Fifth Third Bank 2008 Annual Report Download - page 92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
90 Fifth Third Bancorp
statute extensions are in place for tax years 1997 through 2003,
primarily for leasing uncertainties. With the exception of the state
impact of the federal items discussed above as well as a few states
with insignificant uncertain liabilities, the statutes of limitations
for state income tax returns remain open for tax years in
accordance with the various states’ statutes.
As of January 1, 2007, the Bancorp adopted FIN 48. Upon
adoption of this Interpretation on January 1, 2007, the Bancorp
recognized an after-tax adjustment to beginning retained earnings
of $2 million representing the cumulative effect of applying the
provisions of this Interpretation. At December 31, 2008 and at
December 31, 2007, the Bancorp had unrecognized tax benefits of
$959 million and $469 million, respectively. Those balances
included $83 million and $100 million of tax positions that, if
recognized, would impact the effective tax rate and $1 million and
$6 million in tax positions that would impact goodwill. The
remaining $875 million and $363 million is related to tax positions
for which the ultimate deductibility is highly certain but for which
there is uncertainty about the timing of the deductions. A
significant portion of these tax positions relate to the leveraged
lease litigation discussed below and in Note 16.
Any interest and penalties incurred in connection with
income taxes are recorded as a component of tax expense. For
the year ended December 31, 2008, the Bancorp accrued interest,
net of the related tax benefit, of $143 million and, at December
31, 2008, had accrued interest liabilities of $210 million, net of the
related tax benefits. No material liabilities were recorded for
penalties.
Included in other assets at December 31, 2008 and
December 31, 2007 is a deposit of $1.0 billion and $386 million,
respectively, that the Bancorp made under Internal Revenue Code
section 6603 for taxes associated with the leveraged lease
portfolio.
As previously disclosed, during May 2005, the Bancorp filed
suit in the United States District Court of the Southern District of
Ohio against the IRS seeking a refund of taxes paid as a result of
the audit of the 1997 tax year. This suit involves a determination
of the correct tax treatment of certain leveraged leases entered
into by the Bancorp. The outcome of this litigation will impact a
number of leveraged leases entered into from 1997 through 2004.
During the second quarter of 2008, the Bancorp increased its
liability for uncertain tax positions relating to these leases based
upon several factors, including the jury’s verdict in the form of
answers to interrogatories in the Bancorp’s case, and two other
court cases involving leveraged leasing. The judge in the
Bancorp’s case has not issued his final ruling. In December of
2008, the Bancorp entered into a Stipulated Conditional
Dismissal. This Conditional Order of Dismissal without prejudice
and with leave allows the Bancorp to enter into settlement
discussions with the US Department of Justice under the
Settlement Initiatives offered by the Internal Revenue Service.
The Stipulated Conditional Dismissal is effective until June of
2009. Therefore, it is reasonably possible that the amount of the
unrecognized benefit with respect to certain of the Bancorp’s
uncertain tax positions could significantly change during the next
12 months. If the Bancorp is able to reach an amenable
settlement, it is possible that the unrecognized tax benefits could
decrease by up to $875 million of the $959 million as of
December 31, 2008 disclosed below.
The following table provides a reconciliation of the
beginning and ending amounts of the Bancorp’s unrecognized tax
benefits.
($ in millions) 2008 2007
Unrecognized tax benefits at January 1 $469 446
Gross increases for tax positions taken during prior period 496 -
Gross decreases for tax positions taken during prior period (8) -
Gross increases for tax positions taken during current period 447
Settlements with taxing authorities -(4)
Lapse of applicable statute of limitations (2) (20)
Unrecognized tax benefits at December 31 $959 469
Deferred income taxes are included as a component of other assets and accrued taxes, interest and expenses in the Consolidated Balance
Sheets and are comprised of the following temporary differences at December 31:
($ in millions) 2008 2007
Deferred tax assets:
Allowance for credit losses $975 328
Deferred compensation 171 174
Accrued interest 104 33
Other comprehensive income -68
State net operating losses 58 72
Other 328 188
Total deferred tax assets $1,636 863
Deferred tax liabilities:
Lease financing $849 1,344
State deferred taxes 44 149
Bank premises and equipment 96 75
Mortgage servicing rights 149 160
Other comprehensive income 53 -
Other 144 154
Total deferred tax liabilities $1,335 1,882
Total net deferred tax asset (liability) $301 (1,019)
Retained earnings at December 31, 2008 included $157 million
in allocations of earnings for bad debt deductions of former thrift
subsidiaries for which no income tax has been provided. Under
current tax law, if certain of the Bancorp’s subsidiaries use these
bad debt reserves for purposes other than to absorb bad debt
losses, they will be subject to federal income tax at the current
corporate tax rate.