eTrade 2009 Annual Report Download - page 154

As of the date of the ownership change, the Company estimated that it had federal net operating losses
(“NOLs”) available to carry forward of approximately $1.4 billion. Section 382 of the Internal Revenue Code of
1986, as amended, imposes restrictions on the use of a corporation’s NOLs, certain recognized built-in losses and
other carryovers after an “ownership change” occurs. Section 382 rules governing when a change in ownership
occurs are complex and subject to interpretation; however, an ownership change generally occurs when there has
been a cumulative change in the stock ownership of a corporation by certain “5% shareholders” of more than 50
percentage points over a rolling three-year period.
Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a
corporation may offset with pre-ownership change NOLs. In general, the annual limitation is determined by
multiplying the value of the corporation’s stock immediately before the ownership change (subject to certain
adjustments) by the applicable long-term tax-exempt rate. Any unused portion of the annual limitation is
available for use in future years until such NOLs are scheduled to expire (in general, the Company’s NOLs may
be carried forward 20 years). In addition, the limitation may, under certain circumstances, be decreased by
built-in losses which may be present with respect to assets held at the time of the ownership change that are
recognized in the five-year period (one-year for loans) after the ownership change. The use of NOLs arising after
the date of an ownership change would not be affected unless a corporation experienced an additional ownership
change in a future period.
The Company believes the tax ownership change will extend the period of time it will take to fully utilize its
pre-ownership change NOLs, but will not limit the total amount of pre-ownership change NOLs it can utilize.
The Company’s preliminary estimate is that it will be subject to an overall annual limitation on the use of its
pre-ownership change NOLs of approximately $155 million; however, this amount is subject to change in future
periods as the Company finalizes the tax change of control analysis in 2010. Since the statutory carry forward
period for the Company’s overall pre-ownership change NOLs, which are approximately $1.4 billion, is 20 years
(the majority of which expire in 19 years), the Company believes it will be able to fully utilize these NOLs in
future periods.
The Company’s ability to utilize the pre-ownership change NOLs is dependent on its ability to generate
sufficient taxable income over the duration of the carry forward periods and will not be impacted by its ability or
inability to generate taxable income in an individual year.
NOTE 17—SHAREHOLDERS’ EQUITY
The activity in shareholders’ equity during the year ended December 31, 2009 is summarized as follows
(dollars in thousands):
Common Stock/
Additional Paid-
In Capital
Accumulated
Deficit/Other
Comprehensive
Loss Total
Beginning balance, December 31, 2008 $4,069,917 $(1,478,421) $2,591,496
Common stock offerings 733,118 — 733,118
Activity related to the Debt Exchange:
After-tax loss related to the Debt Exchange — (772,908) (772,908)
Amortization of premium on the convertible debentures 707,224 — 707,224
Conversions of convertible debentures 720,930 — 720,930
All other after-tax operating losses — (524,854) (524,854)
Net change from available-for-sale securities — 107,588 107,588
Net change from cash flow hedging instruments — 138,941 138,941
Other(1) 45,862 2,158 48,020
Ending balance, December 31, 2009 $6,277,051 $(2,527,496) $3,749,555
(1) Other includes employee stock compensation accounting, additional purchase consideration paid in connection with prior acquisitions
and changes in accumulated other comprehensive loss from foreign currency translation.
151