JP Morgan Chase 2006 Annual Report Download - page 33

JPMorgan Chase & Co. / 2006 Annual Report 31
The decrease in Other expense reflected lower litigation reserve charges for
certain material legal proceedings in 2005: $1.9 billion related to the settle-
ment of the Enron class action litigation and for certain other material legal
proceedings, and $900 million for the settlement of the WorldCom class action
litigation; and in 2004, $3.7 billion to increase litigation reserves. Also con-
tributing to the decrease were a $208 million insurance recovery related to
certain material litigation, lower software impairment write-offs, merger-relat-
ed savings and operating efficiencies. These were offset partially by $93 mil-
lion in charges taken by TSS to terminate a client contract and a $40 million
charge taken by RFS related to the dissolution of a student loan joint venture.
For a discussion of Amortization of intangibles and Merger costs, refer to Note
16 and Note 9 on pages 121–123 and 108, respectively, of this Annual Report.
Income tax expense
The Firm’s Income from continuing operations before income tax expense,
Income tax expense and Effective tax rate were as follows for each of the
periods indicated:
Year ended December 31,
(in millions, except rate) 2006 2005 2004(a)
Income from continuing operations
before income tax expense $19,886 $ 11,839 $ 5,856
Income tax expense 6,237 3,585 1,596
Effective tax rate 31.4% 30.3% 27.3%
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
2006 compared with 2005
The increase in the effective tax rate for 2006, as compared with the prior
year, was primarily the result of higher reported pretax income combined with
changes in the proportion of income subject to federal, state and local taxes.
Also contributing to the increase in the effective tax rate were the litigation
charges in 2005 and lower Merger costs, reflecting a tax benefit at a 38%
marginal tax rate, partially offset by benefits related to tax audit resolutions
of $367 million in 2006.
2005 compared with 2004
The increase in the effective tax rate was primarily the result of higher
reported pretax income combined with changes in the proportion of income
subject to federal, state and local taxes. Also contributing to the increase
were lower 2005 litigation charges and a gain on the sale of BrownCo, which
were taxed at marginal tax rates of 38% and 40%, respectively. These
increases were offset partially by a tax benefit in 2005 of $55 million record-
ed in connection with the repatriation of foreign earnings.
Income from discontinued operations
As a result of the transaction with The Bank of New York on October 1, 2006,
the results of operations of the selected corporate trust businesses (i.e.,
trustee, paying agent, loan agency and document management services) were
reported as discontinued operations.
The Firm’s Income from discontinued operations (after-tax) were as follows for
each of the periods indicated:
Year ended December 31,
(in millions) 2006 2005 2004(a)
Income from discontinued operations $ 795 $ 229 $ 206
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
The increases from the prior two periods in Income from discontinued opera-
tions were due primarily to a gain of $622 million from exiting the corporate
trust business in the fourth quarter of 2006.