Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

Income Taxes

20. Income Taxes

The components of income tax provision attributable to continuing operations were as follows:

	Years Ended December 31,
	2011			2010			2009
	(in millions)
Current income tax:
Federal	$	250		$	(224	)	$	200
State and local		21			13			4
Foreign		23			32			4
Total current income tax		294			(179	)		208
Deferred income tax:
Federal		68			540			(13	)
State and local		1			(5	)		(7	)
Foreign		(8	)		(6	)		(4	)
Total deferred income tax		61			529			(24	)
Total income tax provision	$	355		$	350		$	184

The geographic sources of pretax income from continuing operations were as follows:

	Years Ended December 31,
	2011		2010		2009
	(in millions)
United States	$	1,288	$	1,470	$	883
Foreign		97		164		37
Total	$	1,385	$	1,634	$	920

The principal reasons that the aggregate income tax provision attributable to continuing operations is different from that computed by using the U.S. statutory rate of 35% were as follows:

	Years Ended December 31,
	2011			2010			2009
Tax at U.S. statutory rate		35.0	%		35.0	%		35.0	%
Changes in taxes resulting from:
Dividend exclusion		(8.9	)		(4.1	)		(7.6	)
Tax-exempt interest income		(1.3	)		(1.0	)		(1.3	)
Tax credits		(3.4	)		(2.5	)		(5.8	)
State taxes, net of federal benefit		1.0			0.2			(0.4	)
Net income (loss) attributable to noncontrolling interests		2.7			(3.4	)		(0.6	)
Other, net		0.5			(2.7	)		0.7
Income tax provision		25.6	%		21.5	%		20.0	%

The increase in the Company's effective tax rate in 2011 compared to 2010 primarily reflects the change in the noncontrolling interests which is included in pretax income, partially offset by a favorable audit settlement related to the dividends received deduction. The increase in the Company's effective tax rate in 2010 compared to 2009 primarily reflects an increase in pretax income relative to tax advantaged items, which was partially offset by $53 million in benefits from tax planning and the completion of certain audits.

Accumulated earnings of certain foreign subsidiaries, which totaled $89 million at December 31, 2011, are intended to be permanently reinvested outside the United States. Accordingly, U.S. federal taxes, which would have aggregated $9 million, have not been provided on those earnings.

Deferred income tax assets and liabilities result from temporary differences between the assets and liabilities measured for GAAP reporting versus income tax return purposes. The significant components of the Company's deferred income tax assets and liabilities, which are included net within other assets or other liabilities on the Consolidated Balance Sheets, were as follows:

	December 31,
	2011			2010
	(in millions)
Deferred income tax assets:
Liabilities for future policy benefits and claims	$	1,615		$	1,329
Investment impairments and write-downs		118			119
Deferred compensation		274			241
Investment related		—			56
Loss carryovers and tax credit carryforwards		134			134
Other		89			70
Gross deferred income tax assets		2,230			1,949
Less: Valuation allowance		(5	)		—
Total deferred income tax assets		2,225			1,949
Deferred income tax liabilities:
Deferred acquisition costs		1,418			1,473
Investment related		260			—
Deferred sales inducement costs		180			191
Net unrealized gains on Available-for-Sale securities		396			312
Depreciation expense		182			138
Intangible assets		60			52
Other		71			85
Gross deferred income tax liabilities		2,567			2,251
Net deferred income tax liabilities	$	(342	)	$	(302	)

The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in deferred tax assets is a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains. Consideration is given to, among other things in making this determination, (i) future taxable income exclusive of reversing temporary differences and carryforwards, (ii) future reversals of existing taxable temporary differences, (iii) taxable income in prior carryback years, and (iv) tax planning strategies. Based on analysis of the Company's tax position, management believes it is more likely than not that the Company will not realize the full benefit of certain state net operating losses and therefore a valuation allowance of $5 million has been established as of December 31, 2011.

Included in the Company's deferred income tax assets are tax benefits related to capital loss carryforwards of $30 million which will expire beginning December 31, 2015, tax credits of $65 million which will expire beginning December 31, 2027, and state net operating losses of $39 million which will expire beginning December 31, 2014. As a result of the Company's ability to file a consolidated U.S. federal income tax return including the Company's life insurance subsidiaries, as well as the expected level of taxable income, management believes the Company's capital loss carryforwards and tax credit carryforwards will be utilized before they expire.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (expense) were as follows:

	2011			2010			2009
	(in millions)
Balance at January 1	$	75		$	(33	)	$	(56	)
Additions based on tax positions related to the current year		1			2			1
Additions for tax positions of prior years		95			57			45
Reductions for tax positions of prior years		(8	)		(42	)		(23	)
Settlements		21			91			—
Balance at December 31	$	184		$	75		$	(33	)

If recognized, approximately $38 million, $54 million and $81 million, net of federal tax benefits, of unrecognized tax benefits as of December 31, 2011, 2010, and 2009, respectively, would affect the effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized $66 million of interest and penalties for the year ended December 31, 2011. The Company recognized a net reduction of $17 million in interest and penalties for the year ended December 31, 2010 and an increase of $1 million in interest and penalties for the year ended December 31, 2009. At December 31, 2011 and 2010, the Company had a payable of $37 million and a receivable of $29 million, respectively, related to accrued interest and penalties.

It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. Based on the current audit position of the Company, it is estimated that the total amount of gross unrecognized tax benefits may decrease by $150 million to $160 million in the next 12 months.

The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Internal Revenue Service ("IRS") had previously completed its field examination of the 1997 through 2007 tax returns in recent years as part of the overall examination of the American Express Company consolidated returns. However, for federal income tax purposes these years except for 2007, continue to remain open as a consequence of certain issues under appeal. The IRS is currently auditing the Company's U.S. income tax returns for 2008 and 2009. The Company's or certain of its subsidiaries' state income tax returns are currently under examination by various jurisdictions for years ranging from 1999 through 2009. The Company's federal and state income tax returns remain open for the years after 2009.

It is possible there will be corporate tax reform in the next few years. While impossible to predict, corporate tax reform is likely to include a reduction in the corporate tax rate coupled with reductions in tax preferred items. Potential tax reform may also affect the U.S. tax rules regarding international operations. Any changes could have a material impact on the income tax expense and the deferred tax balances of the Company.

The items comprising other comprehensive income are presented net of the following income tax provision (benefit) amounts:

	Years Ended December 31,
	2011			2010			2009
	(in millions)
Net unrealized securities gains	$	77		$	167		$	753
Net unrealized derivatives gains		(15	)		8			6
Defined benefit plans		(28	)		(2	)		10
Foreign currency translation adjustment		(1	)		(6	)		15
Net income tax provision	$	33		$	167		$	784