Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

Note 10—Income Taxes

The following table is an analysis of the effective tax rate.

	Years Ended December 31,
	2011			2010			2009
Federal income tax rate		35	%		35	%		35	%
Net tax effects of:
State income taxes, net of federal income tax benefit		7			6			1
Tax-exempt interest income		(1	)		(1	)		3
Tax credits		(10	)		(10	)		30
Change in estimate to the valuation of FDIC covered assets		(2	)		—			—
Other		—			—			2
Effective tax rate		29	%		30	%		71	%

The Company’s income from international operations was not significant. The federal income tax rate for 2009 indicates an income tax benefit on the loss before taxes.

The components of income tax expense were as follows.

	Years Ended December 31,
(Dollars in millions)	2011			2010		2009
Taxes currently payable:
Federal	$	105		$	72	$	(69	)
State		67			71		24
Foreign		8			12		6
Total currently payable		180			155		(39	)
Taxes deferred:
Federal		109			78		(91	)
State		30			6		(28	)
Foreign		(1	)		—		(3	)
Total deferred		138			84		(122	)
Total income tax expense (benefit)	$	318		$	239	$	(161	)

The components of the Company’s net deferred tax balances as of December 31, 2011 and 2010 were as follows.

	December 31,
(Dollars in millions)	2011		2010
Deferred tax assets:
Allowance for loan and off-balance sheet commitment losses	$	375	$	536
Accrued income and expense		167		139
Unrealized losses on pension and post retirement benefits		445		273
Unrealized net losses on securities available for sale		133		231
Unrealized net losses on cash flow hedges		13		16
Fair value adjustments for valuation of FDIC covered assets		123		—
State taxes		12		—
Other		59		89
Total deferred tax assets		1,327		1,284
Deferred tax liabilities:
Leasing		701		597
Basis differences for premises and equipment		57		47
Intangible assets		140		89
Pension liabilities		299		260
Fair value adjustments for loans		—		17
State taxes		—		8
Total deferred tax liabilities		1,197		1,018
Net deferred tax asset	$	130	$	266

Deferred tax assets as of December 31, 2011 include federal tax credit carry forwards of $15 million that expire after 2030. Deferred tax assets are evaluated for realization based on the expectation of future events, including the reversal of existing temporary differences and our ability to earn future taxable income. It is management’s opinion that a $10 million valuation allowance is necessary to offset certain deferred tax assets attributable to BTMU’s transfer of The Bank of Tokyo-Mitsubishi UFJ Trust Company (BTMUT) to the Company, because those deferred tax assets are not expected to be realized through carrybacks to prior taxable years, future reversals of existing temporary differences or in future taxable income.

The State of California requires the Company to elect to file the franchise tax returns as a member of a unitary group that includes either all worldwide operations of MUFG (worldwide election) or only U.S. operations of MUFG (water’s-edge election). In 2010, the Company made a water’s-edge election on its 2009 California tax return and such election is binding for seven years. The Company has reflected that election in its income tax expense for 2011 and 2010.

The changes in unrecognized tax benefits were as follows.

	Years Ended December 31,
(Dollars in millions)	2011			2010			2009
Balance, beginning of year	$	233		$	202		$	191
Gross increases as a result of tax positions taken during prior periods		53			32			10
Gross decreases as a result of tax positions taken during prior periods		(13	)		(1	)		(2	)
Gross increases as a result of tax positions taken during current period		1			—			3
Balance, end of year	$	274		$	233		$	202

The amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $115 million, $91 million and $71 million at December 31, 2011, 2010 and 2009, respectively.

Interest and penalties relating to unrecognized tax benefits are recognized in income tax expense. The Company recognized $8 million, zero and $3 million of interest expense relating to unrecognized tax benefits during the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011, 2010 and 2009, the Company had $22 million, zero and $1 million of accrued interest expense, respectively. As of December 31, 2011, the Company accrued $7 million of penalties. The Company does not accrue interest on income tax refunds until they are realized.

In 2008, California enacted a new statute mandating a 20 percent penalty on corporate tax underpayments in excess of $1 million that were outstanding after May 31, 2009 for tax years beginning on or after January 1, 2003. During the second quarter of 2009, the Company filed amended tax returns and made payments of $187 million of tax and $44 million of interest with respect to tax positions taken in prior year worldwide unitary tax returns, which primarily involved the method of apportionment of worldwide income to California. The payments were made in order to protect the Company from potential penalties that may be asserted by the tax authorities. The Company has filed refund claims and intends to defend its positions. The payments did not affect the recognition or measurement of unrecognized state tax benefits and they had no impact on income tax expense.

The Company expects a decrease of approximately $10 million to unrecognized tax benefits during the next 12 months relating to an expected change in the tax accounting policy attributable to BTMU’s transfer of BTMUT to the Company. The Company does not expect any other material increase or decrease to unrecognized tax benefits during the next 12 months. However, the Company is subject to federal and state tax examinations, as well as ongoing litigation concerning our lease-in/lease-out (LILO) transactions. Therefore, the Company’s estimate of unrecognized tax benefits is subject to change based on new developments and information. The Company’s years open to examination are 2008 and forward for federal and 2004 and forward for California and most other states.