eTrade 2009 Annual Report Download - page 41

corporate interest payments in future periods will be approximately $160 million on an annual basis, which is
approximately $200 million lower than our estimated annual corporate interest payments prior to the Debt
Exchange.
Income Tax Benefit
Income tax benefit from continuing operations was $537.7 million and $469.5 million for the years ended
December 31, 2009 and 2008, respectively. Our effective tax rates were (29.3)% and (36.7)% for the years ended
December 31, 2009 and 2008, respectively.
Debt Exchange
The effective tax rate on the Debt Exchange of 20% was below our statutory federal tax rate of 35%. This
was primarily due to certain components of the loss on the Debt Exchange not being deductible for tax purposes,
which are summarized in the following table (dollars in millions):
Year Ended December 31, 2009
Amount of Loss Tax Rate Tax Benefit
Deductible portion of the loss on the Debt Exchange $723.0 35% $253.0
Non-deductible portion of the loss on the Debt Exchange 245.3 — % —
Prior period interest expense on the 12
1
⁄ 2 % Notes not
deductible as a result of the Debt Exchange N/A N/A (57.7)
Total $968.3 20% $195.3
Tax Ownership Change
During the third quarter of 2009, we exchanged $1.7 billion principal amount of our interest-bearing debt
for an equal principal amount of non-interest-bearing convertible debentures. Subsequent to the Debt Exchange,
$592.3 million and $720.9 million debentures were converted into 572.2 million and 696.6 million shares of
common stock during the third and fourth quarters of 2009, respectively. As a result of these conversions, we
believe we experienced a tax ownership change during the third quarter of 2009.
As of the date of the ownership change, we estimate that we had federal net operating losses (“NOLs”)
available to carry forward of approximately $1.4 billion. Section 382 of the Internal Revenue Code of 1986, as
amended, imposes restrictions on the use of a corporation’s NOLs, certain recognized built-in losses and other
carryovers after an “ownership change” occurs. Section 382 rules governing when a change in ownership occurs
are complex and subject to interpretation; however, an ownership change generally occurs when there has been a
cumulative change in the stock ownership of a corporation by certain “5% shareholders” of more than 50
percentage points over a rolling three-year period.
Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a
corporation may offset with pre-ownership change NOLs. In general, the annual limitation is determined by
multiplying the value of the corporation’s stock immediately before the ownership change (subject to certain
adjustments) by the applicable long-term tax-exempt rate. Any unused portion of the annual limitation is
available for use in future years until such NOLs are scheduled to expire (in general, our NOLs may be carried
forward 20 years). In addition, the limitation may, under certain circumstances, be increased or decreased by
built-in gains or losses, respectively, which may be present with respect to assets held at the time of the
ownership change that are recognized in the five-year period (one-year for loans) after the ownership change.
The use of NOLs arising after the date of an ownership change would not be affected unless a corporation
experienced an additional ownership change in a future period.
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