eTrade 2012 Annual Report Download - page 162

• At December 31, 2012, the Company had charitable contribution carry forwards of $27.4 million that
expire by 2015. A deferred tax asset of approximately $10.2 million was established with a
corresponding $10.2 million valuation allowance as it is more likely than not that these contributions
will expire unused.
The Company intends to permanently reinvest $16.0 million of undistributed earnings and profits in certain
foreign subsidiaries. As a result, the Company has not recorded $6.4 million of deferred income taxes on those
earnings at December 31, 2012.
Effective Tax Rate
The effective tax rate differed from the federal statutory rate as summarized in the following table for the
years ended December 31, 2012, 2011 and 2010:
Year Ended December 31,
2012 2011 2010
Federal statutory rate (35.0)%35.0 % (35.0)%
State income taxes, net of federal tax benefit (11.8) 9.1 81.0
Difference between statutory rate and foreign effective tax rate (1.1) 0.3 47.3
Tax exempt income (0.4) (0.3) (19.9)
Disallowed interest expense 10.3 6.7 387.3
Change in valuation allowance 6.9 (1.8) 236.5
2009 Debt Exchange (19.7) — —
Tax credits (12.2) (5.3) (79.5)
California state tax legislative changes 19.2 — —
Estimated reserve for uncertain tax positions 9.1 3.9 140.6
Deferred tax adjustments 8.4 — —
Disallowed losses on early extinguishment of debt 7.4 — —
Tax on undistributed earnings and profits in certain foreign subsidiaries 2.5 2.1 79.4
Other 2.4 (1.0) (31.4)
Liquidation of a foreign subsidiary — (33.3) —
Effective tax rate (14.0)%15.4 % 806.3 %
Tax Ownership Change
During the third quarter of 2009, the Company exchanged $1.7 billion principal amount of interest-bearing
debt for an equal principal amount of non-interest-bearing convertible debentures. Subsequent to the 2009 Debt
Exchange, $592.3 million and $128.7 million debentures were converted into 57.2 million and 12.5 million
shares of common stock during the third and fourth quarters of 2009, respectively. As a result of these
conversions, the Company believes it experienced a tax ownership change during the third quarter of 2009.
As of the date of the ownership change, the Company had federal NOLs available to carry forward of
approximately $1,886.3 million. This amount includes $479.7 million in federal NOLs that were recorded in the
third quarter of 2012 due to amended tax returns filed related primarily to additional tax deductions on the 2009
Debt Exchange and additional tax losses on bad debts. Section 382 imposes an annual limitation 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.
159