JP Morgan Chase 2008 Annual Report Download - page 211

JPMorgan Chase & Co./ 2008 Annual Report 209
Note 28 – Income taxes
JPMorgan Chase and eligible subsidiaries file a consolidated U.S. fed-
eral income tax return. JPMorgan Chase uses the asset-and-liability
method required by SFAS 109 as amended by FIN 48 to provide
income taxes on all transactions recorded in the consolidated finan-
cial statements. This method requires that income taxes reflect the
expected future tax consequences of temporary differences between
the carrying amounts of assets or liabilities for book and tax purpos-
es. Accordingly, a deferred tax liability or asset for each temporary
difference is determined based upon the tax rates that the Firm
expects to be in effect when the underlying items of income and
expense are realized. JPMorgan Chase’s expense for income taxes
includes the current and deferred portions of that expense. A valua-
tion allowance is established to reduce deferred tax assets to the
amount the Firm expects to realize.
Due to the inherent complexities arising from the nature of the Firm’s
businesses, and from conducting business and being taxed in a sub-
stantial number of jurisdictions, significant judgments and estimates
are required to be made. Agreement of tax liabilities between
JPMorgan Chase and the many tax jurisdictions in which the Firm
files tax returns may not be finalized for several years. Thus, the
Firm’s final tax-related assets and liabilities may ultimately be differ-
ent than those currently reported.
The components of income tax expense (benefit) included in the
Consolidated Statements of Income were as follows.
Year ended December 31, (in millions) 2008 2007 2006
Current income tax expense
U.S. federal $ 395 $ 2,805 $ 5,512
Non-U.S. 1,009 2,985 1,656
U.S. state and local 307 343 879
Total current income tax expense 1,711 6,133 8,047
Deferred income tax expense (benefit)
U.S. federal (3,015) 1,122 (1,628)
Non-U.S. 1(185) 194
U.S. state and local 377 370 (376)
Total deferred income tax
expense (benefit) (2,637) 1,307 (1,810)
Total income tax expense (benefit)
from continuing operations (926) 7,440 6,237
Total income tax expense
from discontinued operations —— 572
Total income tax expense (benefit) $ (926) $ 7,440 $ 6,809
Total income tax expense includes $55 million, $74 million, and
$367 million of tax benefits recorded in 2008, 2007 and 2006,
respectively, as a result of tax audit resolutions.
The preceding table does not reflect the tax effect of certain items
that are recorded each period directly in stockholders’ equity and cer-
tain tax benefits associated with the Firm’s employee stock-based
compensation plans. The table does not reflect the cumulative tax
effects of initially implementing new accounting pronouncements in
2007 and 2006. The tax effect of all items recorded directly to stock-
holders’ equity was an increase in stockholders’ equity of $3.0 billion,
$159 million and $885 million in 2008, 2007 and 2006, respectively.
U.S. federal income taxes have not been provided on the undistrib-
uted earnings of certain non-U.S. subsidiaries, to the extent that such
earnings have been reinvested abroad for an indefinite period of
time. During 2008, as part of JPMorgan Chase’s periodic review of
the business requirements and capital needs of its non-U.S. sub-
sidiaries, combined with the formation of specific strategies and
steps taken to fulfill these requirements and needs, the Firm deter-
mined that the undistributed earnings of certain of its subsidiaries,
for which U.S. federal income taxes had been provided, will remain
indefinitely reinvested to fund the current and future growth of the
related businesses. As management does not intend to use the earn-
ings of these subsidiaries as a source of funding for its U.S. opera-
tions, such earnings will not be distributed to the U.S. in the foresee-
able future. This determination resulted in the release of deferred tax
liabilities and the recognition of an income tax benefit of $1.1 billion
associated with these undistributed earnings. For 2008, pretax earn-
ings of approximately $2.5 billion were generated that will remain
indefinitely invested in these subsidiaries. At December 31, 2008, the
cumulative amount of undistributed pretax earnings in these sub-
sidiaries approximated $12.9 billion. If the Firm were to record a
deferred tax liability associated with these undistributed earnings,
the amount would be $2.9 billion at December 31, 2008.
The tax expense (benefit) applicable to securities gains and losses for
the years 2008, 2007 and 2006 was $608 million, $60 million and
$(219) million, respectively.
A reconciliation of the applicable statutory U.S. income tax rate to
the effective tax rate for continuing operations for the past three
years is shown in the following table.
Year ended December 31, 2008 2007 2006
Statutory U.S. federal tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting from:
U.S. state and local income taxes, net
of federal income tax benefit 16.0 2.0 2.1
Tax-exempt income (14.8) (2.4) (2.2)
Non-U.S. subsidiary earnings (53.6) (1.1) (0.5)
Business tax credits (24.5) (2.5) (2.5)
Bear Stearns equity losses 5.7 ——
Other, net 2.8 1.6 (0.5)
Effective tax rate (33.4)% 32.6% 31.4%