Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

20. INCOME TAXES

The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in the Consolidated Statements of Income for the years ended December 31:

($ in millions)		2011	2010	2009
Current income tax expense (benefit):
U.S. Federal income taxes	$	82	(5)	(157)
State and local income taxes		14	16	6
Foreign income taxes		0	-	(3)
Total current tax expense (benefit)		96	11	(154)
Deferred income tax expense (benefit):
U.S. Federal income taxes		411	165	190
State and local income taxes		26	11	(8)
Foreign income taxes		0	-	2
Total deferred income tax expense		437	176	184
Applicable income tax expense	$	533	187	30

The following is a reconciliation between the statutory U.S. Federal income tax rate and the Bancorp's effective tax rate for the years ended December 31:

($ in millions)	2011		2010	2009
Statutory tax rate	35.0	%	35.0	35.0
Increase (decrease) resulting from:
State taxes, net of federal benefit	1.4		1.8	(0.1)
Tax-exempt income	(1.4)		(3.6)	(18.7)
Credits	(7.3)		(14.1)	(14.6)
Goodwill	-		-	8.7
Interest to taxing authority, net of tax	-		(0.8)	(7.6)
Other changes in unrecognized tax benefits	-		(1.8)	0.0
Unrealized stock-based compensation benefits	1.3		2.5	0.6
Other, net	0.1		0.8	0.6
Effective tax rate	29.1	%	19.8	3.9

Tax-exempt income in the rate reconciliation table includes interest on municipal bonds, interest on tax-exempt lending, income/charges on life insurance policies held by the Bancorp, and certain gains on sales of leases that are exempt from federal taxation.

During 2010, the Bancorp settled its outstanding dispute with the IRS relating to a specific capital raising transaction. This favorable settlement reduced income tax expense (including interest) by $19 million. During 2009, the Bancorp settled its outstanding dispute with the IRS relating to certain leveraged lease transactions. This favorable settlement reduced income tax expense (including interest) by $6 million and $55 million for 2010 and 2009, respectively.

During 2009, the Bancorp notified the carrier of one of the Bancorp's policies of its intent to surrender a certain BOLI policy and was therefore required to establish a deferred tax asset relating to the difference between its financial reporting and tax basis of its investment. As a result, income tax expense for 2009 was favorably impacted by $106 million.

The following table provides a summary of the Bancorp's unrecognized tax benefits as of December 31:

($ in millions)		2011	2010
Tax positions that would impact the effective tax rate, if recognized	$	14	15
Tax positions where the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of the deduction		-	1
Unrecognized tax benefits	$	14	16

The following table provides a reconciliation of the beginning and ending amounts of the Bancorp's unrecognized tax benefits:

($ in millions)		2011	2010	2009
Unrecognized tax benefits at January 1	$	16	82	959
Gross increases for tax positions taken during prior period		1	4	16
Gross decreases for tax positions taken during prior period		(2)	(23)	(329)
Gross increases for tax positions taken during current period		-	2	1
Settlements with taxing authorities		-	(48)	(563)
Lapse of applicable statute of limitations		(1)	(1)	(2)
Unrecognized tax benefits at December 31	$	14	16	82

The Bancorp's unrecognized tax benefits as of December 31, 2011 and 2010 relate largely to state income tax exposures from taking tax positions where the Bancorp believes it is likely that, upon examination, a state will take a position contrary to the position taken by the Bancorp.

Substantially all of the reduction of unrecognized tax benefits during 2010 related to the settlement of the Bancorp's dispute with the IRS relating to the specific capital raising transaction mentioned previously. Similarly, substantially all of the reduction of unrecognized tax benefits during 2009 related to the settlement of certain leveraged lease transactions with the IRS.

While it is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the Bancorp's uncertain tax positions could increase or decrease during the next 12 months, the Bancorp believes it is unlikely that its unrecognized tax benefits will change by a material amount during the next 12 months.

