Dollar Tree, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

INCOME TAXES

INCOME TAXES

9 Months Ended

Oct. 31, 2015

INCOME TAXES

Our effective tax rate was 34.3% for the 13 weeks ended October 31, 2015 compared with 36.5% for the 13 weeks ended November 1, 2014 and 44.2% for the 39 weeks ended October 31, 2015 compared with 37.6% for the 39 weeks ended November 1, 2014. The decrease in expense for the 13 weeks ended October 31, 2015 is primarily attributable to an increase in work opportunity tax credits in relation to income for the third quarter and a decrease in state tax expense. The increase in expense for the nine months ended October 31, 2015 was a result of Acquisition-related costs that were nondeductible for tax purposes.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are classified on the accompanying consolidated balance sheets based on the classification of the underlying asset or liability. Significant components of the Company's net deferred tax assets (liabilities) follow:



(in millions)	October 31, 2015			January 31, 2015
Deferred tax assets:
Deferred rent	$	46.2		$	41.0
Accrued expenses	65.7			37.6
Net operating losses and credit carryforwards	51.0			31.0
Accrued compensation expense	60.5			33.8
Other	1.3			5.1
Total deferred tax assets	224.7			148.5
Valuation allowance	(22.1		)	(13.8		)
Deferred tax assets, net	202.6			134.7
Deferred tax liabilities:
Property and equipment	(290.4		)	(48.7		)
Other intangibles	(1,426.6		)	(18.7		)
Prepaid expenses	(3.6		)	(3.0		)
Inventory	(0.9		)	(5.4		)
Total deferred tax liabilities	(1,721.5		)	(75.8		)
Net deferred tax asset (liability)	$	(1,518.9	)	$	58.9

Deferred tax liabilities have been provided for the tax effect of the difference between the book and tax basis in the assets. The increase in the deferred tax liability was primarily generated from the recording of the Family Dollar tradename, favorable lease rights, inventory and property plant and equipment.

A valuation allowance of $22.1 million, net of federal tax benefits, has been provided principally for certain state credit carryforwards and net operating loss carryforwards and has increased since January 31, 2015 as a result of the Acquisition. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred taxes will not be realized. Based upon the availability of carrybacks of future deductible amounts to the past two years’ taxable income and the Company's projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes it is more likely than not the remaining existing deductible temporary differences will reverse during periods in which carrybacks are available or in which the Company generates net taxable income.

The Company is participating in the Internal Revenue Service (“IRS”) Compliance Assurance Program (“CAP”) for the 2015 fiscal year. This program accelerates the examination of key transactions with the goal of resolving any issues before the tax return is filed. Dollar Tree's federal tax returns have been examined and all issues have been settled through the fiscal 2014 tax year. The statute of limitations is still open for Family Dollar's tax returns for the fiscal year ended August 25, 2012 and forward. In general, fiscal years 2012 and forward are within the statute of limitations for state tax purposes. The statute of limitations is still open prior to 2012 for some states.

The balance for unrecognized tax benefits at October 31, 2015, was $33.9 million. The total amount of unrecognized tax benefits at October 31, 2015, that, if recognized, would affect the effective tax rate was $24.1 million (net of the federal tax benefit). The following is a reconciliation of the Company’s total gross unrecognized tax benefits:



	October 31, 2015			January 31, 2015
Beginning Balance	$	6.5		$	5.5
Additions, acquisition of Family Dollar	28.2			—
Additions, based on tax positions related to current year	0.2			0.6
Additions for tax positions of prior years	—			0.9
Lapses in statutes of limitation	(1.0		)	(0.5		)
Ending balance	$	33.9		$	6.5

The increase in unrecognized tax benefits for fiscal 2015 is primarily related to the Acquisition.

United States income taxes have not been provided on accumulated but undistributed earnings of Dollar Tree’s foreign subsidiaries as the Company intends to permanently reinvest the earnings. To date, the earnings and related taxes of the legacy Dollar Tree foreign subsidiaries are negligible. The Company has provided United States income taxes on accumulated but undistributed earnings for Family Dollar’s foreign subsidiaries as of the July 6, 2015 acquisition date.