The Hartford 2007 Annual Report Download - page 50

50
• During 2005, the Company recorded an after-tax expense of $46, related to the termination of a provision of an agreement with a
mutual fund distribution partner of the Company’ s retail mutual funds.
• Partially offsetting the increase in Life’ s net income was a $63, after-tax, charge related to the unlock. See Unlock and Sensitivity
Analysis within the Critical Accounting Estimates section of the MD&A for further information on the unlock.
Net Realized Capital Gains and Losses
See “Investment Results” in the Investments section and the "Realized Capital Gains and Losses by Segment" table within the Life
section of the MD&A.
Income Taxes
The effective tax rate for 2007, 2006 and 2005 was 26%, 24% and 24%, respectively. The principal causes of the difference between
the effective rate and the U.S. statutory rate of 35% for 2007, 2006 and 2005 were tax-exempt interest earned on invested assets and the
separate account dividends received deduction (“DRD”). Income taxes paid in 2007, 2006 and 2005 were $451, $179 and $447,
respectively. For additional information, see Note 13 of Notes to Consolidated Financial Statements.
The separate account DRD is estimated for the current year using information from the prior year-end, adjusted for current year equity
market performance. The estimated DRD is generally updated in the third quarter for the provision-to-filed-return adjustments, and in
the fourth quarter based on current year ultimate mutual fund distributions and fee income from the Company’ s variable insurance
products. The actual current year DRD can vary from estimates based on, but not limited to, changes in eligible dividends received by
the mutual funds, amounts of distributions from these mutual funds, amounts of short-term capital gains at the mutual fund level and the
Company’ s taxable income before the DRD. The Company recorded benefits of $155, $174 and $184 related to the separate account
DRD in the years ended December 31, 2007, December 31, 2006 and December 31, 2005, respectively. The 2007 benefit included a tax
of $1 related to a true-up of the prior year tax return, the 2006 benefit included a benefit of $6 related to true-ups of prior years’ tax
returns and the 2005 benefit included a benefit of $3 related to a true-up of the prior year tax return.
In Revenue Ruling 2007-61, issued on September 25, 2007, the IRS announced its intention to issue regulations with respect to certain
computational aspects of DRD on separate account assets held in connection with variable annuity contracts. Revenue Ruling 2007-61
suspended Revenue Ruling 2007-54, issued in August 2007 that purported to change accepted industry and IRS interpretations of the
statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be
subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to
raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and
substance of any such regulations are unknown, but they could result in the elimination of some or all of the separate account DRD tax
benefit that the Company receives. Management believes that it is highly likely that any such regulations would apply prospectively
only.
The Company receives a foreign tax credit (“FTC”) against its U.S. tax liability for foreign taxes paid by the Company including
payments from its separate account assets. The separate account FTC is estimated for the current year using information from the most
recent filed return, adjusted for the change in the allocation of separate account investments to the international equity markets during
the current year. The actual current year FTC can vary from the estimates due to actual FTCs passed through by the mutual funds. The
Company recorded benefits of $11 and $17 related to separate account FTC in the years ended December 31, 2007 and December 31,
2006, respectively. These amounts included benefits related to true-ups of prior years’ tax returns of $0 and $7 in 2007 and 2006,
respectively.
The Company’ s unrecognized tax benefits increased by $68 during 2007 as a result of tax positions taken on the Company’ s 2006 tax
return and expected to be taken on its 2007 tax return, bringing the total unrecognized tax benefits to $76 as of December 31, 2007.
This entire amount, if it were recognized, would affect the effective tax rate.