Citibank 2008 Annual Report Download - page 29

INCOME TAXES
The Company is subject to the income tax laws of the U.S., its states and
municipalities and the foreign jurisdictions in which the Company operates.
These tax laws are complex and subject to different interpretations by the
taxpayer and the relevant governmental taxing authorities. In establishing a
provision for income tax expense, the Company must make judgments and
interpretations about the application of these inherently complex tax laws.
The Company must also make estimates about when in the future certain
items will affect taxable income in the various tax jurisdictions, both
domestic and foreign.
Disputes over interpretations of the tax laws may be subject to review/
adjudication by the court systems of the various tax jurisdictions or may be
settled with the taxing authority upon examination or audit.
The Company treats interest and penalties on income taxes as a
component of income tax expense.
Deferred taxes are recorded for the future consequences of events that
have been recognized in the financial statements or tax returns, based upon
enacted tax laws and rates. Deferred tax assets (DTAs) are recognized subject
to management’s judgment that realization is more likely than not.
Although realization is not assured, the Company believes that the
realization of the recognized net deferred tax asset of $44.5 billion is more
likely than not based on expectations as to future taxable income in the
jurisdictions in which it operates and available tax planning strategies, as
defined in SFAS 109, that could be implemented if necessary to prevent a
carryforward from expiring. The Company’s net deferred tax asset (DTA) of
$44.5 billion consists of approximately $36.5 billion of net U.S. Federal DTAs,
$4 billion of net state DTAs and $4 billion of net foreign DTAs. Included in
the net federal DTA of $36.5 billion are deferred tax liabilities of $4 billion
that will reverse in the relevant carryforward period and may be used to
support the DTA. The major components of the U.S. Federal DTA are $10.5
billion in foreign tax credit carryforwards, $4.6 billion in a net operating loss
carryforward, $0.6 billion in a general business credit carryforward, $19.9
billion in net deductions which have not yet been taken on a tax return, and
$0.9 billion in compensation deductions which reduced additional paid-in
capital in January, 2009 and for which SFAS 123(R) did not permit any
adjustment to such DTA at December 31, 2008 because the related stock
compensation was not yet deductible to the Company. In general, the
Company would need to generate approximately $85 billion of taxable
income during the respective carryforward periods to fully realize its federal,
state and local DTAs.
As a result of the losses incurred in 2008, the Company is in a three-year
cumulative pretax loss position at December 31, 2008. A cumulative loss
position is considered significant negative evidence in assessing the
realizability of a DTA. The Company has concluded that there is sufficient
positive evidence to overcome this negative evidence. The positive evidence
includes two means by which the Company is able to fully realize its DTA.
First, the Company forecasts sufficient taxable income in the carryforward
period, exclusive of tax planning strategies, even under stressed scenarios.
Secondly, the Company has sufficient tax planning strategies, including
potential sales of businesses and assets that could realize the excess of
appreciated value over the tax basis of its assets, in an amount sufficient to
fully realize its DTA. The amount of the deferred tax asset considered
realizable, however, could be significantly reduced in the near term if
estimates of future taxable income during the carryforward period are
significantly lower than forecasted due to further decreases in market
conditions.
Based upon the foregoing discussion, as well as tax planning
opportunities and other factors discussed below, the U.S. and New York State
and City net operating loss carryforward period of 20 years provides enough
time to utilize the DTAs pertaining to the existing net operating loss
carryforwards and any NOL that would be created by the reversal of the
future net deductions which have not yet been taken on a tax return.
The U.S. foreign tax credit carryforward period is 10 years. In addition,
utilization of foreign tax credits is restricted to 35% of foreign source taxable
income in that year. Due to the passage of the American Jobs Creation Act of
2004, overall domestic losses that the Company has incurred of
approximately $35 billion are allowed to be reclassified as foreign source
income to the extent of 50% of domestic source income produced in
subsequent years and are in fact sufficient to cover the foreign tax credits
being carried forward. As such, the foreign source taxable income limitation
will not be an impediment to the foreign tax credit carryforward usage as
long as the Company can generate sufficient domestic taxable income within
the 10-year carryforward period. Regarding the estimate of future taxable
income, the Company has projected its pretax earnings based upon the
“core” businesses that the Company intends to conduct going forward, as
well as Smith Barney and Primerica Financial Services. These “core”
businesses have produced steady and strong earnings in the past.
The Company has taken steps to ring-fence certain legacy assets to
minimize any losses from the legacy assets going forward. During 2008, the
“core” businesses have been negatively affected by the large increase in
consumer credit losses during this sharp economic downturn cycle. The
Company has already taken steps to reduce its cost structure. In addition, its
funding structure has been changed by the issuance of preferred stock, which
is funded by non-tax deductible dividends, as opposed to debt type securities,
which are funded by tax deductible interest payments. Taking these items
into account, the Company is projecting that it will generate sufficient pretax
earnings within the 10-year carryforward period alluded to above to be able
to fully utilize the foreign tax credit carryforward, in addition to any foreign
tax credits produced in such period.
The Company has also examined tax planning strategies available to it in
accordance with SFAS 109 which would be employed, if necessary, to prevent
a carryforward from expiring. These strategies include repatriating low taxed
foreign earnings for which an APB 23 assertion has not been made,
accelerating taxable income into or deferring deductions out of the latter
years of the carryforward period with reversals to occur after the carryforward
period (e.g., selling appreciated intangible assets and electing straight-line
depreciation), holding onto AFS debt securities with losses until they mature
and selling certain assets which produce tax exempt income, while
purchasing assets which produce fully taxable income. In addition, the sale
or restructuring of certain businesses, such as the announced Smith Barney
joint venture with Morgan Stanley with an estimated pretax gain of $9.5
billion, can produce significant taxable income within the relevant
carryforward periods.
See Note 11 to the Consolidated Financial Statements on page 152 for a
further description of the Company’s tax provision and related income tax
assets and liabilities.
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