Prudential 2005 Annual Report Download - page 145

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
17. INCOME TAXES (continued)
The Company’s actual income tax expense for the years ended December 31, differs from the expected amount computed by
applying the statutory federal income tax rate of 35% to income from continuing operations before income taxes, extraordinary gain
on acquisition and cumulative effect of accounting change for the following reasons:
2005 2004 2003
(in millions)
Expected federal income tax expense ............................................................ $1,565 $1,179 $694
Completion of IRS examination for the years 1997 to 2001 .......................................... (720) — —
Non-taxable investment income ................................................................ (185) (149) (72)
Valuation allowance ......................................................................... 76 (24) (2)
Non-deductible expenses ..................................................................... 70 6 (12)
Repatriation of foreign earnings ................................................................ 64 (29) 114
State and local income taxes ................................................................... 22 (9) 43
Disposition of subsidiaries .................................................................... — — (78)
Other ..................................................................................... (23) (19) (25)
Total income tax expense ................................................................. $ 869 $ 955 $662
Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:
2005 2004
(in millions)
Deferred tax assets
Policyholder dividends ................................................................................... $1,045 $ 1,207
Insurance reserves ....................................................................................... 1,044 1,267
Net operating and capital loss carryforwards .................................................................. 831 1,115
Other ................................................................................................. 1,627 1,788
Deferred tax assets before valuation allowance ................................................................ 4,547 5,377
Valuation allowance ..................................................................................... (676) (677)
Deferred tax assets after valuation allowance .................................................................. 3,871 4,700
Deferred tax liabilities
Net unrealized investment gains ............................................................................ 2,450 2,951
Deferred policy acquisition costs ........................................................................... 2,418 2,250
Employee benefits ....................................................................................... 389 368
Other ................................................................................................. 767 946
Deferred tax liabilities .................................................................................... 6,024 6,515
Net deferred tax liability ...................................................................................... $(2,153) $(1,815)
Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the
future to realize its deferred tax assets after valuation allowance. A valuation allowance has been recorded primarily related to tax
benefits associated with foreign operations and state and local deferred tax assets. The valuation allowance as of December 31, 2005
and 2004, respectively, includes $152 million and $16 million recorded in connection with Prudential Securities Group Inc. state
deferred tax assets and $336 million and $443 million recorded in connection with the acquisition of Hyundai.
Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of the
deferred tax asset that is realizable. At December 31, 2005 and 2004, respectively, the Company had federal net operating and
capital loss carryforwards of $873 million and $874 million, which expire between 2007 and 2024. At December 31, 2005 and
2004, respectively, the Company had state operating and capital loss carryforwards for tax purposes approximating $2,765 million
and $2,655 million, which expire between 2007 and 2025. At December 31, 2005 and 2004, respectively, the Company had foreign
operating loss carryforwards for tax purposes approximating $1,321 million and $2,090 million, $1,292 million of which expires
between 2006 and 2012 and $29 million of which have an unlimited carryforward.
During the third quarter of 2004, the Company completed a review of its deferred tax accounts relating to Gibraltar Life that
identified a miscalculation of deferred tax assets before valuation allowance. As a result, deferred tax assets before valuation
allowance at April 1, 2001 (Gibraltar Life’s acquisition date) have been increased by approximately $130 million. Analysis of the
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