Note 17 - Income Taxes

12 Months Ended

Feb. 03, 2024

Notes to Financial Statements

Income Tax Disclosure [Text Block]

17. Income Taxes

The domestic and international components of pre-tax (loss) income are as follows:

($ in millions)	2023			2022		2021
Domestic	$	(381	)	$	440	$	1,244
International		(42	)		84		(4	)
Total pre-tax (loss) income	$	(423	)	$	524	$	1,240

Domestic pre-tax (loss) income includes the results of non-U.S. businesses that are operated in branches owned directly by the U.S. which, therefore, are subject to U.S. income tax.

The income tax provision consists of the following:

($ in millions)	2023			2022			2021
Current:
Federal	$	8		$	64		$	192
State and local		2			27			66
International		33			68			16
Total current tax provision		43			159			274
Deferred:
Federal		(88	)		23			49
State and local		(24	)		4			15
International		(24	)		(6	)		10
Total deferred tax provision		(136	)		21			74
Total income tax provision	$	(93	)	$	180		$	348

Following the enactment of Public Law 115-97 ("Tax Act") and the one-time transition tax, our historical foreign earnings are not subject to additional U.S. federal tax upon repatriation. Further, no additional U.S. federal tax will be due upon repatriation of current foreign earnings because they are either exempt or subject to U.S. tax as earned.

At February 3, 2024, we had accumulated undistributed foreign earnings of $511 million. This amount consists of historical earnings that were previously taxed under the Tax Act and post-Tax Act earnings. Investments in our foreign subsidiaries, including working capital, will continue to be permanently reinvested. Cash balances in excess of working capital needs are considered to be available for repatriation to the United States and foreign withholding taxes will be accrued as necessary on these amounts.

We have not recorded a deferred tax liability for the difference between the financial statement carrying amount and the tax basis of our investments in foreign subsidiaries. The determination of any unrecorded deferred tax liability on this amount is not practicable due to the uncertainty of how these investments would be recovered.

A reconciliation of the significant differences between the federal statutory income tax rate and the effective income tax rate on pre-tax (loss) income is as follows:

	2023			2022			2021
Federal statutory income tax rate		21.0	%		21.0	%		21.0	%
Increase in valuation allowance		(0.6	)		2.6			0.7
State and local income taxes, net of federal tax benefit		5.4			5.0			5.4
International income taxed at varying rates		(4.4	)		8.4			2.4
Foreign tax credits		1.4			(3.6	)		(1.4	)
Domestic/foreign tax settlements		1.0			(0.5	)		(0.3	)
Federal tax credits		0.5			(0.4	)		(0.1	)
Foreign deferred adjustment		(2.0	)		—			—
Other, net		(0.3	)		1.8			0.4
Effective income tax rate		22.0	%		34.3	%		28.1	%

Deferred income taxes are provided for the effects of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Items that give rise to significant portions of our deferred tax assets are as follows:

	February 3,			January 28,
($ in millions)	2024			2023
Deferred tax assets:
Tax loss/credit carryforwards and capital loss	$	166		$	123
Employee benefits		32			42
Operating leases - liabilities		668			725
Other		62			61
Total deferred tax assets	$	928		$	951
Valuation allowance		(95	)		(93	)
Total deferred tax assets, net	$	833		$	858

Items that give rise to significant portions of our deferred tax liabilities are as follows:

	February 3,			January 28,
($ in millions)	2024			2023
Deferred tax liabilities:
Merchandise inventories	$	97		$	87
Operating leases - assets		611			667
Goodwill and other intangible assets		118			123
Net investment gains		—			115
Property and equipment		24			6
Other		9			7
Total deferred tax liabilities	$	859		$	1,005
Net deferred tax liability	$	(26	)	$	(147	)
Balance Sheet caption reported in:
Deferred taxes	$	114		$	90
Other liabilities		(140	)		(237	)
	$	(26	)	$	(147	)

Based upon the level of historical taxable income and projections for future taxable income, which are based upon our long-range strategic plans, management believes it is more likely than not that we will realize the benefits of deductible differences, net of the valuation allowances, over the periods in which the temporary differences are anticipated to reverse. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.

As of February 3, 2024, we have a valuation allowance of $95 million to reduce our deferred tax assets to an amount that is more likely than not to be realized. A valuation allowance of $73 million was recorded against tax loss carryforwards of certain foreign entities. Based on the history of losses and the absence of prudent and feasible business plans for generating future taxable income in these entities, we believe it is more likely than not that the benefit of these loss carryforwards will not be realized. As of February 3, 2024, a valuation allowance of $20 million was established for foreign taxes assessed at rates in excess of the U.S. federal tax rate for which no U.S. foreign tax credit is available. Additionally, since we do not have any reasonably foreseeable sources of capital gains in the U.S. or Canada, a valuation allowance of $2 million was established to offset deferred tax assets on capital losses.

At February 3, 2024, we have international minimum tax credit carryforwards with a potential tax benefit of $3 million and operating loss carryforwards with a potential tax benefit of $132 million, a portion of which will expire between 2024 and 2038 and a portion of which will never expire. The international operating loss carryforwards include unrecognized tax benefits. The Canadian capital loss of $1 million will carry forward indefinitely and the U.S. capital losses of $10 million can be carried back 3 years and forward for 5 years after realization. We also have foreign tax credit carryforwards with a potential tax benefit of $20 million that will expire between 2029 and 2033.

We operate in multiple taxing jurisdictions and are subject to audit. Audits can involve complex issues that may require an extended period of time to resolve. A taxing authority may challenge positions that we have adopted in our income tax filings. Accordingly, we may apply different tax treatments for transactions in filing the income tax returns than for income tax financial reporting. We regularly assess our tax positions for such transactions and record reserves for those differences. We participate in the IRS's Compliance Assurance Process and the examination of our 2022 U.S. Federal income tax filing was concluded in February 2024. To date, no adjustments have been proposed in any audits that will have a material effect on our financial position or results of operations.

At February 3, 2024, we had $50 million of gross unrecognized tax benefits, of which $43 million would, if recognized, affect our annual effective tax rate. We classified certain income tax liabilities as current or noncurrent based on management’s estimate of when these liabilities will be settled. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. We recognized interest income of $2 million in 2023 and interest expense of $6 million in 2022, the amount in 2021 was not significant.

The following table summarizes the activity related to unrecognized tax benefits:

($ in millions)	2023			2022			2021
Unrecognized tax benefits at beginning of year	$	52		$	41		$	47
Foreign currency translation adjustments		—			(1	)		(2	)
Increases related to current year tax positions		5			9			3
Increases related to prior period tax positions		2			7			2
Decreases related to prior period tax positions		—			—			(3	)
Settlements		(5	)		—			(1	)
Lapse of statute of limitations		(4	)		(4	)		(5	)
Unrecognized tax benefits at end of year	$	50		$	52		$	41

It is reasonably possible that the liability associated with our unrecognized tax benefits will increase or decrease within the next twelve months. These changes may be the result of foreign currency fluctuations, ongoing audits, or the expiration of statutes of limitations. Settlements during 2024 are not expected to be significant based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although management believes that adequate provision has been made for such issues, the ultimate resolution could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, generating a positive effect on earnings.