Deferred income taxes are comprised of the following items at December 31:

($ in millions)		2011	2010
Deferred tax assets:
Allowance for loan and lease losses	$	789	1,051
Deferred compensation		119	136
Impairment reserves		102	144
Reserves		70	52
Reserve for unfunded commitments		63	79
State net operating losses		63	66
Other		216	221
Total deferred tax assets	$	1,422	1,749
Deferred tax liabilities:
Lease financing	$	853	801
Investments in joint ventures and partnership interests		468	481
Other comprehensive income		253	169
MSRs		173	190
Bank premises and equipment		95	69
State deferred taxes		74	53
Other		130	130
Total deferred tax liabilities	$	2,046	1,893
Total net deferred tax liability	$	(624)	(144)

Deferred tax assets are included as a component of other assets in the Consolidated Balance Sheets and deferred tax liabilities are included as a component of accrued taxes, interest and expenses in the Consolidated Balance Sheets.

At December 31, 2011 and 2010, the Bancorp had recorded deferred tax assets of $63 million and $66 million, respectively, related to state net operating loss carryforwards. The deferred tax assets relating to state net operating losses are presented net of specific valuation allowances, primarily resulting from leasing operations, of $34 million and $25 million at December 31, 2011 and 2010, respectively. If these carry forwards are not utilized, they will expire in varying amounts through 2030. Additionally, at December 31, 2011 and 2010, the Bancorp had federal general business tax credit carryforwards of $5million and $45 million, respectively. If unused, these credit carryforwards will expire in 2031.

The Bancorp has determined that a valuation allowance is not needed against the remaining deferred tax assets as of December 31, 2011 or 2010. The Bancorp considered all of the positive and negative evidence available to determine whether it is more likely than not that the deferred tax assets will ultimately be realized and, based upon that evidence, the Bancorp believes it is more likely than not that the deferred tax assets recorded at December 31, 2011 and 2010 will ultimately be realized. The Bancorp reached this conclusion as the Bancorp has taxable income in the carryback period and it is expected that the Bancorp's remaining deferred tax assets will be realized through the reversal of its existing taxable temporary differences and its projected future taxable income.

As required under U.S. GAAP, the Bancorp established a deferred tax asset for stock-based awards granted to its employees.When the actual tax deduction for these stock-based awards is less than the expense previously recognized for financial reporting or when the awards expire unexercised, the Bancorp is required to write-off the deferred tax asset previously established for these stock-based awards. As a result of the expiration of certain stock options and SARs and the lapse of restrictions on certain shares of restricted stock during the year ended December 31, 2011, the Bancorp recorded additional income tax expense of approximately $26million related to the write-off of a portion of the deferred tax asset previously established. As a result of the Bancorp's stock price as of December 31, 2011, it is reasonably possible that the Bancorp will be required to record an additional $21 million of income tax expense over the next twelve months, primarily in the second quarter of 2012. The Bancorp cannot predict its stock price or whether its employees will exercise other stock-based awards with lower exercise prices in the future; therefore, it is possible that the impact to income tax expense will be greater than or less than $21 million over the next twelve months.

The IRS concluded its audit for 2006 and 2007 during the third quarter of 2010. As a result, all issues have been resolved with the IRS through 2007. Further, the IRS has concluded its fieldwork on the Bancorp's 2008 and 2009 federal income tax returns. No material issues were identified as a result of the IRS audit and all significant issues have been resolved. The Bancorp anticipates that the IRS audit of the 2008 and 2009 federal income tax returns will be completed during 2012. The statute of limitations for the Bancorp's federal income tax returns remains open for tax years 2008-2011. On occasion, as various state and local taxing jurisdictions examine the returns of the Bancorp and its subsidiaries, the Bancorp may agree to extend the statute of limitations for a short period of time. Otherwise, with the exception of a few states with insignificant uncertain tax positions, the statutes of limitations for state income tax returns remain open only for tax years in accordance with each state's statutes.

Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the Consolidated Financial Statements. During the year ended December 31, 2011, the Bancorp recognized interest expense of $1 million, net of the related tax impact related to interest and penalties. During the year ended December 31, 2010, the Bancorp recognized an interest benefit incurred in connection with income taxes of $8 million, net of the related tax impact.At December 31, 2011 and 2010, the Bancorp had accrued interest liabilities, net of the related tax benefits, of $3 million and $1 million, respectively. No material liabilities were recorded for penalties.

Retained earnings at December 31, 2011 and 2010 included $157 million in allocations of earnings for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current tax law, if certain of the Bancorp's subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current corporate tax rate.