JP Morgan Chase 2009 Annual Report Download - page 236

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report
234
Note 27 – Income taxes
JPMorgan Chase and its eligible subsidiaries file a consolidated U.S.
federal income tax return. JPMorgan Chase uses the asset and
liability method to provide income taxes on all transactions re-
corded in the Consolidated Financial Statements. This method
requires that income taxes reflect the expected future tax conse-
quences of temporary differences between the carrying amounts of
assets or liabilities for book and tax purposes. Accordingly, a de-
ferred tax asset or liability for each temporary difference is deter-
mined based on 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 valuation 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 substantial 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 ulti-
mately be different from those currently reported.
The components of income tax expense/(benefit) included in the
Consolidated Statements of Income were as follows for each of the
years ended December 31, 2009, 2008 and 2007.
Year ended December 31,
(in millions) 2009 2008 2007
Current income tax expense
U.S. federal $ 4,698 $ 395 $ 2,805
Non-U.S. 2,368 1,009 2,985
U.S. state and local 971 307 343
Total current income
tax expense 8,037 1,711 6,133
Deferred income tax expense/
(benefit)
U.S. federal (2,867) (3,015) 1,122
Non-U.S. (454)
1 (185)
U.S. state and local (301)
377 370
Total deferred income
tax expense/(benefit) (3,622)
(2,637) 1,307
Total income tax expense/
(benefit) before extraor-
dinary gain $ 4,415 $ (926)
$ 7,440
Total income tax expense includes $280 million, $55 million and
$74 million of tax benefits recorded in 2009, 2008 and 2007,
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
certain tax benefits associated with the Firm’s employee stock-
based compensation plans. The table also does not reflect the
cumulative tax effects of initially implementing new accounting
pronouncements in 2007. The tax effect of all items recorded
directly to stockholders’ equity resulted in a decrease of $3.7 billion
in 2009 and an increase in stockholders’ equity of $3.0 billion and
$159 million in 2008 and 2007, 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.
subsidiaries, 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 be
indefinitely reinvested to fund the current and future growth of the
related businesses. As management does not intend to use the
earnings of these subsidiaries as a source of funding for its U.S.
operations, such earnings will not be distributed to the U.S. in the
foreseeable 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
2009, pretax earnings of approximately $2.8 billion were generated
that will be indefinitely reinvested in these subsidiaries. At Decem-
ber 31, 2009, the cumulative amount of undistributed pretax
earnings in these subsidiaries approximated $15.7 billion. If the
Firm were to record a deferred tax liability associated with these
undistributed earnings, the amount would be $3.6 billion at De-
cember 31, 2009.
The tax expense applicable to securities gains and losses for the
years 2009, 2008 and 2007 was $427 million, $608 million, and
$60 million, respectively.
A reconciliation of the applicable statutory U.S. income tax rate to
the effective tax rate for each of the years ended December 31,
2009, 2008 and 2007, is presented in the following table.
Year ended December 31,
2009 2008 2007
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 U.S. federal
income tax benefit 2.7 16.0 2.0
Tax-exempt income (3.9) (14.8) (2.4 )
Non-U.S. subsidiary earnings (1.7) (53.6) (1.1 )
Business tax credits (5.5) (24.5) (2.5
)
Bear Stearns equity losses — 5.7 —
Other, net 0.9 2.8 1.6
Effective tax rate 27.5% (33.4)% 32.6 %