Wells Fargo 2010 Annual Report Download - page 212

Note 20: Income Taxes (continued)
December 31,
2010 2009 2008
(in millions) Amount Rate Amount Rate Amount Rate
Statutory federal income tax expense and rate $ 6,545 35.0 % $ 6,162 35.0 % $ 1,140 35.0 %
Change in tax rate resulting from:
State and local taxes on income, net of
federal income tax benefit 586 3.1 468 2.7 94 2.9
Tax-exempt interest (283) (1.5) (260) (1.5) (130) (4.0)
Excludable dividends (258) (1.3) (253) (1.4) (186) (5.7)
Other deductible dividends (33) (0.2) (29) (0.2) (71) (2.2)
Tax credits (577) (3.1) (533) (3.0) (266) (8.2)
Life insurance (223) (1.2) (257) (1.5) (67) (2.0)
Leveraged lease tax expense 461 2.5 400 2.3 - -
Other 120 0.6 (367) (2.1) 88 2.7
Effective income tax expense and rate $ 6,338 33.9 % $ 5,331 30.3 % $ 602 18.5 %
Income tax expense for 2010 increased primarily due to the
new health care legislation and to fewer favorable settlements
with tax authorities.
The change in unrecognized tax benefits follows:
Year ended
December 31,
(in millions) 2010 2009
Balance at beginning of year $ 4,921 7,521
Additions:
For tax positions related to the current year 579 438
For tax positions related to prior years 301 898
For tax positions from business combinations (1) - 6
Reductions:
For tax positions related to prior years (111) (834)
Lapse of statute of limitations (148) (75)
Settlements with tax authorities (42) (3,033)
Balance at end of year $ 5,500 4,921
(1) Unrecognized tax benefits from the Wachovia acquisition.
Of the $5.5 billion of unrecognized tax benefits at December
31, 2010, approximately $3.1 billion would, if recognized, affect
the effective tax rate. The remaining $2.4 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 $870 million
and $771 million for the payment of interest and penalties at
December 31, 2010 and 2009, respectively. A net expense from
interest expense and penalties expense of $45 million (after tax)
for 2010 and a net benefit from interest income and penalties
expense of $72 million (after tax) for 2009 was recognized as a
component of income tax expense.
During 2009, we and the IRS executed settlement
agreements in accordance with the IRS’s settlement initiative
related to certain leverage leases that the IRS considers sale-in,
lease-out (SILO) transactions. These settlement agreements
resolved the SILO transactions originally entered into by
Wachovia and reduced our tax exposure on our overall SILO
portfolio by approximately 90%. As a result of this resolution,
our unrecognized tax benefits decreased $2.7 billion in 2009.
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 2006. 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 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. The IRS is also examining the
consolidated federal income tax returns of Wachovia and its
Subsidiaries for tax years 2006 through 2008. We are appealing
various issues related to Wachovia’s federal 2003 through 2005
tax years. In addition, we are 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.
In September 2006, we filed a federal tax refund suit in the
U.S. Court of Federal Claims related to certain leveraged lease
transactions, which the IRS considers SILO transactions that we
entered into between 1997 and 2002. On February 19, 2010, the
Court of Federal Claims entered an adverse judgment, and on
April 15, 2010, we filed a Notice of Appeal to the U.S. Court of
Appeals for the Federal Circuit. Oral argument was heard on
December 7, 2010, and we expect a decision sometime during
2011. There will be no adverse financial statement impact if the
Court of Appeals affirms the judgment of the Court of Federal
Claims.
We estimate that our unrecognized tax benefits could
decrease by between $100 million and $500 million during the
next 12 months primarily related to statute expirations and
settlements.
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