Wells Fargo 2009 Annual Report Download - page 177

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December 31,
2009 2008 2007
(in millions) Amount Rate Amount Rate Amount Rate
Statutory federal income tax expense and rate $6,162 35.0% $1,140 35.0% $4,070 35.0%
Change in tax rate resulting from:
State and local taxes on income, net of
federal income tax benefit 468 2.7 94 2.9 359 3.1
Tax-exempt interest (260) (1.5) (130) (4.0) (81) (0.7)
Excludable dividends (253) (1.4) (186) (5.7) (23) (0.2)
Other deductible dividends (29) (0.2) (71) (2.2) (70) (0.6)
Tax credits (533) (3.0) (266) (8.2) (256) (2.2)
Life insurance (257) (1.5) (67) (2.0) (58) (0.5)
Leveraged lease tax expense 400 2.3 —— ——
Other (367) (2.1) 88 2.7 (371) (3.2)
Effective income tax expense and rate $5,331 30.3% $ 602 18.5% $3,570 30.7%
The table below reconciles the statutory federal income
tax expense and rate to the effective income tax expense and
rate. Effective January 1, 2009, we adopted new accounting
guidance that changed the way noncontrolling interests are
presented in the income statement such that the consolidated
Income tax expense for 2009 increased primarily due
to higher pre-tax earnings partially offset by favorable
tax settlements.
The change in unrecognized tax benefits follows:
Year ended December 31,
(in millions) 2009 2008
Balance at beginning of year $ 7,521 2,695
Additions:
For tax positions related
to the current year 438 420
For tax positions related
to prior years 898 452
For tax positions from
business combinations (1) 64,308
Reductions:
For tax positions related
to prior years (834) (266)
Lapse of statute of limitations (75) (80)
Settlements with tax authorities (3,033) (8)
Balance at end of year $ 4,921 7,521
(1) Unrecognized tax benefits from the Wachovia acquisition.
Of the $4.9 billion of unrecognized tax benefits at
December 31, 2009, approximately $2.8 billion would, if recog-
nized, affect the effective tax rate. The remaining $2.1 billion
of unrecognized tax benefits relates to income tax positions
on temporary differences.
We recognize interest and penalties as a component of
income tax expense. We accrued approximately $771 million
and $1.6 billion for the payment of interest and penalties at
December 31, 2009 and 2008, respectively. The decrease in
accrued interest is primarily related to the Internal Revenue
Service (IRS) settlement agreements (described below) on
sale-in, lease-out (SILO) transactions. A net benefit from inter-
est income and penalties expense of $72 million (after tax) for
2009 and interest expense of $62 million (after tax) for 2008
was recognized as a component of income tax expense.
We are subject to U.S. federal income tax as well as income
tax in numerous state and foreign jurisdictions. With few
exceptions, Wells Fargo and its subsidiaries are not subject
to federal income tax examinations for taxable years prior
to 2007, and state, local and foreign income tax examinations
for taxable years prior to 2005. Wachovia Corporation and
its subsidiaries, with few exceptions, are no longer subject to
federal income tax examinations for taxable years prior to
2006, and state, local and foreign income tax examinations
for taxable years prior to 2003.
We are routinely examined by tax authorities in various
jurisdictions. The IRS is currently examining the consolidated
federal income tax returns of Wachovia and its Subsidiaries
for tax years 2006 through 2008. In addition, Wachovia is
appealing various issues related to its 2000 through 2005 tax
years. Wachovia is also currently subject to examination by
various state, local and foreign taxing authorities. While it
is possible that one or more of these examinations may be
resolved within the next twelve months, we do not anticipate
that there will be a significant impact to our unrecognized
tax benefits as a result of these examinations.
The IRS is examining the 2007 and 2008 consolidated
federal income tax returns of Wells Fargo & Company and
its Subsidiaries. We are also litigating or appealing various
issues related to our prior IRS examinations for the periods
1997-2006. We have paid the IRS the contested income tax
associated with these issues and refund claims have been
filed for the respective years. We are also under examination
in numerous other taxing jurisdictions. While it is possible
that one or more of these examinations may be resolved
within the next 12 months, we do not anticipate that these
examinations will significantly impact our uncertain
tax positions.
income statement includes amounts from both Wells Fargo
interests and the noncontrolling interests. As a result, our
effective tax rate is calculated by dividing income tax expense
by income before income tax expense less the net income
from noncontrolling interests.