Fifth Third Bank 2010 Annual Report Download - page 109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 107
assets will be realized through the reversal of its existing taxable
temporary differences and its projected future taxable income.
As required under U.S. GAAP, the Bancorp recognized a
deferred tax asset for compensation expense recognized for
financial reporting that may be deductible for tax purposes in the
future for certain stock-based awards granted to its employees. As
a result of the Bancorp’s stock price as of December 31, 2010, as
much as $24 million of deferred tax assets previously established
for these stock-based awards will not be realized within the next 12
months and will negatively impact the Bancorp’s income tax
expense in 2011. The Bancorp cannot predict its stock price or
whether its employees will exercise other stock-based awards with
lower exercise prices in the future; therefore, it is possible that the
impact to income tax expense will be greater than or less than $24
million in 2011.
The IRS concluded its audit for 2006 and 2007 during the
third quarter of 2010. As a result, all issues have been resolved with
the IRS through 2007. The statute of limitations for the Bancorp’s
federal income tax returns remains open for tax years 2007 through
2010. The IRS is currently auditing the Bancorp’s federal income
tax returns for 2008 and 2009. On occasion, as various state and
local taxing jurisdictions examine the returns of the Bancorp and
its subsidiaries, the Bancorp may agree to extend the statute of
limitations for a short period of time. Otherwise, with the
exception of a few states with insignificant uncertain tax positions,
the statutes of limitations for state income tax returns remain open
only for tax years in accordance with each state’s statutes.
Any interest and penalties incurred in connection with income
taxes are recorded as a component of income tax expense in the
Consolidated Financial Statements. During the years ended
December 31, 2010 and 2009, the Bancorp recognized an interest
benefit of $8 million and interest expense of $3 million,
respectively, net of the related tax impact. This $3 million
recognized in 2009 is exclusive of the $55 million interest reduction
discussed previously. At December 31, 2010 and 2009, the
Bancorp had accrued interest liabilities, net of the related tax
benefits, of $1 million and $13 million, respectively. No material
liabilities were recorded for penalties.
Retained earnings at December 31, 2010 and 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.