eTrade 2009 Annual Report Download - page 42

We believe the tax ownership change will extend the period of time it will take to fully utilize our
pre-ownership change NOLs, but will not limit the total amount of pre-ownership change NOLs we can utilize.
Our preliminary estimate is that we will be subject to an overall annual limitation on the use of our
pre-ownership change NOLs of approximately $155 million; however, this amount is subject to change in future
periods as we finalize the tax change of control analysis in 2010. Since the statutory carry forward period for our
overall pre-ownership change NOLs, which are approximately $1.4 billion, is 20 years (the majority of which
expire in 19 years), we believe we will be able to fully utilize these NOLs in future periods.
Our ability to utilize the pre-ownership change NOLs is dependent on our ability to generate sufficient
taxable income over the duration of the carry forward periods and will not be impacted by our ability or inability
to generate taxable income in an individual year.
Valuation Allowance
During the year ended December 31, 2009, we did not provide for a valuation allowance against our federal
deferred tax assets. We are required to establish a valuation allowance for deferred tax assets and record a charge
to income if we determine, 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 we did conclude that a
valuation allowance was required, the resulting loss would have a material adverse effect on our results of
operations and financial condition.
We did not establish a valuation allowance against our federal deferred tax assets as of December 31, 2009
as we believe that it is more likely than not that all of these assets will be realized. Our evaluation focused on
identifying significant, objective evidence that we will be able to realize our deferred tax assets in the future. We
reviewed the estimated future taxable income for our trading and investing and balance sheet management
segments separately and determined that our net operating losses since 2007 are due solely to the credit losses in
our balance sheet management segment. We believe these losses were caused by the crisis in the residential real
estate and credit markets which significantly impacted our asset-backed securities and home equity loan
portfolios in 2007 and continued to generate credit losses in 2008 and 2009. We estimate that these credit losses
will continue in future periods; however, we ceased purchasing asset-backed securities and home equity loans
which we believe are the root cause of the majority of these losses. Therefore, while we do expect credit losses to
continue in future periods, we do expect these amounts to decline when compared to our credit losses in the
three-year period ending in 2009. Our trading and investing segment generated substantial book taxable income
for each of the last six years and we estimate that it will continue to generate taxable income in future periods at a
level sufficient to generate taxable income for the Company as a whole. We consider this to be significant,
objective evidence that we will be able to realize our deferred tax assets in the future.
A key component of our evaluation of the need for a valuation allowance was our level of corporate interest
expense, which represents our most significant non-segment related expense. Our estimates of future taxable
income included this expense, which reduces the amount of segment income available to utilize our federal
deferred tax assets. Therefore, a decrease in this expense in future periods would increase the level of estimated
taxable income available to utilize our federal deferred tax assets. As a result of the Debt Exchange, we reduced
our annual cash interest payments by approximately $200 million. We believe this decline in cash interest
payments significantly improves our ability to utilize our federal deferred tax assets in future periods when
compared to evaluations in prior periods which did not include this decline in corporate interest payments.
Our analysis of the need for a valuation allowance recognizes that we are in a cumulative book taxable loss
position as of the three-year period ended December 31, 2009, which is considered significant and objective
evidence that we may not be able to realize some portion of our deferred tax assets in the future. However, we
believe we are able to rely on our forecasts of future taxable income and overcome the uncertainty created by the
cumulative loss position.
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