JP Morgan Chase 2008 Annual Report Download - page 51

JPMorgan Chase & Co./ 2008 Annual Report 49
Income tax expense
The Firm’s income from continuing operations before income tax
expense (benefit), income tax expense (benefit) and effective tax rate
were as follows for each of the periods indicated.
Year ended December 31,
(in millions, except rate) 2008(a) 2007 2006
Income from continuing operations
before income tax expense (benefit) $ 2,773 $ 22,805 $ 19,886
Income tax expense (benefit) (926) 7,440 6,237
Effective tax rate (33.4)% 32.6% 31.4%
(a) On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington
Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these
transactions was accounted for as a purchase and their respective results of operations are
included in the Firm’s results from each respective transaction date. For additional information
on these transactions, see Note 2 on pages 135–140 of this Annual Report.
2008 compared with 2007
The decrease in the effective tax rate in 2008 compared with the
prior year was the result of significantly lower reported pretax
income combined with changes in the proportion of income subject
to U.S. federal taxes. Also contributing to the decrease in the effec-
tive tax rate was increased business tax credits and the realization
of a $1.1 billion benefit from the release of deferred tax liabilities.
These deferred tax liabilities were associated with the undistributed
earnings of certain non-U.S. subsidiaries that were deemed to be
reinvested indefinitely. These decreases were partially offset by
changes in state and local taxes, and equity losses representing the
Firm’s 49.4% ownership interest in Bear Stearns’ losses from April 8
to May 30, 2008, for which no income tax benefit was recorded.
For a further discussion of income taxes, see Critical Accounting
Estimates Used by the Firm on pages 119–123 and Note 28 on
pages 209–211 of this Annual Report.
2007 compared with 2006
The increase in the effective tax rate for 2007, 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 feder-
al, state and local taxes. Also contributing to the increase in the
effective tax rate was the recognition in 2006 of $367 million of
benefits related to the resolution of tax audits.
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 busi-
nesses (i.e., trustee, paying agent, loan agency and document manage-
ment services) were reported as discontinued operations.
Income from discontinued operations in 2006 was due predominantly
to a gain of $622 million from exiting selected corporate trust busi-
nesses in the fourth quarter of 2006. No income from discontinued
operations was recorded in 2008 or 2007.
Extraordinary gain
The Firm recorded an extraordinary gain of $1.9 billion in 2008 asso-
ciated with the acquisition of the banking operations of Washington
Mutual. The transaction is being accounted for under the purchase
method of accounting in accordance with SFAS 141. The adjusted fair
value of net assets of the banking operations, after purchase account-
ing adjustments, was higher than JPMorgan Chase’s purchase price.
There were no extraordinary gains recorded in 2007 or 2006.