JP Morgan Chase 2010 Annual Report Download - page 271

JPMorgan Chase & Co./2010 Annual Report
271
Note 27 – Income taxes
JPMorgan Chase and its eligible subsidiaries file a consolidated U.S.
federal income tax return. JPMorgan Chase uses the asset and
liability method to provide income taxes on all transactions re-
corded in the Consolidated Financial Statements. This method
requires that income taxes reflect the expected future tax conse-
quences of temporary differences between the carrying amounts of
assets or liabilities for book and tax purposes. Accordingly, a de-
ferred tax asset or liability for each temporary difference is deter-
mined based on 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 businesses, 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 ulti-
mately be different from those currently reported.
The components of income tax expense/(benefit) included in the
Consolidated Statements of Income were as follows for each of the
years ended December 31, 2010, 2009 and 2008.
Year ended December 31,
(in millions) 2010 2009 2008
Current income tax
expense
U.S. federal
$
4,001
$ 4,698 $ 395
Non-U.S.
2,
712
2,368 1,009
U.S. state and local
1,744
971 307
Total current i
n
come
tax expense 8,457 8,037 1,711
Deferred income tax
expense/(benefit)
U.S. federal
(
753
)
(2,867) (3,015
)
Non-U.S.
169
(454) 1
U.S. state and local
(384)
(301) 377
Total deferred i
n
come
tax expense/(benefit) (968) (3,622) (2,637 )
Total income tax expense/
(benefit) before
extraordinary gain $ 7,489 $ 4,415 $ (926
)
Total income tax expense includes $485 million, $280 million and
$55 million of tax benefits recorded in 2010, 2009 and 2008,
respectively, as a result of tax audit resolutions.
The preceding table does not reflect the tax effect of certain items
that are recorded each period directly in stockholders’ equity and
certain tax benefits associated with the Firm’s employee stock-
based compensation plans. The tax effect of all items recorded
directly to stockholders’ equity resulted in an increase of $1.8
billion in 2010, a decrease of $3.7 billion in 2009, and an increase
of $3.0 billion in 2008.
U.S. federal income taxes have not been provided on the undis-
tributed earnings of certain non-U.S. subsidiaries, to the extent
that such earnings have been reinvested abroad for an indefinite
period of time. During 2008, as part of JPMorgan Chase’s peri-
odic review of the business requirements and capital needs of its
non-U.S. subsidiaries, combined with the formation of specific
strategies and steps taken to fulfill these requirements and needs,
the Firm determined that the undistributed earnings of certain of
its subsidiaries, for which U.S. federal income taxes had been
provided, would be indefinitely reinvested to fund the current and
future growth of the related businesses. As management does
not intend to use the earnings of these subsidiaries as a source of
funding for its U.S. operations, such earnings will not be distrib-
uted to the U.S. in the foreseeable future. This determination
resulted in the release of deferred tax liabilities and the recogni-
tion of an income tax benefit of $1.1 billion associated with these
undistributed earnings in 2008. For 2010, pretax earnings of
approximately $3.5 billion were generated that will be indefi-
nitely reinvested in these subsidiaries. At December 31, 2010, the
cumulative amount of undistributed pretax earnings in these
subsidiaries approximated $19.3 billion. If the Firm were to
record a deferred tax liability associated with these undistributed
earnings, the amount would be $4.3 billion at December 31,
2010.
Tax expense applicable to securities gains and losses for the years
2010, 2009 and 2008 was $1.1 billion, $427 million, and $608
million, respectively.
A reconciliation of the applicable statutory U.S. income tax rate to
the effective tax rate for each of the years ended December 31,
2010, 2009 and 2008, is presented in the following table.
Year ended December 31,
20
10
2009 2008
Statutory U.S. federal tax rate
35.0
%
35.0% 35.0
%
Increase/(decrease) in tax rate
resulting from:
U.S. state and l
ocal income
taxes, net of U.S. federal
income tax benefit 3.6 2.7 16.0
Tax-exempt income
(2.4)
(3.9) (14.8 )
Non-U.S. subsidiary earnings
(a)
(2.2) (1.7) (53.6 )
Business tax credits
(3.7)
(5.5) (24.5 )
Bear Stearns equity losses
—
— 5.7
Other, net
(0.
2
)
0.9 2.8
Effective tax rate
30.1
%
27.5% (33.4 )%
(a) Includes earnings deemed to be reinvested indefinitely in non-U.S. subsidiaries.
Deferred income tax expense/(benefit) results from differences be-
tween assets and liabilities measured for financial reporting versus
income-tax return purposes. Deferred tax assets are recognized if, in
management’s judgment, their realizability is determined to be
more likely than not. If a deferred tax asset is determined to be
unrealizable, a valuation allowance is established. The significant
components of deferred tax assets and liabilities are reflected in the
following table as of December 31, 2010 and 2009.