J CREW GROUP INC | 2012 | FY |

15. Income Taxes

Group files a consolidated federal income tax return, which includes all of its wholly owned subsidiaries. Each subsidiary files separate, or combined where required, state tax returns in required jurisdictions. Group and its subsidiaries have entered into a tax sharing agreement providing that each of the subsidiaries will reimburse Group for its share of income taxes based on the proportion of such subsidiaries’ tax liability on a separate return basis to the total tax liability of Group. Effective for the tax year ended January 2013, the Company will file as a member of the consolidated group of Parent.

The following table summarizes the components of the provision for income taxes:

 

(Dollars in millions)		For the Year Ended February 2, 2013				For the Period March 8, 2011 to January 28, 2012						For the Period January 30, 2011 to March 7, 2011				For the Year Ended January 29, 2011
		(Successor)				(Successor)						(Predecessor)				(Predecessor)
Current:
Federal		$	57.9			$	30.6					$	(4.5	)		$	73.3
State and local			6.8				(0.4	)					—				17.2
Foreign			0.1				0.2						—				—
			64.8				30.4						(4.5	)			90.5
Deferred:
Federal			(12.0	)			(31.4	)					3.0				(0.7	)
State and local			3.3				1.7						(0.3	)			(1.3	)
Foreign			(0.2	)			(0.1	)					—
			(8.9	)			(29.8	)					2.7				(2.0	)
Total		$	55.9			$	0.6					$	(1.8	)		$	88.5

The following table summarizes the principal reasons for the difference between the effective tax and the U.S. federal statutory income tax rate:

 

		For the Year Ended February 2, 2013				For the Period March 8, 2011 to January 28, 2012						For the Period January 30, 2011 to March 7, 2011				For the Year Ended January 29, 2011
		(Successor)				(Successor)						(Predecessor)				(Predecessor)
Federal income tax rate			35.0	%			35.0	%					35.0	%			35.0	%
State and local income taxes, net of federal benefit			4.3				6.4						1.0				5.0
Non-deductible Transaction costs			—				(18.7	)					(25.8	)			2.5
Uncertain tax positions			(1.3	)			(13.8	)					—				—
Other			(1.3	)			(4.4	)					(0.2	)			(0.3	)
Effective tax rate			36.7	%			4.5	%					10.0	%			42.2	%

 

The tax effect of temporary differences which give rise to deferred tax assets and liabilities are as follows:

 

(Dollars in millions)		February 2, 2013				January 28, 2012
Deferred tax assets:
Customer liabilities		$	11.3			$	—
Rent			26.0				22.9
Financial instruments			13.3				12.1
Reserve for sales returns			3.6				3.5
Share-based payments			7.1				5.1
State net operating losses			1.0				4.9
Intangible assets			—				3.7
State taxes and interest			1.8				1.7
Transaction costs			10.7				—
Other			5.2				12.6
			80.0				66.5
Deferred tax liabilities:
Intangible assets			(380.6	)			(388.2	)
Difference in book and tax basis for property and equipment			(49.9	)			(45.6	)
Rent			(13.7	)			(21.4	)
Prepaid catalog and other prepaid expenses			(14.1	)			(11.1	)
Other			—				(0.7	)
			(458.3	)			(467.0	)
Net deferred income tax assets (liability)		$	(378.3	)		$	(400.5	)
Amounts included in consolidated balance sheets:
Current assets		$	14.7			$	10.0
Non-current assets			—				—
Current liabilities			—				—
Non-current liabilities			(393.0	)			(410.5	)
		$	(378.3	)		$	(400.5	)

Management believes that it is more likely than not that the deferred tax asset balance of $80.0 million as of February 2, 2013 will be realized. The Company recorded significant deferred taxes in connection with its Acquisition on March 7, 2011. See note 3 for more information regarding the allocation of purchase price.

As of February 2, 2013, the Company has $5.2 million in liabilities associated with uncertain tax positions (including interest and penalties of $1.0 million) reflected in other liabilities. The amount, if recognized, that would affect the effective tax rate is $6.0 million. While the Company expects the amount of unrecognized tax benefits to change in the next twelve months, the change is not expected to have a significant effect on the estimated effective annual tax rate, the results of operations or financial position. However, the outcome of tax matters is uncertain and unforeseen results can occur.

 

A reconciliation of unrecognized tax benefits is as follows:

 

(Dollars in millions)		For the Year Ended February 2, 2013				For the Period March 8, 2011 to January 28, 2012						For the Period January 30, 2011 to March 7, 2011
		(Successor)				(Successor)						(Predecessor)
Balance at beginning of period		$	7.7			$	9.5					$	9.5
Additions for tax positions taken during current year			3.4				2.2						—
Additions for tax positions taken during prior years			0.7				—						—
Reductions for tax positions taken during prior years			—				(1.4	)					—
Settlements			(0.4	)			—						—
Expirations of statutes of limitations			(2.1	)			(2.6	)					—
Balance at end of period		$	9.3			$	7.7					$	9.5

Tax returns for periods ended January 2010 through January 2012 are subject to examination by the Internal Revenue Service. The tax returns for the period ended January 2010 through March 7, 2011 are currently under examination. Various state and local jurisdiction tax authorities are in the process of examining income tax returns or hearing appeals for certain tax years ranging from 2008 to 2010. The results of these audits and appeals are not expected to have a significant effect on the results of operations or financial position.

As of February 2, 2013, the Company has state and local net operating loss carryovers of approximately $89.5 million. These carryovers are available to offset future taxable income for state and local tax purposes and expire primarily in March 2031.