Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Income Taxes

Note 17

income taxes

The components of income tax expense for the years ended December 31 included in the Consolidated Statements of Income were as follows:

(Millions)					2011		2010		2009
Current income tax expense:
	U.S. federal			$	958	$	532	$	661
	U.S. state and local				156		110		40
	Non-U.S.				434		508		295
		Total current income tax expense			1,548		1,150		996
Deferred income tax expense (benefit):
	U.S. federal				464		782		(231)
	U.S. state and local				68		78		24
	Non-U.S.				(23)		(103)		(85)
		Total deferred income tax expense
			(benefit)		509		757		(292)
Total income tax expense on
	continuing operations			$	2,057	$	1,907	$	704
Income tax (benefit) expense from
	discontinued operations			$	(36)	$	―	$	4

A reconciliation of the U.S. federal statutory rate of 35 percent to the Company's actual income tax rate for the years ended December 31 on continuing operations was as follows:

			2011		2010		2009
Combined tax at U.S. statutory federal
	income tax rate		35.0	%	35.0	%	35.0	%
Increase (decrease) in taxes resulting from:
	Tax-exempt income		(1.5)		(1.9)		(4.6)
	State and local income taxes, net of
		federal benefit	2.6		2.7		2.7
	Non-U.S. subsidiaries earnings(a)		(4.4)		(3.1)		(6.8)
	Tax settlements(b)		(1.9)		(1.3)		(1.4)
	All other		(0.2)		0.6		(0.1)
		Actual tax rates	29.6	%	32.0	%	24.8	%

• Results for all years primarily include tax benefits associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely.
• Relates to the resolution of tax matters in various jurisdictions.

The Company records a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax return purposes. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse.

The significant components of deferred tax assets and liabilities as of December 31 are reflected in the following table:

(Millions)				2011		2010
Deferred tax assets:
	Reserves not yet deducted for tax purposes		$	3,435	$	3,789
	Employee compensation and benefits			760		741
	Other			626		290
		Gross deferred tax assets		4,821		4,820
		Valuation allowance		(112)		(104)
		Deferred tax assets after valuation allowance		4,709		4,716
Deferred tax liabilities:
	Intangibles and fixed assets			1,013		834
	Deferred revenue			382		36
	Asset securitizations			39		43
	Net unrealized securities gains			25		19
	Other			375		387
		Gross deferred tax liabilities		1,834		1,319
Net deferred tax assets			$	2,875	$	3,397

A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax assets will not be realized. The valuation allowances as of December 31, 2011and 2010are associated with net operating losses and other deferred tax assets in certain non-U.S. operations of the Company.

Accumulated earnings of certain non-U.S. subsidiaries, which totaled approximately $7.7 billion as of December 31, 2011, are intended to be permanently reinvested outside the United States. The Company does not provide for federal income taxes on foreign earnings intended to be permanently reinvested outside the United States. Accordingly, federal taxes, which would have aggregated approximately $2.3 billion as of December 31, 2011, have not been provided on those earnings.

Net income taxes paid by the Company (including amounts related to discontinued operations) during 2011, 2010 and 2009, were approximately $0.7 billion, $0.8 billion and $0.4 billion, respectively. These amounts include estimated tax payments and cash settlements relating to prior tax years.

The Company is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer's facts is sometimes open to interpretation. Given these inherent complexities, the Company must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. A tax position is recognized only when, based on management's judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on management's best judgment of the largest amount of benefit that is more likely than not to be realized on ultimate settlement with the taxing authority given the facts, circumstances and information available at the reporting date. The Company adjusts the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome.

The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of the Company's federal tax returns for years through 2004, and in April 2011, unagreed issues for 1997 through 2004 were resolved at IRS Appeals. Additional refund claims for those years continue to be reviewed by the IRS. In addition, the Company is currently under examination by the IRS for the years 2005 through 2007.

The following table presents changes in unrecognized tax benefits:

(Millions)				2011		2010		2009
Balance, January 1			$	1,377	$	1,081	$	1,176
Increases:
	Current year tax positions			77		182		39
	Tax positions related to prior years			247		403		161
	Effects of foreign currency
		translations		―		―		1
Decreases:
	Tax positions related to prior years			(457)		(145)		(197)
	Settlements with tax authorities			(2)		(138)		(97)
	Lapse of statute of limitations			(19)		(6)		(2)
Balance, December 31			$	1,223	$	1,377	$	1,081

Included in the $1.2 billion, $1.4 billion and $1.1 billion of unrecognized tax benefits as ofDecember 31, 2011, 2010 and 2009, respectively, are approximately $440 million, $476 million and $480 million, respectively, that, if recognized, would favorably affect the effective tax rate in a future period.

The Company believes it is reasonably possible that the unrecognized tax benefits could decrease within the next 12 months by as much as $867 million principally as a result of potential resolutions of prior years' tax items with various taxing authorities. The prior years' tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $867 million of unrecognized tax benefits, approximately $640 million relates to amounts recorded to equity that, if recognized, would not impact the effective tax rate. With respect to the remaining $227 million, it is not possible to quantify the impact that the decrease could have on the effective tax rate and net income due to the inherent complexities and the number of tax years open for examination in multiple jurisdictions. Resolution of the prior years' items that comprise this remaining amount could have an impact on the effective tax rate and on net income, either favorably (principally as a result of settlements that are less than the liability for unrecognized tax benefits) or unfavorably (if such settlements exceed the liability for unrecognized tax benefits).

Interest and penalties relating to unrecognized tax benefits are reported in the income tax provision. During the years ended December 31, 2011,2010 and 2009, the Company recognized approximately $(63) million, $31 million and $1 million, respectively, of interest and penalties. The Company has approximately $163 million and $226 million accrued for the payment of interest and penalties as of December 31, 2011 and 2010, respectively.

Discontinued operations for 2011 included the impact of a $36 million tax benefit related to the favorable resolution of certain prior years' tax items related to American Express Bank, Ltd., which was sold to Standard Chartered PLC during the quarter ended March 31, 2008.