Prudential 2007 Annual Report Download - page 164

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
17. INCOME TAXES (continued)
Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:
2007 2006
(in millions)
Deferred tax assets
Policyholder dividends ...................................................................................... $ 511 $ 598
Insurance reserves ......................................................................................... 773 1,467
Net operating and capital loss carryforwards ..................................................................... 626 750
Other .................................................................................................... 665 425
Deferred tax assets before valuation allowance ................................................................... 2,575 3,240
Valuation allowance ........................................................................................ (382) (592)
Deferred tax assets after valuation allowance .................................................................... 2,193 2,648
Deferred tax liabilities
Net unrealized investment gains ............................................................................... 1,847 1,491
Deferred policy acquisition costs .............................................................................. 2,346 2,658
Employee benefits ......................................................................................... 379 156
Other .................................................................................................... 235 566
Deferred tax liabilities ...................................................................................... 4,807 4,871
Net deferred tax liability ......................................................................................... $(2,614) $(2,223)
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, 2007 and 2006,
respectively, includes $150 million and $168 million recorded in connection with Prudential Securities Group Inc. state deferred tax assets
and $215 million and $249 million recorded in connection with the acquisition of Hyundai Investment and Securities Co., Ltd. and its
subsidiary. 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, 2007 and 2006, respectively, the Company had federal net operating and capital loss carryforwards of $725 million
and $996 million, which expire between 2010 and 2023. At December 31, 2007 and 2006, respectively, the Company had state operating
and capital loss carryforwards for tax purposes approximating $2,038 million and $1,986 million, which expire between 2008 and 2028. At
December 31, 2007 and 2006, respectively, the Company had foreign operating loss carryforwards for tax purposes approximating $835
million and $991 million, $804 million of which expires between 2008 and 2014 and $31 million of which have an unlimited carryforward.
The Company does not provide U.S. income taxes on unremitted foreign earnings of its non-U.S. operations, other than its Japanese
operations and certain German, Taiwan and United Kingdom 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 determined that the earnings from its Taiwan investment management subsidiary would be
repatriated to the U.S. Accordingly, earnings from its Taiwan investment management subsidiary were no longer considered permanently
reinvested. A U.S. income tax benefit of $18 million associated with the assumed repatriation of those earnings was recognized in 2006.
During 2007, the Company sold its investment in its German operating joint ventures Oppenheim Pramerica Fonds Trust GmbH and
Oppenheim Pramerica Asset Management S.a.r.l. Accordingly, the earnings were no longer considered reinvested and the Company
recognized an income tax expense of $9 million related to those earnings. In addition, in 2007, the Company determined that the earnings
from certain of its United Kingdom investment management subsidiaries would be repatriated to the U.S. Accordingly, earnings from those
United Kingdom investment management subsidiaries were no longer considered permanently reinvested. A U.S. income tax benefit of $23
million associated with the assumed repatriation of those earnings was recognized in discontinued operations in 2007. The Company had
undistributed earnings of foreign subsidiaries, where it assumes permanent reinvestment, of $1,516 million at December 2007, $1,252
million at December 31, 2006 and $1,018 at December 31, 2005, for which deferred taxes have not been provided. 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.
On January 1, 2007, the Company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes,” an Interpretation of FASB
Statement No. 109. This interpretation prescribes a comprehensive model for how a company should recognize, measure, present, and
disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Adoption of FIN
No. 48 resulted in a decrease to the Company’s income tax liability and an increase to retained earnings of $61 million as of January 1, 2007.
162 Prudential Financial 2007 Annual Report