Income Taxes

12 Months Ended

Mar. 03, 2012

Income Taxes

Income Taxes

4. Income Taxes

        The provision for income taxes was as follows:

	Year Ended
	March 3, 2012 (53 Weeks)			February 26, 2011 (52 Weeks)			February 27, 2010 (52 Weeks)
Current tax expense (benefit):
Federal	$	0		$	(36	)	$	(4,819	)
State		3,654			9,348			3,330
		3,654			9,312			(1,489	)
Deferred tax expense (benefit):
Federal		1,729			1,959			1,849
State		(29,069	)		(1,429	)		26,398
		(27,340	)		530			28,247
Total income tax expense (benefit)	$	(23,686	)	$	9,842		$	26,758

        A reconciliation of the expected statutory federal tax and the total income tax benefit was as follows:

	Year Ended
	March 3, 2012 (53 Weeks)			February 26, 2011 (52 Weeks)			February 27, 2010 (52 Weeks)
Expected federal statutory expense at 35%	$	(137,279	)	$	(190,956	)	$	(167,972	)
Nondeductible expenses		2,408			1,354			2,941
State income taxes, net		11,492			(18,139	)		(24,662	)
Increase (decrease) of previously recorded liabilities		(17,771	)		647			18,359
Recoverable AMT tax due to special 5-year NOL carryback		—			—			(4,790	)
Valuation allowance		117,464			216,936			202,882
Total income tax expense (benefit)	$	(23,686	)	$	9,842		$	26,758

        Net loss for fiscal 2012 included income tax benefit of $23,686 and was primarily comprised of adjustments to unrecognized tax benefits due to the lapse of statute of limitations. The Company maintains a full valuation allowance against its net deferred tax assets. ASC 740, "Income Taxes" requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. According to ASC 740, a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, ASC 740 precludes relying on projections of future taxable income to support the recognition of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods.

        The fiscal 2011 income tax expense was primarily comprised of an accrual for state and local taxes, adjustments to unrecognized tax benefits and the need for an accrual of additional state taxes resulting from the receipt of a final audit determination.

        The fiscal 2010 income tax expense was primarily comprised of an accrual for state and local taxes net of federal tax recoveries and adjustments to unrecognized tax benefits.

        The tax effect of temporary differences that gave rise to significant components of deferred tax assets and liabilities consisted of the following at March 3, 2012 and February 26, 2011:

	2012			2011
Deferred tax assets:
Accounts receivable	$	54,119		$	39,021
Accrued expenses		252,560			266,523
Liability for lease exit costs		158,454			175,547
Pension, retirement and other benefits		218,197			188,658
Long-lived assets		298,877			233,317
Other		1,994			2,166
Credits		71,716			71,526
Net operating losses		1,584,626			1,578,714
Total gross deferred tax assets		2,640,543			2,555,472
Valuation allowance		(2,317,425	)		(2,199,302	)
Total deferred tax assets		323,118			356,170
Deferred tax liabilities:
Inventory		323,118			356,170
Total gross deferred tax liabilities		323,118			356,170
Net deferred tax assets	$	—		$	—

        A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:

	2012			2011			2010
Unrecognized tax benefits	$	286,952		$	300,707		$	280,394
Increases to prior year tax positions		—			8,872			8,661
Decreases to tax positions in prior periods		(11,125	)		(16,940	)		(306	)
Increases to current year tax positions		—			821			12,669
Settlements		—			(2,498	)		—
Lapse of statute of limitations		(28,105	)		(4,010	)		(711	)
Unrecognized tax benefits balance	$	247,722		$	286,952		$	300,707

        The amount of the above unrecognized tax benefits at March 3, 2012, February 26, 2011 and February 27, 2010 which would impact the Company's effective tax rate, if recognized, was $83,804, $109,030 and $116,972, respectively. Additionally, any impact on the effective rate may be mitigated by the valuation allowance that is maintained against the Company's net deferred tax assets.

