			37
Settlements with taxing authorities	(9		)	(3		)	(10		)
Lapse of statute of limitations	(10		)	(15		)	(19		)
Balance at end of period	$	410		$	370		$	383

Unrecognized tax benefits of $297 million, $228 million and $231 million at January 31, 2015, February 1, 2014, and February 2, 2013, respectively, would favorably impact our effective income tax rate if recognized.

We recognize interest and penalties (not included in the "unrecognized tax benefits" above), as well as interest received from favorable tax settlements, as components of income tax expense. Interest income of $6 million was recognized in fiscal 2015. At January 31, 2015, February 1, 2014, and February 2, 2013, we had accrued interest of $78 million, $91 million and $85 million, respectively, along with accrued penalties of $2 million, $2 million and $0 million at January 31, 2015, February 1, 2014, and February 2, 2013, respectively.

We file a consolidated U.S. federal income tax return, as well as income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2005.

Because existing tax positions will continue to generate increased liabilities for us for unrecognized tax benefits over the next 12 months, and since we are routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. An estimate of the amount or range of such change cannot be made at this time. However, we do not expect the change, if any, to have a material effect on our consolidated financial condition, results of operations or cash flows within the next 12 months.