Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

19. 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)		2012	2011	2010
Current income tax expense (benefit):
U.S. Federal income taxes	$	327	82	(5)
State and local income taxes		38	14	16
Total current tax expense		365	96	11
Deferred income tax expense
U.S. Federal income taxes		252	411	165
State and local income taxes		19	26	11
Total deferred income tax expense		271	437	176
Applicable income tax expense	$	636	533	187

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)	2012		2011	2010
Statutory tax rate	35.0	%	35.0	35.0
Increase (decrease) resulting from:
State taxes, net of federal benefit	1.7		1.4	1.8
Tax-exempt income	(2.1)		(1.4)	(3.6)
Credits	(6.7)		(7.3)	(14.1)
Interest to taxing authority, net of tax	-		-	(0.8)
Other changes in unrecognized tax benefits	-		-	(1.8)
Unrealized stock-based compensation benefits	0.8		1.3	2.5
Other, net	0.1		0.1	0.8
Effective tax rate	28.8	%	29.1	19.8

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 for 2010.

The following table provides a summary of the Bancorp’s unrecognized tax benefits as of December 31:
($ in millions)		2012	2011
Tax positions that would impact the effective tax rate, if recognized	$	18	14
Tax positions where the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of the deduction		-	-
Unrecognized tax benefits	$	18	14

The following table provides a reconciliation of the beginning and ending amounts of the Bancorp’s unrecognized tax benefits:
($ in millions)		2012	2011	2010
Unrecognized tax benefits at January 1	$	14	16	82
Gross increases for tax positions taken during prior period		6	1	4
Gross decreases for tax positions taken during prior period		(3)	(2)	(23)
Gross increases for tax positions taken during current period		2	-	2
Settlements with taxing authorities		-	-	(48)
Lapse of applicable statute of limitations		(1)	(1)	(1)
Unrecognized tax benefits at December 31	$	18	14	16

The Bancorp's unrecognized tax benefits as of December 31,2012 and2011 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.

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)		2012	2011
Deferred tax assets:
Allowance for loan and lease losses	$	649	789
Deferred compensation		105	119
Impairment reserves		74	102
Reserves		63	70
Reserve for unfunded commitments		47	63
State net operating losses		33	63
Other		191	216
Total deferred tax assets	$	1,162	1,422
Deferred tax liabilities:
Lease financing	$	844	853
Investments in joint ventures and partnership interests		470	468
Other comprehensive income		202	253
MSRs		162	173
Bank premises and equipment		108	95
State deferred taxes		64	74
Other		155	130
Total deferred tax liabilities	$	2,005	2,046
Total net deferred tax liability	$	(843)	(624)

At December 31, 2012 and 2011, the Bancorp had recorded deferred tax assets of $33 million and $63 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 $20 million and $34 million at December 31, 2012 and 2011, respectively. If these carryforwards are not utilized, they will expire in varying amounts through 2030. Additionally, at December 31, 2011, the Bancorp had federal general business tax credit carryforwards of $5million that were fully utilized in 2012.

The Bancorp has determined that a valuation allowance is not needed against the remaining deferred tax assets as of December 31, 2012 or 2011. 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, 2012 and 2011 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.

The IRS concluded its audit for 2008 and 2009 during the first quarter of 2012. As a result, all issues have been resolved with the IRS through 2009. The IRS is currently examining the Bancorp's 2010 and 2011 federal income tax returns. The statute of limitations for the Bancorp's federal income tax returns remains open for tax years 2008-2012. 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.

During the years ended December 31, 2012 and 2011, the Bancorp recognized an immaterial amount of interest expense in connection with income taxes. At December 31, 2012 and 2011, the Bancorp had accrued interest liabilities, net of the related tax benefits of $3 million. No material liabilities were recorded for penalties.

Retained earnings at December 31, 2012 and 2011included $157millionin 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.