eTrade 2008 Annual Report Download - page 141

future periods, it does expect these amounts to decline when compared to the credit losses in 2007 and 2008. The
retail segment generated substantial book taxable income for each of the last six years and the Company
estimates that it will continue to generate taxable income in future periods at a level sufficient enough to generate
taxable income for the Company as a whole. The Company considers this to be significant, objective evidence
that it will be able to realize the deferred tax assets in the future.
The Company’s analysis of the need for a valuation allowance recognizes that it is in a cumulative book
taxable loss position as of the three-year period ended December 31, 2008, which is considered significant,
objective evidence that the Company may not be able to realize some portion of the deferred tax assets in the
future. However, the Company believes it is able to rely on the forecasts of future taxable income and overcome
the uncertainty created by the cumulative loss position.
The crisis in the residential real estate and credit markets has created significant volatility in the Company’s
results of operations. This volatility is isolated almost entirely to the institutional segment. The forecasts for this
segment include assumptions regarding the estimate of future expected credit losses, which the Company
believes to be the most variable component of the forecasts of future taxable income. The Company believes this
variability could create a book loss in the overall results for an individual reporting period while not significantly
impacting the overall estimate of taxable income over the period in which the Company expects to realize the
deferred tax assets. Conversely, the Company believes the retail segment will continue to produce a stable stream
of income which it believes can reliably estimate in both individual reporting periods as well as over the period
in which the Company estimates it will realize the deferred tax assets.
In evaluating the need for a valuation allowance, the Company estimated future taxable income based on
management approved forecasts. This process required significant judgment by management about matters that
are by nature uncertain. If future events differ significantly from the current forecasts, a valuation allowance may
need to be established, which would have a material adverse effect on the results of operations, financial
condition and regulatory capital position at E*TRADE Bank. In addition, a significant portion of the net deferred
tax asset relates to a $2.3 billion federal tax loss carryforward, the utilization of which may be further limited in
the event of certain material changes in the ownership of the Company. The Company will continue to monitor
and update its assumptions and forecasts of future taxable income and assess the need for a valuation allowance.
For certain of the Company’s state and foreign country deferred tax assets, the Company maintains a
valuation allowance of $127.7 million and $91.8 million at December 31, 2008 and 2007, respectively, as it is
more likely than not that they will not be fully realized. The Company’s valuation allowance increased by $35.9
million for the year ended December 31, 2008. 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
carryforwards and excess tax bases in certain illiquid investments:
• At December 31, 2008, the Company had foreign country net operating loss carryforwards of
approximately $99 million for which a deferred tax asset of approximately $27 million was established.
The foreign net operating losses represent the foreign tax loss carryforwards in numerous foreign
countries, some of which are subject to expiration from in 2017. 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 $26 million
against such deferred tax asset at December 31, 2008.
• At December 31, 2008, the Company had gross state net operating loss carryforwards of $2.3 billion
that expire between 2009 and 2027, most of which are subject to reduction for apportionment when
utilized. A deferred tax asset of approximately $112.5 million has been established related to these
state net operating loss carryforwards with a valuation allowance of $82.6 million against such deferred
tax asset at December 31, 2008.
• At December 31, 2008, the Company maintained a valuation allowance against the excess tax basis in
certain capital assets of approximately $8.3 million. The capital assets in question are certain
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