Prudential 2006 Annual Report Download - page 161

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
17. INCOME TAXES (continued)
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, 2006
and 2005, respectively, includes $168 million and $168 million recorded in connection with Prudential Securities Group Inc. state
deferred tax assets and $249 million and $336 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, 2006 and 2005, respectively, the Company had federal net operating and
capital loss carryforwards of $996 million and $873 million, which expire between 2007 and 2026. At December 31, 2006 and
2005, respectively, the Company had state operating and capital loss carryforwards for tax purposes approximating $1,986 million
and $2,765 million, which expire between 2007 and 2025. At December 31, 2006 and 2005, respectively, the Company had foreign
operating loss carryforwards for tax purposes approximating $991 million and $1,321 million, $963 million of which expires
between 2007 and 2015 and $28 million of which have an unlimited carryforward.
The Company previously had not provided U.S. income taxes on unremitted foreign earnings of its non-U.S. operations, other
than its Japanese insurance operations and German investment management subsidiaries. During 2005, the Company determined
that historical earnings of its Canadian operations were no longer considered permanently reinvested and will be available for
repatriation to the U.S. The U.S. income tax expense of $69 million associated with the repatriation of the Canadian operations’
earnings was recognized in 2005. During 2006, the Company no longer had unrepatriated capital in its Canadian operations and it
determined that earnings from its Taiwan investment management subsidiary will be repatriated to the U.S. Accordingly, earnings
from its Taiwan investment management subsidiary are no longer considered permanently reinvested. A U.S. income tax benefit of
$58 million associated with the assumed repatriation of the 2006 earnings and the change of the repatriation assumption for the
Taiwan investment management subsidiary was recognized in 2006. The Company has undistributed earnings of foreign
subsidiaries, other than its Japanese insurance operations, German and Taiwan investment management subsidiaries, and Canadian
operations, of $1,252 million at December 31, 2006 for which deferred taxes have not been provided. The Company had
undistributed earnings of foreign subsidiaries, other than its Japanese insurance operations, German investment management
subsidiaries and Canadian operations of $1,018 million at December 31, 2005, for which deferred taxes have not been provided.
Such earnings are considered permanently invested in the foreign subsidiaries. Determining the tax liability that would arise if these
earnings were remitted is not practicable.
On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA includes a deduction of
85% of certain foreign earnings that are repatriated, as defined in the AJCA. During 2005, the Company evaluated the effects of the
repatriation provision and repatriated earnings of approximately $160 million from foreign operations under the AJCA, for which
the Company recorded income tax expense of $9 million.
The amount of income taxes the Company pays is subject to ongoing audits in various jurisdictions. The Company reserves for
its best estimate of potential payments/settlements to be made to the Internal Revenue Service (the “Service”), and other taxing
jurisdictions for audits ongoing or not yet commenced. In 2006, the Service completed all fieldwork with regards to its examination
of the consolidated federal income tax returns for tax years 2002-2003. The Company anticipates the final report to be submitted to
the Joint Committee on Taxation for their review during the first quarter of 2007. The statute of limitations for the 2002-2003 tax
years expires in 2008. In addition, in January 2007, the Service began an examination of tax years 2004 through 2006.
The Company’s liability for income taxes includes management’s best estimate of potential payments and settlements for audit
periods still subject to review by the Service or other taxing jurisdictions. Audit periods remain open for review until the statute of
limitations has passed. The completion of review or expiration of the statute of limitations for a given audit period could result in an
adjustment to our liability for income taxes. Any such adjustment could be material to our results of operations for any given
quarterly or annual period based, in part, upon the results of operations for the given period.
On January 26, 2006, the Service officially closed the audit of the Company’s consolidated federal income tax returns for the
1997 to 2001 periods. As a result of certain favorable resolutions, the Company’s consolidated statement of operations for the year
ended December 31, 2005 includes an income tax benefit of $720 million, reflecting a reduction in the Company’s liability for
income taxes.
For tax year 2007, the Company has chosen to participate in the Service’s new Compliance Assurance Program (the “CAP”).
Under CAP, the Service assigns an examination team to review completed transactions contemporaneously during the 2007 tax year
in order to reach agreement with the Company on how they should be reported in the tax return. If disagreements arise, accelerated
resolutions programs are available to resolve the disagreements in a timely manner before the tax return is filed. It is management’s
expectation this new program will significantly shorten the time period between when the Company files its federal income tax
return and when the Service completes its examination of the return.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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