JP Morgan Chase 2008 Annual Report Download - page 212

Notes to consolidated financial statements
210 JPMorgan Chase & Co./ 2008 Annual Report
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) 2008 2007
Deferred tax assets
Allowance for loan losses $ 8,029 $ 3,800
Employee benefits 4,841 3,391
Allowance for other than loan losses 3,686 3,635
Fair value adjustments 2,565 —
Non-U.S. operations 2,504 285
Tax attribute carryforwards 1,383 —
Gross deferred tax assets $23,008 $11,111
Deferred tax liabilities
Depreciation and amortization $ 4,681 $ 2,966
Leasing transactions 1,895 2,304
Fee income 1,015 548
Non-U.S. operations 946 1,790
Fair value adjustments —570
Other, net 202 207
Gross deferred tax liabilities $ 8,739 $ 8,385
Valuation allowance 1,266 220
Net deferred tax asset $13,003 $ 2,506
JPMorgan Chase has recorded deferred tax assets of $1.4 billion in
connection with net operating loss and business tax credit carry for-
wards. The U.S. federal net operating loss carryforward of approxi-
mately $1.3 billion, the state and local net operating loss carryfor-
wards of approximately $7.2 billion, and the business tax credit car-
ryforward of approximately $300 million are subject to annual limita-
tions on utilization. If not utilized, the net operating losses would
expire in 2026, 2027 and 2028, and the business tax credits would
expire in 2028. In addition, an alternative minimum tax credit carry-
forward has been recorded for approximately $200 million and has
an indefinite carryforward period.
A valuation allowance has been recorded relating to state and local
net operating losses, losses associated with non-U.S. subsidiaries and
losses associated with certain portfolio investments. The increase in
the valuation allowance from the prior year to 2008 is largely related
to Bear Stearns.
The Firm adopted and applied FIN 48, which addresses the recogni-
tion and measurement of tax positions taken or expected to be
taken, and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure,
to all of its income tax positions at the required effective date of
January 1, 2007, resulting in a $436 million cumulative effect
increase to retained earnings, a reduction in goodwill of $113 million
and a $549 million decrease in the liability for income taxes.
At December 31, 2008 and 2007, JPMorgan Chase’s unrecognized
tax benefits, excluding related interest expense and penalties, were
$5.9 billion and $4.8 billion, respectively, of which $2.9 billion and
$1.3 billion, if recognized, would reduce the annual effective tax
rate. As JPMorgan Chase is presently under audit by a number of
tax authorities, it is reasonably possible that unrecognized tax bene-
fits could significantly change over the next 12 months, which could
also significantly impact JPMorgan Chase’s quarterly and annual
effective tax rates.
The following table presents a reconciliation of the beginning and end-
ing amount of unrecognized tax benefits for the years 2008 and 2007.
Unrecognized tax benefits
Year ended December 31, (in millions) 2008 2007
Balance at January 1, $ 4,811 $ 4,677
Increases based on tax positions related to
the current period 890 434
Decreases based on tax positions related to the
current period (109) (241)
Increases associated with the Bear Stearns merger 1,387 —
Increases based on tax positions related to
prior periods 501 903
Decreases based on tax positions related to
prior periods (1,386) (791)
Decreases related to settlements with taxing
authorities (181) (158)
Decreases related to a lapse of applicable
statute of limitations (19) (13)
Balance at December 31, $5,894 $ 4,811
Pretax interest expense and penalties related to income tax liabilities
recognized in income tax expense were $571 million ($346 million
after-tax) in 2008 and $516 million ($314 million after-tax) in 2007.
Included in accounts payable and other liabilities at December 31,
2008 and 2007, in addition to the Firm’s liability for unrecognized
tax benefits, was $2.3 billion and $1.6 billion, respectively, for
income tax-related interest and penalties, of which the penalty com-
ponent was insignificant.