JP Morgan Chase 2010 Annual Report Download - page 272

Notes to consolidated financial statements
JPMorgan Chase & Co./2010 Annual Report
272
December 31, (in millions)
20
10
2009
Deferred tax assets
Allowance for loan losses
$
12,287
$ 12,376
Employee benefits
4,279
4,424
Allowance for other than loan losses
6,029
3,995
Non-U.S. operations
956
1,926
Tax attribute carryforwards
1,
370
912
Fee income
446
—
Fair value adjustments
(a)
51 —
Gross deferred tax assets
$
2
5,
418
$ 23,633
Deferred tax liabilities
Depreciation and amortization
$
3,500
$ 4,832
Leasing transactions
2,160
2,054
Non-U.S. operations
1,136
1,338
Fee income
—
670
Fair value adjustments
(a)
— 328
Other, net
519
147
Gross deferred tax liabil
i
ties
$
7,
315
$ 9,369
Valuation allowance
1,784
1,677
Net deferred tax asset
$
16,
319
$ 12,587
(a) Includes fair value adjustments related to AFS securities, cash flows hedging
activities and other portfolio investments.
JPMorgan Chase has recorded deferred tax assets of $1.4 billion at
December 31, 2010, in connection with U.S. federal, state and local
and non-U.S. subsidiary net operating loss carryforwards and foreign
tax credit carryforwards. At December 31, 2010, the U.S. federal net
operating loss carryforward was approximately $1.2 billion; the state
and local net operating loss carryforward was approximately $1.0
billion; the non-U.S. subsidiary net operating loss carryforward was
$515 million; and the U.S. foreign tax credit carryforward was ap-
proximately $750 million.
If not utilized, the U.S. federal net operating loss carryforward and
the state and local net operating loss carryforward will expire in
2027; and the U.S. foreign tax credit carryforward will expire in
2020. The non-U.S. subsidiary net operating loss carryforward has
an unlimited carryforward period.
A valuation allowance has been recorded for losses associated with
non-U.S. subsidiaries and certain portfolio investments, and certain
state and local tax benefits.
At December 31, 2010, 2009 and 2008, JPMorgan Chase’s unrecog-
nized tax benefits, excluding related interest expense and penalties,
were $7.8 billion, $6.6 billion and $5.9 billion, respectively, of which
$3.8 billion, $3.5 billion and $2.9 billion, respectively, 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 significant changes in the gross balance of unrecog-
nized tax benefits may occur within the next 12 months. JPMorgan
Chase does not expect that any changes over the next twelve
months in its gross balance of unrecognized tax benefits caused by
such audits would result in a significant change in its annual effec-
tive tax rate.
The following table presents a reconciliation of the beginning and
ending amount of unrecognized tax benefits for the years ended
December 31, 2010, 2009 and 2008.
Unrecognized tax benefits
Year ended December 31,
(in millions) 2010 2009 2008
Balance at January 1,
$
6,608
$ 5,894 $ 4,811
Increases based on tax positions
related to the current period
813
584 890
Decreases based on tax positions
related to the current period
(24)
(6) (109 )
Increases associate
d with the
Bear Stearns merger — — 1,387
Increases based on tax positions
related to prior periods 1,681 703 501
Decreases based on tax positions
related to prior periods (1,198) (322) (1,386 )
Decreases related to settl
e
ments
with taxing authorities (74) (203) (181 )
Decreases related to a lapse of
applicable statute of limitations (39) (42) (19 )
Balance at December 31,
$
7,767
$ 6,608 $ 5,894
After-tax interest expense/(benefit) and penalties related to
income tax liabilities recognized in income tax expense were
$(54) million, $101 million and $346 million in 2010, 2009 and
2008, respectively.
Included in accounts payable and other liabilities at December 31,
2010 and 2009, in addition to the Firm’s liability for unrecognized
tax benefits, was $1.6 billion and $2.4 billion, respectively, for
income tax-related interest and penalties.
JPMorgan Chase is subject to ongoing tax examinations by the tax
authorities of the various jurisdictions in which it operates, includ-
ing U.S. federal, state and local, and non-U.S. jurisdictions. The
Firm’s consolidated federal income tax returns are presently under
examination by the Internal Revenue Service (“IRS”) for the years
2003, 2004 and 2005. This examination is expected to conclude in
2011. The consolidated federal income tax returns of Bear Stearns
for the years ended November 30, 2006, and November 30, 2007,
and for the period December 1, 2007, through May 30, 2008, are
presently under examination. This examination is expected to
conclude in 2012.
The IRS audits of the consolidated federal income tax returns of
JPMorgan Chase for the years 2006, 2007 and 2008 are expected to
commence in 2011. Administrative appeals are pending with the IRS
relating to prior periods that were examined for JPMorgan Chase and
for certain of its predecessor entities. For 2002 and prior years, refund
claims relating to income and credit adjustments, and to tax attribute
carrybacks, for JPMorgan Chase have been filed. Refund claims have
been filed for Bank One for the period January 1, 2004, through July
31, 2004, and for prior years primarily to reflect income adjustments.
Amended returns to reflect refund claims primarily attributable to net
operating losses and tax credit carrybacks are anticipated to be filed
for the final Bear Stearns U.S. federal consolidated tax return for the
period December 1, 2007, through May 30, 2008, and for prior years.