Safeway 2006 Annual Report Download - page 72

SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant components of the Company’s net deferred tax liability at year end were as follows (in millions):
2006 2005
Deferred tax assets:
Workers’ compensation and other claims $ 201.3 $ 212.6
Reserves not currently deductible 52.0 58.4
Accrued claims and other liabilities 39.2 44.9
Employee benefits 117.0 95.4
Charitable contribution carryforwards 58.5 52.8
Operating loss carryforwards 31.2 81.3
Other assets 31.9 51.4
531.1 596.8
Valuation allowance (2.7) (81.3)
$ 528.4 $ 515.5
2006 2005
Deferred tax liabilities:
Property $(381.7) $(432.2)
Pension costs (8.0) (69.0)
Inventory (218.8) (200.9)
Investments in foreign operations (46.2) (44.8)
(654.7) (746.9)
Net deferred tax liability (126.3) (231.4)
Less: current liability (8.9) (8.3)
Long-term portion $(117.4) $(223.1)
In April 2006, Safeway announced that it had settled a federal income tax refund claim for the years 1992 through
1999 for costs associated with debt financing. The federal refund consisted of a tax refund of $259.2 million and
interest, net of tax, earned on that refund of $60.8 million. The state income tax refunds received in 2006 consisted of
$3.1 million of tax and $1.8 million of interest, net of tax.
The federal and state tax refunds of $262.3 million were recorded in 2006 as an increase to additional paid-in capital
since the tax deductions associated with the debt financing exceeded the previously recognized book expense. The
interest earned reduced income tax expense by $62.6 million, net of tax, in 2006.
Safeway has outstanding claims for refunds of income tax and interest related to this same matter in several states. As
of December 30, 2006, the Company expects these state tax and interest refunds will be approximately $27 million
and $10 million, respectively, net of tax. Collection of these funds may take several years.
As a result of acquiring the remaining minority interests in Safeway.com in 2006, the Company eliminated the valuation
allowance on Safeway.com’s net operating loss (“NOL”) carryforwards, which it expects to deduct in its income tax
returns for 2006 and 2007. The expected utilization of these NOL carryforwards resulted in a tax asset of $84.8 million,
which reduced income tax expense by $13.6 million and goodwill by $71.2 million in the fourth quarter of 2006.
At December 30, 2006, the Company had NOL carryforwards for federal income tax purposes of approximately $85.3
million and NOL carryforwards for state purposes of approximately $24.8 million. These carryforwards expire at various
dates from 2011 through 2026. The Company also had federal and state charitable contribution carryforwards of
$158.7 million which expire from 2008 through 2011. During the fourth quarter of 2006, the Company recorded a
valuation allowance against $7.1 million of the charitable contribution carryforwards which caused an increase in
income tax expense of $2.7 million. The valuation allowance was recorded when it became more likely than not that a
portion of the deferred tax asset would not be realized. The Company also had state tax credit carryforwards of $9.8
million which have no expiration date.
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