Capital One 2009 Annual Report Download - page 171

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The Company has an acquired Federal net operating loss carryforward of $249.7 million attributable to Chevy Chase Bank that
expires in 2028. Under IRS rules, the Company’s ability to utilize this loss against future income is limited to $33 million per year.
The Company has state net operating loss carryforwards with a tax value of $113 million that expire from 2010 to 2029. The
Company has a foreign net operating loss carryforward of $15.3 million with no expiration date. The Company has foreign tax credit
carryforwards of $131.1 million that expire in 2014 through 2018.
The valuation allowance was increased by $40.8 million to adjust the tax benefit of certain state deferred tax assets and net operating
loss carryforwards to the amount the Company has determined is more likely than not to be realized.
The deferred tax liability for original issue discount represents interchange, late fees, cash advance fees and overlimit fees. These
items are generally treated as original issue discount (“OID”) for tax purposes and recognized over the life of the related credit card
receivables. These items are recognized in the income statement as income in the year earned. For income statement purposes, late
fees are reported as interest income, and interchange, cash advance fees and overlimit fees are reported as non-interest income.
December 31
2009
2008
Deferred revenue:
OID—late fees ..........................................................................................................................................
.
$ 512,023 $ 774,403
OID—all other ..........................................................................................................................................
.
1,460,687 905,031
Gross deferred tax liability ........................................................................................................................
.
1,972,710 1,679,434
N
et federal deferred tax liability ...............................................................................................................
.
$ 714,557 $ 605,769
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and Interpretation
of FASB Statement No. 109 (“ASC 740-10/FIN 48”), effective January 1, 2007. As a result of the adoption, the Company recorded a
$29.7 million reduction in retained earnings.
ASC 740-10/FIN 48 clarifies the accounting for uncertainty in income taxes, and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC
740-10/FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.
During 2009, 2008 and 2007, $(7.5) million, $30.5 million and $34.3 million, respectively, of net interest was included in income tax
expense. The accrued balance of interest and penalties related to unrecognized tax benefits is presented in the table below.
A reconciliation of the change in unrecognized tax benefits from January 1, 2008 to December 31, 2009 is as follows:
Gross
Unrecognized
Tax Benefits
Accrued
Interest and
Penalties
Gross Tax,
Interest and
Penalties
Balance at January 1, 2008 ............................................................................................... $ 540,502 $ 140,237 $ 680,739
Additions for tax positions related to the current year ...................................................... 21,185 — 21,185
Additions for tax positions related to prior years .............................................................. 49,255 46,985 96,240
Reductions for tax positions related to prior years due to IRS and other settlements ....... (53,879) (11,727) (65,606)
Additions for tax positions related to acquired entities in prior years, offset to
goodwill ....................................................................................................................... 13,563 498 14,061
Other reductions for tax positions related to prior years ................................................... (9,546) (174) (9,720)
Balance at December 31, 2008 ......................................................................................... $ 561,080 $ 175,819 $ 736,899
Additions for tax positions related to the current year ...................................................... 7,777 — 7,777
Additions for tax positions related to prior years .............................................................. 43,217 35,432 78,649
Reductions for tax positions related to prior years due to IRS and other settlements ....... (255,147) (110,059) (365,206)
Additions for tax positions related to acquired entities in prior years, offset to
goodwill ....................................................................................................................... 6,906 1,711 8,617
Reductions resulting from lapsing statutes of limitation ................................................... (4,941) (2,327) (7,268)
Balance at December 31, 2009 ......................................................................................... $ 358,892 $ 100,576 $ 459,468
Portion of balance at December 31, 2009 that, if recognized, would impact the
effective income tax rate .............................................................................................. $ 109,346 $ 66,919 $ 176,265