eTrade 2004 Annual Report Download - page 111

Table of Contents
Index to Financial Statements
The decrease in the valuation allowance in 2004 relates principally to the elimination of a valuation allowance of $14.4 million when the
corresponding deferred tax asset was written off upon the disposition of eAdvisor. The elimination of the valuation allowance did not impact
income tax expense. The balance of the change in the valuation allowance relates to adjustments to the valuation allowance components
discussed above.
At December 31, 2004, the Company had federal net operating loss carry-
forwards of approximately $60.9 million for which no valuation
has been provided. These carry-forwards expire through 2020. These federal net operating loss carry-forwards relate to pre-acquisition losses
from acquired subsidiaries and, accordingly, are subject to annual limitations in their use in accordance with Internal Revenue Code Section
382. Accordingly, the extent to which the loss carry-forwards can be used to offset future taxable income may be limited.
The Company has not provided deferred income taxes of approximately $9.1 million on approximately $25.9 million of undistributed
earnings in its foreign subsidiaries at December 31, 2004, as it is the Company’s intention to permanently reinvest such earnings. The
American Jobs Creation Act of 2004 (the “Act”) was enacted in October of 2004. The Act provided for a temporary incentive for U.S.
multinational corporations to repatriate accumulated income earned abroad by providing an 85% exclusion from taxable income for certain
dividends from controlled foreign corporations. As a result of this special temporary tax incentive, the Company distributed $20.0 million from
its Canadian subsidiaries and recorded $750,000 of federal tax expense in connection with such repatriation.
The effective tax rates differed from the Federal statutory rates as follows:
The reduction in our 2004 tax rate was principally the result of two items. First, during 2004 the Company reached a favorable tax
settlement with the Internal Revenue Service. This agreement resolved various issues for all federal tax liabilities through 2000, including most
notably certain research and experimentation credit claims. As a result of the settlement, reductions in income tax expense of $22.4 million
were recorded resulting in reductions of previously accrued taxes. In addition, we recognized a tax benefit of $12.2 million from our excess tax
basis in a partnership interest that was sold during 2004.
NOTE 20—SHAREHOLDERS’ EQUITY
Shares Exchangeable into Common Stock
Year Ended December 31,
2004 2003 2002
Federal statutory rate
35.0
%
35.0
%
35.0
%
State income taxes, net of Federal tax benefit
4.3
3.5
4.7
Difference between statutory rate and foreign effective tax rate and establishment of valuation allowance
for foreign deferred tax assets
(0.7
)
3.8
(1.3
)
IRS tax settlement
(3.0
)
—
—
Excess tax basis upon sale of partnership interests
(2.4
)
—
—
Change in valuation allowance
(0.6
)
(5.2
)
5.4
Other
(1.1
)
(0.9
)
0.1
Effective tax rate
31.5
%
36.2
%
43.9
%
In August 2000, EGI Canada Corporation issued approximately 9.4 million Exchangeable Shares in connection with the Company’s
acquisition of E*TRADE Technologies. Holders of the Exchangeable Shares have dividend, voting and other rights equivalent to those of the
Company’s common shareholders. Exchangeable Shares may be exchanged at any time, at the option of the holder, on a one-for-one basis for
the Company’s common stock. The Company may redeem all outstanding Exchangeable Shares for its common stock after August 23, 2005 or
earlier under certain circumstances. Exchangeable Shares converted were 0.1 million in 2004, 0.2 million in 2003 and 0.2 million in 2002. At
December 31, 2004, approximately 1.3 million Exchangeable Shares were outstanding.
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