Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

12. Income Taxes

Income taxes included in the income statement are summarized below. We file a consolidated federal income tax return.

Year ended December 31, in millions	2011		2010		2009
Currently payable:
Federal	$	90	$	127	$	(97)
State		(31)		(21)		(60)
Total currently payable		59		106		(157)
Deferred:
Federal		280		51		(806)
State		30		29		(72)
Total deferred		310		80		(878)
Total income tax (benefit) expense (a)	$	369	$	186	$	(1,035)

(a) Income tax (benefit) expense on securities transactions totaled $.4 million in 2011, $5 million in 2010 and $42 million in 2009. Income tax expense excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which we operate. These taxes, which are recorded in “noninterest expense” on the income statement, totaled $21 million in 2011, $19 million in 2010 and $24 million in 2009.

Significant components of our deferred tax assets and liabilities included in “accrued income and other assets” and “accrued expense and other liabilities,” respectively, on the balance sheet, are as follows:

December 31, in millions	2011		2010
Allowance for loan and lease losses	$	409	$	701
Employee benefits		228		202
Federal credit carryforwards		442		390
Net operating losses		12		71
Other		298		381
Total deferred tax assets		1,389		1,745
Leasing transactions		985		1,033
Net unrealized securities gains		199		158
Other		113		124
Total deferred tax liabilities		1,297		1,315
Net deferred tax assets (liabilities) (a)	$	92	$	430

(a) From continuing operations

We conduct quarterly assessments of all available evidence to determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change. Based on these criteria, and in particular our projections for future taxable income, we currently believe it is more-likely-than-not that we will realize our net deferred tax asset in future periods. However, changes to the evidence used in our assessments could have a material adverse effect on our results of operations in the period in which they occur.

At December 31, 2011, we had a federal credit carryforward of $442 million. Additionally, we had a state net operating loss carryforward of $363 million. These carryforwards are subject to limitations imposed by tax laws and, if not utilized, will gradually expire through 2031.

The following table shows how our total income tax (benefit) expense and the resulting effective tax rate were derived:

Year ended December 31, dollars in millions	2011					2010					2009
	Amount		Rate			Amount		Rate			Amount		Rate
Income (loss) before income taxes times 35% statutory federal tax rate	$	471		35.0	%	$	278		35.0	%	$	(804)		35.0	%
Amortization of tax-advantaged investments		65		4.8			59		7.4			53		(2.3)
Amortization of nondeductible intangibles		—		—			—		—			38		(1.7)
Foreign tax adjustments		17		1.3			24		3.0			9		(.4)
Reduced tax rate on lease financing income		—		—			6		.8			(16)		.7
Tax-exempt interest income		(16)		(1.2)			(17)		(2.1)			(17)		.8
Corporate-owned life insurance income		(42)		(3.1)			(48)		(6.0)			(40)		1.7
Increase (decrease) in tax reserves		2		.1			(6)		(.8)			(53)		2.3
Interest refund (net of federal tax benefit)		(24)		(1.8)			—		—			—		—
State income tax, net of federal tax benefit		(1)		—			5		.6			(86)		3.7
Tax credits		(125)		(9.3)			(117)		(14.7)			(106)		4.6
Other		22		1.6			2		.2			(13)		.6
Total income tax expense (benefit)	$	369		27.4	%	$	186		23.4	%	$	(1,035)		45.0	%

During 2011, we received after-tax interest refunds from the IRS of $23 million related to the timing of tax payments previously made in tax years 2001-2006. An additional $16 million was received that was a recovery of interest assessments previously paid that were recorded as part of our tax reserves in prior years.

Prior to 2010, we did not provide federal income taxes or non-U.S. withholding taxes on undistributed earnings from our non-U.S. subsidiaries, with the exception of Canada, as these earnings were considered to be indefinitely reinvested overseas. As we consider alternative long-term strategic and liquidity plans, opportunities may arise to repatriate part or all of these earnings in the future. As a result, we have changed our assertion as to indefinitely reinvesting these earnings, which total approximately $86 million through 2010. Therefore, $32 million was included in our 2010 income tax expense for any taxes that would be incurred in connection with the repatriation of these earnings, if any. Beginning in 2011, taxes on the foreign earnings are recorded as part of the tax provision for continuing operations.

Liability for Unrecognized Tax Benefits

The change in our liability for unrecognized tax benefits is as follows:

Year ended December 31, in millions	2011		2010
Balance at beginning of year	$	23	$	21
Increase for other tax positions of prior years		7		2
Decrease related to other settlements with taxing authorities		(22)		—
Balance at end of year	$	8	$	23

Each quarter, we review the amount of unrecognized tax benefits recorded in accordance with the applicable accounting guidance. Any adjustment to unrecognized tax benefits is recorded in income tax expense. The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $8 million at December 31, 2011 and $23 million at December 31, 2010. We do not currently anticipate that the amount of unrecognized tax benefits will significantly change over the next twelve months.

As permitted under the applicable accounting guidance, it is our policy to record interest and penalties related to unrecognized tax benefits in income tax expense. We recorded net interest credits of $52 million in 2011, and $12 million in 2010 and $99 million in 2009. The portion of the respective interest credit or expense attributable to our leveraged lease transactions was $25 million in 2011, $6 million in 2010 and $62 million in 2009. We recovered penalties of $14 million in 2011 and $5 million in 2010. At December 31, 2011, we had an accrued interest payable of $1 million, compared to $3 million at December 31, 2010. Our liability for accrued state tax penalties was $1million at December 31, 2011 and $20 million at December 31, 2010.

We file federal income tax returns, as well as returns in various state and foreign jurisdictions. Currently, the IRS is auditing our income tax returns for the 2007 and 2008 tax years. We are not subject to income tax examinations by other tax authorities for years prior to 2003, except in California and Utah. Income tax returns filed in those jurisdictions are subject to examination as far back as 1995 (California) and 1997 (Utah).