Citibank 2010 Annual Report Download - page 143

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As a result of the losses incurred in 2008 and 2009, Citi is in a three-
year cumulative pretax loss position at December 31, 2010. A cumulative
loss position is considered significant negative evidence in assessing the
realizability of a DTA. Citi has concluded that there is sufficient positive
evidence to overcome this negative evidence. The positive evidence includes
two means by which Citi is able to fully realize its DTAs. First, Citi forecasts
sufficient taxable income in the carryforward period, exclusive of tax
planning strategies, even under stressed scenarios. Second, Citi has sufficient
tax planning strategies, including potential sales of businesses and assets, in
which it could realize the excess of appreciated value over the tax basis of its
assets. The amount of the DTAs considered realizable, however, is necessarily
subject to Citi’s estimates of future taxable income in the jurisdictions in
which it operates during the respective carryforward periods, which is in turn
subject to overall market and global economic conditions.
Based upon the foregoing discussion, as well as tax planning
opportunities and other factors discussed below, Citi believes that the U.S.
federal 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 that have not yet been taken on a
tax return. The U.S. federal NOL carryforward component of the DTAs of
$3.9 billion at December 31, 2010 is expected to be utilized in 2011 based
upon Citi’s current expectations of future taxable income.
The U.S. foreign tax credit carryforward period is 10 years. In addition,
utilization of foreign tax credits in any year is restricted to 35% of foreign
source taxable income in that year. Further, overall domestic losses that
Citi has incurred of approximately $47 billion are allowed to be reclassified
as foreign source income to the extent of 50% of domestic source income
produced in subsequent years and such resulting foreign source income
would in fact be 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 Citi can
generate sufficient domestic taxable income within the 10-year carryforward
period. Under U.S. tax law, NOL carry-forwards must generally be used
against taxable income before foreign tax credits (FTCs) or general business
credits (GBCs) can be utilized.
Regarding the estimate of future taxable income, Citi has projected its
pretax earnings, predominantly based upon the “core” businesses in Citicorp
that Citi intends to conduct going forward. These “core” businesses have
produced steady and strong earnings in the past. Citi has already taken steps
to reduce its cost structure. In 2010, operating trends were positive and credit
costs improved. Taking these items into account, Citi is projecting that it will
generate sufficient pretax earnings within the 10-year carryforward period
referenced above to be able to fully utilize the foreign tax credit carryforward,
in addition to any foreign tax credits produced in such period. Until the
U.S. federal NOL carryforward is fully utilized, the FTCs and GBCs will likely
continue to increase. Citi’s net DTAs will decline as additional domestic GAAP
taxable income is generated.
Citi has also examined tax planning strategies available to it in
accordance with ASC 740 that would be employed, if necessary, to prevent a
carryforward from expiring. These strategies include repatriating low-taxed
foreign source earnings for which an assertion that the earnings have
been indefinitely reinvested has not been made, accelerating U.S. taxable
income into or deferring U.S. tax deductions out of the latter years of the
carryforward period (e.g., selling appreciated intangible assets and electing
straight-line depreciation), accelerating deductible temporary differences
outside the U.S., holding onto available-for-sale debt securities with losses
until they mature and selling certain assets that produce tax-exempt income,
while purchasing assets that produce fully taxable income. In addition,
the sale or restructuring of certain businesses can produce significant U.S.
taxable income within the relevant carryforward periods.
Citi’s ability to utilize its DTAs to offset future taxable income may be
significantly limited if Citi experiences an “ownership change,” as defined in
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).
See “Risk Factors” and Note 10 to the Consolidated Financial Statements
for a further description of Citi’s tax provision and related income tax assets
and liabilities.
Approximately $13 billion of the net DTA is included in Tier 1 Common
and Tier 1 Capital.
LEGAL RESERVES
See the discussion in Note 29 to the Consolidated Financial Statements for
information regarding Citi’s policies on establishing reserves for legal and
regulatory claims.
ACCOUNTING CHANGES AND FUTURE APPLICATION
OF ACCOUNTING STANDARDS
See Note 1 to the Consolidated Financial Statements for a discussion
of “Accounting Changes” and the “Future Application of Accounting
Standards.”