eTrade 2009 Annual Report Download - page 151

Deferred income taxes are recorded when revenues and expenses are recognized in different periods for
financial statement and tax return purposes. Prior year balances for the deferred tax assets and liabilities have
been re-presented to ensure consistency between periods. The adjustments relate to the presentation of the federal
benefit of the state deferred assets and liabilities. The temporary differences and tax carryforwards that created
deferred tax assets and deferred tax liabilities are as follows (dollars in thousands):
December 31,
2009 2008
Deferred tax assets:
Reserves and allowances, net $1,115,187 $ 420,472
Net unrealized loss on equity investments and Bank assets held-for-sale 187,385 335,966
Net operating losses 665,183 937,815
Deferred compensation 55,987 27,577
Capitalized interest 63,864 47,186
Tax credits 29,950 24,448
Restructuring reserve and related write-downs 13,800 45,274
Other 9,940 3,437
Total deferred tax assets 2,141,296 1,842,175
Valuation allowance (on state and foreign country deferred tax assets) (107,314) (127,693)
Total deferred tax assets, net of valuation allowance 2,033,982 1,714,482
Deferred tax liabilities:
Internally developed software (31,215) (43,814)
Basis differences in investments (409,963) (464,213)
Depreciation and amortization (150,943) (171,105)
Other — (653)
Total deferred tax liabilities (592,121) (679,785)
Net deferred tax asset $1,441,861 $1,034,697
During the year ended December 31, 2009, the Company generated a federal net operating loss of
approximately $321 million and did not provide for a valuation allowance against the federal deferred tax assets.
Of the $321 million net operating loss, $153 million is expected to be carried back to prior years, generating an
expected federal tax refund of approximately $50 million. The remaining $1.4 billion federal net operating loss
will be carried forward and generally can be used to offset future taxable income. The majority of the
carryforwards expire in 19 years.
The Company did not provide for a valuation allowance against its federal deferred tax assets as of
December 31, 2009. The Company is required to establish a valuation allowance for deferred tax assets and
record a charge to income if it is determined, based on available evidence at the time the determination is made,
that it is more likely than not that some portion or all of the deferred tax assets will not be realized. If the
Company did conclude that a valuation allowance was required, the resulting loss would have a material adverse
effect on its results of operations and financial condition.
The Company did not establish a valuation allowance against its federal deferred tax assets as of
December 31, 2009 as it believes that it is more likely than not that all of these assets will be realized. The
Company’s evaluation focused on identifying significant, objective evidence that it will be able to realize its
deferred tax assets in the future. The Company reviewed the estimated future taxable income for its trading and
investing and balance sheet management segments separately and determined that the net operating losses since
2007 are due solely to the credit losses in the balance sheet management segment. The Company believes these
losses were caused by the crisis in the residential real estate and credit markets which significantly impacted its
asset-backed securities and home equity loan portfolios in 2007 and continued to generate credit losses in 2008
and 2009. The Company estimates that these credit losses will continue in future periods; however, the Company
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