Fifth Third Bank 2009 Annual Report Download - page 97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 95
BOLI policy. See Note 13 for a further discussion of those
charges.
Deferred income taxes are included as a component of other
assets and accrued taxes, interest and expenses in the
Consolidated Balance Sheets. At December 31, 2009 and 2008,
the Bancorp had recorded deferred tax assets of $81 million and
$58 million, respectively related to state net operating loss
carryforwards. These deferred tax assets relating to state net
operating losses were net of specific valuation allowances,
primarily resulting from leasing operations, of $15 million and $2
million at December 31, 2009 and 2008, respectively. If these
carry forwards are not utilized, they will expire in varying amounts
through 2029. Additionally, at December 31, 2009, the Bancorp
had federal general business tax credit carryforwards of $42
million. If unused, these credit carryforwards will expire in 2029.
The Bancorp did not have any general business tax credit
carryforwards at December 31, 2008.
The Bancorp has determined that a valuation allowance is
not needed against the remaining deferred tax assets as of
December 31, 2009 or 2008 as the Bancorp has considered the
positive and negative evidence and based upon that evidence
believes it is more likely than not that the deferred tax asset will be
recognized. This is based upon the fact that there is sufficient
taxable income in the carry back period to absorb a significant
portion of the deferred tax assets. The remaining deferred tax
assets will be absorbed by future reversals of existing taxable
temporary differences.
During 2009, the Bancorp also settled its outstanding
dispute with the Internal Revenue Service relating to certain
leveraged lease transactions. This settlement had a favorable
impact on income tax for 2009 of $55 million primarily through
the reduction of previously accrued interest expense. The accrual
of this interest expense had an adverse impact on tax expense for
2008 and 2007. The Bancorp is in the process of filing amended
state income tax returns to reflect that settlement. Statutes of
Limitations remain open for tax years 2004-2009 and on a limited
basis from 1998 through 2003. The Bancorp is currently
addressing non-leasing items as part of the appeals process
relating to tax years 2004 and 2005 and the Internal Revenue
Service is currently auditing 2006 and 2007. Any uncertain tax
positions are considered in the calculation of unrecognized tax
benefits discussed below.
At December 31, 2009 and at December 31, 2008, the
Bancorp had unrecognized tax benefits of $82 million and $959
million, respectively. Those balances included $81 million and $83
million, respectively, of tax positions that, if recognized, would
impact the effective tax rate and another $1 million at December
31, 2008 that would impact goodwill. The remaining $1 million
and $875 million, respectively, 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. Substantially all of
the reduction of uncertain tax positions related to the settlement
of certain leasing items with the IRS. It is reasonably possible that
the amount of unrecognized benefit with respect to some of the
Bancorp’s uncertain tax positions could decrease by as much as
$70 million during the next 12 months.
Any interest and penalties incurred in connection with
income taxes are recorded as a component of tax expense. For
the year ended December 31, 2009, the Bancorp accrued interest
of $3 million, net of the related tax benefit. This $3 million is
exclusive of the $55 million interest reduction discussed above
relating to the leasing settlement. At December 31, 2009 and 2008,
the Bancorp had accrued interest liabilities, net of the related tax
benefits, of $13 million and $210 million, respectively.
Substantially all of the reduction of accrued interest related to the
settlement of certain leasing items with the IRS. No material
liabilities were recorded for penalties.
Retained earnings at December 31, 2009 included $157
million in allocations of earnings for bad debt deductions of
former thrift subsidiaries for which no income tax has been
provided. Under current tax law, if certain of the Bancorp’s
subsidiaries use these bad debt reserves for purposes other than to
absorb bad debt losses, they will be subject to federal income tax
at the current corporate tax rate.
The following table provides a reconciliation of the
beginning and ending amounts of the Bancorp’s unrecognized tax
benefits.
($ in millions) 2009 2008 2007
Unrecognized tax benefits at January 1 $959 469 446
Gross increases for tax positions taken during prior period 16 496 -
Gross decreases for tax positions taken during prior period (329) (8) -
Gross increases for tax positions taken during current period 1 4 47
Settlements with taxing authorities (563) - (4)
Lapse of applicable statute of limitations (2) (2) (20)
Unrecognized tax benefits at December 31 $82 959 469
Deferred income taxes are included as a component of other assets in the Consolidated Balance Sheets and are comprised of the following
temporary differences at December 31:
($ in millions) 2009 2008
Deferred tax assets:
Allowance for loan & lease losses $1,312 975
Deferred compensation 147 171
Impairment reserves 145 4
Reserve for unfunded commitments 103 68
State net operating losses 81 58
Accrued interest 2104
Other 222 256
Total deferred tax assets $2,012 1,636
Deferred tax liabilities:
Lease financing $898 849
Investments in JV and partnership interests 481 12
Mortgage servicing rights 191 149
Other comprehensive income 130 53
Bank premises and equipment 88 96
State deferred taxes 60 44
Other 138 132
Total deferred tax liabilities $1,986 1,335
Total net deferred tax asset $26 301