JP Morgan Chase 2009 Annual Report Download - page 237

JPMorgan Chase & Co./2009 Annual Report 235
Deferred income tax expense/(benefit) results from differences be-
tween assets and liabilities measured for financial reporting versus
income-tax return purposes. The significant components of deferred
tax assets and liabilities are reflected in the following table as of
December 31, 2009 and 2008.
December 31, (in millions) 2009 2008
Deferred tax assets
Allowance for loan losses $ 12,376 $ 8,029
Employee benefits 4,424 4,841
Allowance for other than loan losses 3,995 3,686
Non-U.S. operations 1,926 2,504
Tax attribute carryforwards 912 1,383
Fair value adjustments(a) — 2,565
Gross deferred tax assets $ 23,633 $ 23,008
Deferred tax liabilities
Depreciation and amortization $ 4,832 $ 4,681
Leasing transactions 2,054 1,895
Non-U.S. operations 1,338 946
Fee income 670 1,015
Fair value adjustments(a) 328 —
Other, net 147 202
Gross deferred tax liabilities $ 9,369 $ 8,739
Valuation allowance 1,677 1,266
Net deferred tax asset $ 12,587 $ 13,003
(a) Includes fair value adjustments related to AFS securities, cash flows hedging
activities and other portfolio investments.
JPMorgan Chase has recorded deferred tax assets of $912 million
at December 31, 2009, in connection with U.S. federal, state and
local and non-U.S. subsidiary net operating loss carryforwards. At
December 31, 2009, the U.S. federal net operating loss carryfor-
ward was approximately $1.2 billion, the state and local net oper-
ating loss carryforwards were approximately $4.4 billion and the
non-U.S. subsidiary net operating loss carryforward was $768
million.
If not utilized, the U.S. federal net operating loss carryforward will
expire in 2027 and the state and local net operating loss carryfor-
wards will expire in years 2026, 2027 and 2028. The non-U.S.
subsidiary net operating loss carryforward has an unlimited carry-
forward period.
A valuation allowance has been recorded for losses associated with
non-U.S. subsidiaries and certain portfolio investments, and certain
state and local tax benefits. The increase in the valuation allowance
from 2008 was predominantly related to non-U.S. subsidiaries.
At December 31, 2009, 2008 and 2007, JPMorgan Chase’s unrecog-
nized tax benefits, excluding related interest expense and penalties,
were $6.6 billion, $5.9 billion and $4.8 billion, respectively, of which
$3.5 billion, $2.9 billion and $1.3 billion, respectively, if recognized,
would reduce the annual effective tax rate. As JPMorgan Chase is
presently under audit by a number of tax authorities, it is reasonably
possible that unrecognized tax benefits could significantly change
over the next 12 months, which could also significantly impact
JPMorgan Chase’s quarterly and annual effective tax rates.
The following table presents a reconciliation of the beginning and
ending amount of unrecognized tax benefits for the years ended
December 31, 2009, 2008 and 2007.
Unrecognized tax benefits
Year ended December 31,
(in millions) 2009 2008 2007
Balance at January 1,
$ 5,894 $ 4,811 $ 4,677
Increases based on tax positions
related to the current period
584 890 434
Decreases based on tax positions
related to the current period
(6) (109) (241
)
Increases associated with the
Bear Stearns merger
— 1,387 —
Increases based on tax positions
related to prior periods
703 501 903
Decreases based on tax positions
related to prior periods
(322) (1,386) (791
)
Decreases related to settlements
with taxing authorities
(203) (181) (158
)
Decreases related to a lapse of
applicable statute of limitations
(42) (19) (13
)
Balance at December 31,
$ 6,608 $ 5,894 $ 4,811
Pretax interest expense and penalties related to income tax liabili-
ties recognized in income tax expense were $154 million ($101
million after-tax) in 2009; $571 million ($346 million after-tax) in
2008; and $516 million ($314 million after-tax) in 2007. Included
in accounts payable and other liabilities at December 31, 2009 and
2008, in addition to the Firm’s liability for unrecognized tax bene-
fits, was $2.4 billion and $2.3 billion, respectively, for income tax-
related interest and penalties, of which the penalty component was
insignificant.
JPMorgan Chase is subject to ongoing tax examinations by the tax
authorities of the various jurisdictions in which it operates, includ-
ing U.S. federal, state and local, and non-U.S. jurisdictions. The
Firm’s consolidated federal income tax returns are presently under
examination by the Internal Revenue Service (“IRS”) for the years
2003, 2004 and 2005. The consolidated federal income tax returns
of Bear Stearns for the years ended November 30, 2003, 2004 and
2005, are also under examination. Both examinations are expected
to conclude in 2010.
The IRS audits of the consolidated federal income tax returns of
JPMorgan Chase for the years 2006, 2007 and 2008, and for Bear
Stearns for the years ended November 30, 2006, November 30,
2007, and for the period December 1, 2007, through May 30, 2008,
are expected to commence in 2010. Administrative appeals are
pending with the IRS relating to prior periods that were examined.
For 2002 and prior years, refund claims relating to income and credit
adjustments, and to tax attribute carrybacks, for JPMorgan Chase and
its predecessor entities, including Bank One, have been filed.
Amended returns to reflect refund claims primarily attributable to net
operating losses and tax credit carrybacks will be filed for the final
Bear Stearns U.S. federal consolidated tax return for the period
December 1, 2007, through May 30, 2008, and for prior years.
On January 1, 2007, the Firm adopted FASB guidance which ad-
dresses the recognition and measurement of tax positions taken or
expected to be taken, and also guidance on derecognition, classifi-
cation, interest and penalties, accounting in interim periods and
disclosure, to all of its income tax positions, resulting in a $436
million cumulative effect increase to retained earnings, a reduction
in goodwill of $113 million and a $549 million decrease in the
liability for income taxes.