        The Company is indemnified by Jean Coutu Group for certain tax liabilities incurred for all years ended up to and including the acquisition date of June 4, 2007, related to the Brooks Eckerd acquisition. Although the Company is indemnified by Jean Coutu Group, the Company remains the primary obligor to the tax authorities with respect to any tax liability arising for the years prior to the acquisition. Accordingly, as of March 3, 2012, February 26, 2011 and February 27, 2010, the Company had a corresponding recoverable indemnification asset of $156,797, $158,209 and $146,053 from Jean Coutu Group, included in the "Other Assets" line of the Consolidated Balance Sheets, to reflect the indemnification for such liabilities.

        Over the next 12 months, the Company believes that it is reasonably possible that the unrecognized tax positions reflected in the table above could decrease by $209,266 ($69,152 of which would impact the effective tax rate) if its tax positions are sustained upon audit, the controlling statute of limitations expires or the Company agrees to a disallowance. The primary driver of the decrease is contingent upon the timing of the conclusion of the pre-acquisition period's audit of the consolidated U.S. income tax returns for Brooks Eckerd and will impact the effective rate by $38,816 and the overall decrease of unrecognized tax benefits by $168,229. The Company believes that it is reasonably possible that approximately $41,037 of its remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of the fiscal year as a result of concluding audits or lapse of statute of limitations.

        The Company recognizes interest and penalties related to tax contingencies as income tax expense. Prior to the adoption of ASC 740, "Income Taxes," the Company included interest as income tax expense and penalties as an operating expense. The Company recognized expense for interest and penalties in connection with tax matters of ($2,113), $8,937 and $12,267 for fiscal years 2012, 2011 and 2010, respectively. As of March 3, 2012 and February 26, 2011 the total amount of accrued income tax-related interest and penalties was $65,266 and $67,379, respectively.

        The Company files U.S. federal income tax returns as well as income tax returns in those states where it does business. The consolidated federal income tax returns have been subject to examination by the Internal Revenue Service (IRS) through fiscal 2008. However, any net operating losses that were generated in these prior closed years may be subject to examination by the IRS upon utilization. The IRS has completed the examination of the consolidated U.S. income tax returns for Brooks Eckerd for the periods leading up to the acquisition which include fiscal years 2004 through 2007. A revenue agent report (RAR) has been received for each of the three audit cycles, with the last RAR received in the third quarter of fiscal 2011. The Company appealed these audit results. Management is actively in settlement discussions with the IRS Appellate Division which upon signature of a closing agreement will conclude the examination of the Brooks Eckerd pre-acquisition periods. Management does not anticipate the impending IRS settlement to impact the net financial position or results of operations. Furthermore, the IRS settlement will result in the resolution of tax contingencies associated with these tax years which will impact the fiscal 2013 effective rate. This amount will be completely offset by the reversal of the tax indemnification asset which will be recorded in selling, general and administrative expenses. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. However, as a result of filing amended returns, the Company has statutes open in some states from fiscal 2004.

• Net Operating Losses and Tax Credits

        At March 3, 2012, the Company had federal net operating loss (NOL) carryforwards of approximately $3,891,357, the majority of which will expire, if not utilized, between fiscal 2019 and 2022.

        At March 3, 2012, the Company had state NOL carryforwards of approximately $5,502,866, the majority of which will expire between fiscal 2017 and 2025.

        At March 3, 2012, the Company had federal business tax credit carryforwards of $59,187, the majority of which will expire between 2013 and 2020. In addition to these credits, the Company had alternative minimum tax credit carryforwards of $3,221.

• Valuation Allowances

        The valuation allowances as of March 3, 2012 and February 26, 2011 apply to the net deferred tax assets of the Company. The Company maintained a full valuation allowance of $2,317,425 and $2,199,302 against net deferred tax assets at March 3, 2012 and February 26, 2011, respectively.