Discover 2010 Annual Report Download - page 140

The following table reconciles the Company’s effective tax rate to the U.S. federal statutory income tax rate:
For the Years Ended November 30,
2010 2009 2008
U.S. federal statutory income tax rate .................................................................................................................. 35.0% 35.0% 35.0%
U.S. state and local income taxes and other, net of U.S. federal income tax benefits.................................................... 4.1 4.1 2.5
Valuation allowance – capital loss ...................................................................................................................... 0.0 1.1 0.0
State examinations and settlements ..................................................................................................................... 0.0 0.0 (0.9)
Other ............................................................................................................................................................. 0.6 (0.4) (0.7)
Effective income tax rate ................................................................................................................................ 39.7% 39.8% 35.9%
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences
are expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely
than not to be realized. The Company evaluates the likelihood of realizing its deferred tax assets by estimating sources of
future taxable income and the impact of tax planning strategies. Significant components of the Company’s net deferred
income taxes, which are included in other assets in the consolidated statements of financial condition, were as follows
(dollars in thousands):
November 30,
2010 2009
Deferred tax assets:
Allowance for loan losses(1) ........................................................................................................................................... $1,264,069 $ 703,563
Compensation and benefits........................................................................................................................................... 67,263 68,219
Unrealized gains/losses ............................................................................................................................................... 0 72,585
Customer fees and rewards........................................................................................................................................... 126,197 51,123
State income taxes....................................................................................................................................................... 75,503 0
Other ........................................................................................................................................................................ 76,030 126,705
Total deferred tax assets before valuation allowance...................................................................................................... 1,609,062 1,022,195
Valuation allowance................................................................................................................................................. (22,876) (24,545)
Total deferred tax assets (net of valuation allowance).................................................................................................. 1,586,186 997,650
Deferred tax liabilities:
Depreciation and software amortization.......................................................................................................................... (41,550) (48,421)
Securitizations ............................................................................................................................................................ 0 (45,209)
Unrealized gains/losses ............................................................................................................................................... (2,393) 0
Unearned income........................................................................................................................................................ (33,386) (41,593)
Other ........................................................................................................................................................................ (39,652) (72,900)
Total deferred tax liabilities..................................................................................................................................... (116,981) (208,123)
Net deferred tax assets ....................................................................................................................................... $1,469,205 $ 789,527
(1) The amount at November 30, 2010 includes deferred tax assets related to the allowance for loan losses on securitized loans as a result of the consolidation of the securitization trusts upon adoption
of Statements No. 166 and 167 on December 1, 2009. See Note 2: Change in Accounting Principle for more information.
Included in other deferred tax assets at November 30, 2010, is a $62.6 million capital loss carryforward for U.S.
federal income tax purposes with a tax benefit of $21.9 million that expires in 2013 and capital loss carryforwards for
state purposes with a tax benefit of $1.0 million that expire between 2013 and 2023. These deferred tax assets were
created in connection with the sale of the Goldfish business in March 2008. In 2009, the Company concluded there was
no prudent or feasible tax planning strategy that would allow it to realize the benefits of substantially all the federal and
state capital losses within the carryforward period. As a result, the Company recorded a full valuation allowance against
these deferred tax assets in 2009. In 2010, the capital loss was revalued based on a change in estimate related to capital
gains generated in prior years.
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