eTrade 2007 Annual Report Download - page 129

Deferred income taxes are recorded when revenues and expenses are recognized in different periods for
financial statement and tax return purposes. Prior year balances for the deferred tax asset and liabilities have been
re-presented to ensure consistency between periods. The adjustments relate to the presentation of the federal
benefit of the state deferred assets and liabilities. The temporary differences and tax carry-forwards that created
deferred tax assets and deferred tax liabilities are as follows (dollars in thousands):
December 31,
2007 2006
Deferred tax assets:
Reserves and allowances, net $ 203,260 $ 29,690
Net unrealized loss on equity investments and Bank assets
held-for-sale 226,527 94,129
Net operating loss carry-forwards 624,730 64,299
Deferred compensation 24,155 19,285
Capitalized technology development 2,654 1,887
Tax credits 24,709 —
Restructuring reserve and related write-downs 53,510 44,823
Total deferred tax assets 1,159,545 254,113
Deferred tax liabilities:
Internally developed software (34,861) (23,330)
Acquired intangibles (7,974) (22,219)
Basis differences in investments (340,432) (113,306)
Loan fees (5,010) (4,488)
Depreciation and amortization (123,060) (92,825)
Other (6,143) (18,135)
Total deferred tax liabilities (517,480) (274,303)
Valuation allowance (91,831) (38,295)
Net deferred tax asset (liability) $ 550,234 $ (58,485)
The Company maintains a valuation allowance of $91.8 million and $38.3 million at December 31, 2007
and 2006, respectively, against certain of its deferred tax assets, as it is more likely than not that they will not be
fully realized. The Company’s valuation allowance increased by $53.5 million for the year ended
December 31, 2007. The principal components of the deferred tax assets for which a valuation allowance has
been established include the following state and foreign country net operating loss carry-forwards and excess tax
bases in certain illiquid investments:
• At December 31, 2007, the Company had foreign country net operating loss carry-forwards of
approximately $112 million for which a deferred tax asset of approximately $32 million was established.
The foreign net operating losses represent the foreign tax loss carry-forwards in numerous foreign
countries, some of which are subject to expiration from in 2008. In most of these foreign countries, the
Company has historical tax losses, and the Company continues to project to incur operating losses in most
of these countries. Accordingly, the Company has provided a valuation allowance of $24 million against
such deferred tax asset at December 31, 2007.
• At December 31, 2007, the Company had gross state net operating loss carry-forwards of $1.67 billion
that expire between 2008 and 2026, most of which are subject to reduction for apportionment when
utilized. A deferred tax asset of approximately $68.5 million has been established related to these state net
operating loss carry-forwards with a valuation allowance of $52 million against such deferred tax asset at
December 31, 2007.
• At December 31, 2007, the Company maintains a valuation allowance against the excess tax basis in
certain capital assets of approximately $8.3 million. The capital assets in question are certain investments
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