Discover 2009 Annual Report Download - page 141

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences
are expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely
than not to be realized. The Company evaluates the likelihood of realizing its deferred tax assets by estimating sources of
future taxable income and the impact of tax planning strategies. Significant components of the Company’s net deferred
income taxes, which are included in other assets in the consolidated statements of financial condition, were as follows
(dollars in thousands):
November 30,
2009 2008
Deferred tax assets:
Allowance for loan losses ............................................................................................................................................... $ 703,563 $ 546,306
Compensation and benefits............................................................................................................................................. 68,219 49,611
Unrealized gains/losses ................................................................................................................................................. 72,585 74,254
Customer fees and rewards............................................................................................................................................. 51,123 118,403
Unearned income.......................................................................................................................................................... — 1,169
Other .......................................................................................................................................................................... 126,705 131,497
Total deferred tax assets before valuation allowance........................................................................................................ 1,022,195 921,240
Valuation allowance................................................................................................................................................... (24,545) —
Total deferred tax assets (net of valuation allowance).................................................................................................... 997,650 921,240
Deferred tax liabilities:
Depreciation and software amortization............................................................................................................................ (48,421) (41,011)
Securitizations .............................................................................................................................................................. (45,209) (113,983)
Unearned income.......................................................................................................................................................... (41,593) —
Other .......................................................................................................................................................................... (72,900) (73,216)
Total deferred tax liabilities ...................................................................................................................................... (208,123) (228,210)
Net deferred tax assets......................................................................................................................................... $ 789,527 $ 693,030
Included in other deferred tax assets at November 30, 2009, is a $63.4 million capital loss carryforward for U.S.
federal income tax purposes with a tax benefit of $22.2 million that expires in 2013 and capital loss carryforwards for
state purposes with a tax benefit of $2.4 million that expire from 2013-2023. These deferred tax assets were created in
connection with the sale of the Goldfish business in March 2008. In 2009, the Company concluded there was no prudent
or feasible tax planning strategy that would allow it to realize the benefits of substantially all the federal and state capital
losses within the carryforward period. As a result, the Company recorded a full valuation allowance against these
deferred tax assets in 2009.
A reconciliation of beginning and ending unrecognized tax benefits is as follows (dollars in thousands):
Balance as of December 1, 2008(1) ............................................................................................................................................................ $285,619
Additions:
Current year tax positions ..................................................................................................................................................................... 41,943
Prior year tax positions......................................................................................................................................................................... 32,089
Reductions:
Prior year tax positions......................................................................................................................................................................... (19,719)
Settlements with taxing authorities .......................................................................................................................................................... (32,508)
Expired statute of limitations .................................................................................................................................................................. (1,703)
Balance as of November 30, 2009(1) ......................................................................................................................................................... $305,721
(1) At December 1, 2008 and November 30, 2009, amounts include $65.8 million and $81.9 million, respectively, of unrecognized tax benefits, which, if recognized, would favorably affect the
effective tax rate.
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