eTrade 2005 Annual Report Download - page 179

Table of Contents
operating loss carry-forwards with a valuation allowance of $2 million against such deferred tax asset at December31, 2005.
•
At December31, 2005, the Company maintains a valuation allowance against the excess tax basis in certain capital assets of
approximately $11 million. The capital assets in question are certain investments in e-commerce and Internet startup venture
funds that have no ready market or liquidity at December31, 2005. The Company has concluded that the realization of these
excess tax benefits on these capital assets are uncertain and not in the control of the Company, as there is no ready market or
liquidity for these investments.
•
The valuation allowance was decreased in 2005 for the elimination of a valuation allowance of $7 million related to foreign tax
credits when the corresponding deferred tax asset was written off upon the conversion of all outstanding Exchangeable Shares
to the Company’s common stock. The elimination of the valuation allowance did not impact income tax expense.
•
The majority of the balance of the reduction in the valuation allowance of approximately $5 million related to foreign net
operating loss carry-forwards and other foreign deferred tax items.
At December31, 2005, the Company had federal net operating loss carry-forwards of approximately $59million for which no valuation
allowance 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 generally subject to annual limitations in their use of $4.9 million
per year in accordance with Internal Revenue Code Section382. 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 on $31 million of undistributed earnings and profits in its foreign subsidiaries at
December31, 2005. The Company intends to permanently reinvest such earnings. The Company has not provided deferred income
taxes of $10.9 million on such undistributed earnings and profits. The American Jobs Creation Act 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 million from its Canadian subsidiaries in 2004. The Company did not record any cumulative tax expense in
connection with such repatriation since the Company believes the distribution was a tax-free return of capital for tax purposes.
The effective tax rates differed from the Federal statutory rates as follows:
Year Ended December31,
2005
2004
2003
Federal statutory rate
35.0
%
35.0
%
35.0
%
State income taxes, net of Federal tax benefit
2.3
4.4
3.6
Difference between statutory rate and foreign effective tax rate and establishment of
valuation allowance for foreign deferred tax assets
(0.9
)
(0.7
)
3.8
IRS tax settlement
—
(2.8
)
—
Excess tax basis upon sale of partnership interests
—
(2.2
)
—
Change in valuation allowance
(0.3
)
(0.5
)
(5.2
)
Other
(2.1
)
(1.0
)
(0.9
)
Effective tax rate
34.0
%
32.2
%
36.3
%

2006. EDGAR Online, Inc.