KeyBank 2006 Annual Report Download - page 96

96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Income taxes included in the consolidated statements of income are
summarized below. Key files a consolidated federal income tax return.
Significant components of Key’s deferred tax assets and liabilities,
included in “accrued income and other assets” and “accrued expense and
other liabilities,” respectively, on the balance sheet, are as follows:
At December 31, 2006, Key had state net operating loss carryforwards
of $319 million (for which it has recorded a $10 million tax benefit) that
are subject to various limitations imposed by tax laws and, if not used,
will expire in varying amounts from 2007 through 2025.
17. INCOME TAXES
Year ended December 31,
in millions 2006 2005 2004
Currently payable:
Federal $402 $289 $ (12)
State 21 42 1
423 331 (11)
Deferred:
Federal 13 98 377
State 14 739
27 105 416
Total income tax expense
a
$450 $436 $405
a
Income tax expense on securities transactions totaled $.4 million in 2006, $.2 million in
2005 and $2 million in 2004. Income tax expense in the above table excludes equity- and
gross receipts-based taxes, which are assessed in lieu of an income tax in certain states
in which Key operates. These taxes are recorded in “noninterest expense” on the income
statement and totaled $13 million in 2006, $18 million in 2005 and ($9) million in 2004.
December 31,
in millions 2006 2005
Provision for loan losses $ 430 $ 405
Net unrealized securities losses 21 48
Other 395 216
Total deferred tax assets 846 669
Leasing income reported using the
operating method for tax purposes 2,762 2,809
Depreciation —6
Other 75 49
Total deferred tax liabilities 2,837 2,864
Net deferred tax liabilities $1,991 $2,195
The following table shows how Key arrived at total income tax expense and the resulting effective tax rate.
Year ended December 31, 2006 2005 2004
dollars in millions Amount Rate Amount Rate Amount Rate
Income before income taxes times
35% statutory federal tax rate $575 35.0% $534 35.0% $459 35.0%
State income tax, net of federal tax benefit 4.2 31 2.0 26 2.0
Write-off of nondeductible goodwill — — — — 19 1.5
Tax-exempt interest income (14) (.8) (12) (.8) (13) (1.0)
Corporate-owned life insurance income (38) (2.3) (40) (2.6) (41) (3.1)
Tax credits (69) (4.2) (64) (4.2) (51) (3.9)
Reduced tax rate on lease income (42) (2.6) (65) (4.3) (44) (3.4)
Reduction of deferred tax asset —— 8 .6 43 3.3
Other 34 2.1 44 2.9 7 .5
Total income tax expense $450 27.4% $436 28.6% $405 30.9%
A lower tax rate is applied to portions of the equipment lease portfolio
that are managed by a foreign subsidiary in a lower tax jurisdiction. Since
Key intends to permanently reinvest the earnings of this foreign subsidiary
overseas, deferred income taxes of $269 million, $219 million and $157
million have not been recorded as of December 31, 2006, 2005 and 2004,
respectively, in accordance with SFAS No. 109, “Accounting for Income
Taxes.”
LEASE FINANCING TRANSACTIONS
In the ordinary course of business, Key’s equipment finance business unit
(“KEF”) enters into various types of lease financing transactions.
Between 1996 and 2004, KEF entered into three types of lease financing
transactions with both foreign and domestic customers (primarily
municipal authorities) for terms ranging from ten to fifty years.
Lease in, Lease out (“LILO”) transactions are leveraged leasing
transactions in which KEF leases property from an unrelated third
party and then leases the property back to that party. The transaction
is similar to a sale-leaseback, except that the property is leased by
KEF, rather than purchased. Qualified Technical Equipment Leases
(“QTEs”) and Service Contract Leases are even more like sale-leaseback
transactions, as KEF is considered to be the purchaser of the equipment
for tax purposes. LILO and Service Contract transactions involve
commuter rail equipment, public utility facilities, and commercial
aircraft. QTE transactions involve sophisticated high technology
hardware and related software, such as telecommunications equipment.
Like other forms of leasing transactions, LILO transactions generate
income tax deductions for Key from net rental expense associated with
the leased property, interest expense on nonrecourse debt incurred to
fund the transaction, and transaction costs. QTE and Service Contract
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