NOTE 10: Income Taxes

The following is a reconciliation of the federal statutory tax rate to the effective tax rate:



	2015		2014		2013
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	3.6		3.3		2.9
Valuation allowance - impairment	4.2		—		—
Other, net	(0.4	)	(1.4	)	(0.1	)
Effective tax rate	42.4	%	36.9	%	37.8	%

The components of the income tax provision are as follows:



(In millions)	2015			2014			2013
Current:
Federal	$	1,688		$	1,475		$	1,342
State	248			221			203
Total current	1,936			1,696			1,545
Deferred:
Federal	(59		)	(112		)	(133		)
State	(4		)	(6		)	(25		)
Total deferred	(63		)	(118		)	(158		)
Total income tax provision	$	1,873		$	1,578		$	1,387

The tax effects of cumulative temporary differences that gave rise to the deferred tax assets and liabilities were as follows:



(In millions)	January 29, 2016			January 30, 2015
Deferred tax assets:
Self-insurance	$	369		$	378
Share-based payment expense	83			81
Deferred rent	91			88
Impairment of equity method investment	270			—
Foreign currency translation	107			62
Net operating losses	159			152
Other, net	156			131
Total deferred tax assets	1,235			892
Valuation allowance	(447		)	(170		)
Net deferred tax assets	788			722

Deferred tax liabilities:
Property	(507		)	(534		)
Other, net	(40		)	(55		)
Total deferred tax liabilities	(547		)	(589		)

Net deferred tax asset	$	241		$	133

As of January 29, 2016, the Company reported a deferred tax asset of $270 million related to its intention to exit from the Company’s joint venture investment in Australia. The Company established a full valuation allowance against the deferred tax asset related to these losses generated from impairments and equity method losses. These losses are collectively considered capital losses, having a five year carryforward period, and can only be used to offset capital gain income. No present or future capital gains have been identified through which this deferred tax asset can be realized.

The Company operates as a branch in various foreign jurisdictions and cumulatively has incurred net operating losses of $580 million and $557 million as of January 29, 2016, and January 30, 2015, respectively. These net operating losses are subject to expiration in 2017 through 2035. Deferred tax assets have been established for these foreign net operating losses in the accompanying consolidated balance sheets. Given the uncertainty regarding the realization of the foreign net deferred tax assets, the Company recorded cumulative valuation allowances of $177 million and $170 million as of January 29, 2016, and January 30, 2015, respectively.

The Company has not provided for deferred income taxes on accumulated but undistributed earnings of the Company’s foreign operations of approximately $153 million and $112 million as of January 29, 2016, and January 30, 2015, respectively, due to its intention to permanently reinvest these earnings outside the U.S. It is not practicable to determine the income tax liability that would be payable on these earnings. The Company will provide for deferred or current income taxes on such earnings in the period it determines requisite to remit those earnings.

A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:



(In millions)	2015			2014			2013
Unrecognized tax benefits, beginning of year	$	7		$	62		$	63
Additions for tax positions of prior years	—			2			—
Reductions for tax positions of prior years	(2		)	(57		)	—
Settlements	(2		)	—			(1		)
Unrecognized tax benefits, end of year	$	3		$	7		$	62

The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $2 million and $4 million as of January 29, 2016, and January 30, 2015, respectively.

The Company recognized $1 million of interest income related to uncertain tax positions during 2015 and 2014. The Company recognized $6 million of interest expense related to uncertain tax positions during 2013. As of January 29, 2016 and January 30, 2015, the Company had accrued interest related to uncertain tax positions of $1 million and $2 million, respectively. Penalties recognized related to uncertain tax positions were insignificant for 2015, 2014, and 2013. Accrued penalties were also insignificant as of January 29, 2016 and January 30, 2015.

The Company is subject to examination by various foreign and domestic taxing authorities. During 2015, the Company’s 2012 Federal tax return was audited by the Internal Revenue Service. This limited scope audit resulted in an assessment of $14 million. It is reasonably possible that the Company will resolve $3 million in state related audit items within the next 12 months. There are ongoing U.S. state audits covering tax years 2008 to 2014. An audit of the Company’s Canadian operations by the Canada Revenue Agency for fiscal years 2009 and 2010 was closed during the year with no assessment being rendered. The Company remains subject to income tax examinations for international income taxes for fiscal years 2007 through 2014. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.