JP Morgan Chase 2006 Annual Report Download - page 130

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JPMorgan Chase & Co.
128 JPMorgan Chase & Co. / 2006 Annual Report
Note 24 – Income taxes
JPMorgan Chase and eligible subsidiaries file a consolidated U.S. federal
income tax return. JPMorgan Chase uses the asset-and-liability method
required by SFAS 109 to provide income taxes on all transactions recorded in
the Consolidated financial statements. This method requires that income taxes
reflect the expected future tax consequences of temporary differences
between the carrying amounts of assets or liabilities for book and tax purposes.
Accordingly, a deferred tax liability or asset for each temporary difference is
determined based upon the tax rates that the Firm expects to be in effect
when the underlying items of income and expense are realized. JPMorgan
Chase’s expense for income taxes includes the current and deferred portions
of that expense. A valuation allowance is established to reduce deferred tax
assets to the amount the Firm expects to realize.
Due to the inherent complexities arising from the nature of the Firm’s busi-
nesses, and from conducting business and being taxed in a substantial number
of jurisdictions, significant judgments and estimates are required to be made.
Agreement of tax liabilities between JPMorgan Chase and the many tax
jurisdictions in which the Firm files tax returns may not be finalized for
several years. Thus, the Firm’s final tax-related assets and liabilities may
ultimately be different than those currently reported.
Deferred income tax expense (benefit) results from differences between assets
and liabilities measured for financial reporting and for income-tax return
purposes. The significant components of deferred tax assets and liabilities are
reflected in the following table:
December 31, (in millions) 2006 2005
Deferred tax assets
Employee benefits $ 5,175 $ 3,381
Allowance for other than loan losses 3,533 3,554
Allowance for loan losses 2,910 2,745
Non-U.S. operations 566 807
Fair value adjustments 427 531
Gross deferred tax assets $ 12,611 $11,018
Deferred tax liabilities
Depreciation and amortization $ 3,668 $ 3,683
Leasing transactions 2,675 3,158
Non-U.S. operations 1,435 1,297
Fee income 1,216 1,396
Other, net 78 149
Gross deferred tax liabilities $ 9,072 $ 9,683
Valuation allowance $ 210 $ 110
Net deferred tax asset $ 3,329 $ 1,225
A valuation allowance has been recorded in accordance with SFAS 109,
primarily relating to capital losses associated with certain portfolio investments.
The components of income tax expense included in the Consolidated statements
of income were as follows:
Year ended December 31, (in millions) 2006 2005 2004(a)
Current income tax expense
U.S. federal $ 5,512 $ 4,178 $ 1,613
Non-U.S. 1,656 887 653
U.S. state and local 879 311 157
Total current income tax expense 8,047 5,376 2,423
Deferred income tax (benefit) expense
U.S. federal (1,628) (2,063) (382)
Non-U.S. 194 316 (322)
U.S. state and local (376) (44) (123)
Total deferred income tax
(benefit) expense (1,810) (1,791) (827)
Total income tax expense
from continuing operations 6,237 3,585 1,596
Total income tax expense
from discontinued operations 572 147 132
Total income tax expense $ 6,809 $ 3,732 $ 1,728
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
Total income tax expense includes $367 million of tax benefits recorded in
2006 as a result of tax audit resolutions.
The preceding table does not reflect the tax effects of SFAS 52 foreign currency
translation adjustments, SFAS 115 unrealized gains and losses on AFS securi-
ties, SFAS 133 hedge transactions and certain tax benefits associated with the
Firm’s employee stock-based compensation plans. Also not reflected are the
cumulative tax effects of implementing in 2006, SFAS 155, which applies to
certain hybrid financial instruments; SFAS 156, which accounts for servicing
financial assets; and SFAS 158, which applies to defined benefit pension and
OPEB plans. The tax effect of all items recorded directly in Stockholders’ equity
was an increase of $885 million, $425 million and $431 million in 2006,
2005 and 2004, respectively.
U.S. federal income taxes have not been provided on the undistributed earn-
ings of certain non-U.S. subsidiaries, to the extent that such earnings have
been reinvested abroad for an indefinite period of time. For 2006, such earn-
ings approximated $423 million on a pretax basis. At December 31, 2006, the
cumulative amount of undistributed pretax earnings in these subsidiaries
approximated $1.9 billion. It is not practicable at this time to determine the
income tax liability that would result upon repatriation of these earnings.
On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”)
was signed into law. The Act created a temporary incentive for U.S. compa-
nies to repatriate accumulated foreign earnings at a substantially reduced
U.S. effective tax rate by providing a dividends received deduction on the
repatriation of certain foreign earnings to the U.S. taxpayer (the “repatriation
provision”). The deduction was subject to a number of limitations and
requirements. In the fourth quarter of 2005, the Firm applied the repatriation
provision to $1.9 billion of cash from foreign earnings, resulting in a net tax
benefit of $55 million. The $1.9 billion of cash was invested in accordance
with the Firm’s domestic reinvestment plan pursuant to the guidelines set
forth in the Act.