Income Taxes

3 Months Ended

Sep. 30, 2011

Notes To Condensed Consolidated Financial Statements [Abstract]

Income Taxes

7. Income Taxes

The effective tax rate for the three months ended September 30, 2011 and 2010 was (17.1)% and 32.8%, respectively, and the effective tax rate for the nine months ended September 30, 2011 and 2010 was 19.7% and 38.2%, respectively. The year-to-date 2011 rate includes a $34 million tax benefit from the sale ofnon-U.S. leveraged lease assets, $27 million of tax benefits arising from the findings of various tax examinations and a $3 million charge from the write-off of deferred tax assets associated with the expiration of out-of-the-money vested stock options and the vesting of restricted stock units previously granted to our employees. The year-to-date 2010 rate included a $9 million charge from the write-off of deferred tax assets related to the U.S. health care reform legislation that eliminated the tax deduction for retiree health care costs to the extent of federal subsidies received by companies that provide retiree prescription drug benefits equivalent to Medicare Part D coverage and a $10 million charge from the write-off of deferred tax assets associated with the expiration of out-of-the-money vested stock options and the vesting of restricted stock units previously granted to our employees.

We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications. Tax reserves have been established which we believe to be appropriate given the possibility of tax adjustments. Determining the appropriate level of tax reserves requires us to exercise judgment regarding the uncertain application of tax laws. The amount of reserves is adjusted when information becomes available or when an event occurs indicating a change in the reserve is appropriate. Future changes in tax reserve requirements could have a material impact on our results of operations.

As is the case with other large corporations, our tax returns are examined each year by tax authorities in the United States, other countries and local jurisdictions in which we have operations. The IRS examination of tax years 2001-2004 is estimated to be closed to audit within the next six months and the examination of years 2005-2008 within the next 12 months. During July 2011, in connection with the 2001-2004 examination, we entered into a series of settlements with the IRS under which we agreed upon both the tax treatment of a number of disputed issues and revised tax calculations. Accordingly, in the third quarter $76 million of previously provided tax and interest reserves were released, of which $60 million related to our Capital Services business that we sold in 2006 and was released through discontinued operations. During the fourth quarter of 2011, in connection with the 2005-2008 IRS examination, we entered into a settlement with the IRS under which we agreed upon both the tax treatment of disputed issues and revised tax calculations. In the fourth quarter, we expect to release at least $30 million of 2005-2008 tax and interest reserves, about $5 million of which will be released through Discontinued Operations. Our additional liability for tax and interest arising from the 2001-2008 IRS examinations is approximately $400 million, which was previously paid through the purchase of tax bonds.

In addition, a variety of post-2000 tax years remain subject to examination by other tax authorities, including the U.S., UK, Canada, France, Germany and various U.S. states. It is reasonably possible that the amount of our unrecognized tax benefits will decrease in the next 12 months, and we expect this change could be up to two-thirds of our unrecognized tax benefits. We believe we have established tax reserves that are appropriate given the possibility of tax adjustments, including any adjustments to our unrecognized tax benefits. However, depending upon the size of the reserve as compared to the ultimate determination of such matters, the resolution could have a material impact, positive or negative, on our results of operations, financial position and cash flows.