Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

Income Taxes

NOTE 13. Income Taxes

The provision for income taxes comprised the following:

		Years Ended December 31,
		2012		2011		2010
		(Dollars in millions)
Current expense:
	Federal	$	252	$	83	$	161
	State		67		26		18
	Foreign		2		2		2
Total current expense			321		111		181
Deferred expense (benefit):
	Federal		417		163		(65)
	State		26		22		(1)
Total deferred expense (benefit)			443		185		(66)
Provision for income taxes		$	764	$	296	$	115

The foreign income tax expense is related to income generated on assets controlled by a foreign subsidiary of Branch Bank.

The reasons for the difference between the provision for income taxes and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:

		Years Ended December 31,
		2012			2011			2010
		(Dollars in millions)
Federal income taxes at statutory rate of 35%		$	977		$	570		$	339
Increase (decrease) in provision for income taxes as a result of:
	State income taxes, net of Federal tax benefit		61			31			11
	Federal tax credits		(126)			(115)			(105)
	Tax exempt income		(133)			(135)			(125)
	Nontaxable gain on termination of leveraged lease		(12)			(22)			(2)
	Other, net		(3)			(33)			(3)
Provision for income taxes		$	764		$	296		$	115
Effective income tax rate			27.4	%		18.2	%		11.9	%

The tax effects of temporary differences that gave rise to significant portions of the net deferred tax assets and liabilities are reflected in the table below. Net deferred tax assets are included in other assets on the Consolidated Balance Sheets

			December 31,
			2012		2011
			(Dollars in millions)
Deferred tax assets:
	ALLL		$	771	$	855
	Postretirement plans			432		362
	Equity-based compensation			144		130
	Loan/securities basis difference			6		127
	Foreclosed property write-downs			56		240
	Net unrealized loss on cash flow hedges			105		95
	Other			277		257
Total deferred tax assets				1,791		2,066
Deferred tax liabilities:
	Net unrealized gain on securities available for sale			201		31
	Lease financing			270		267
	Prepaid pension plan expense			373		352
	Loan fees and expenses			244		225
	Depreciation			57		76
	Identifiable intangible assets			161		92
	Loan servicing rights			201		156
	Derivatives and hedging			163		136
	Other			70		89
Total deferred tax liabilities				1,740		1,424
		Net deferred tax assets	$	51	$	642

On a periodic basis, BB&T evaluates its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This evaluation takes into consideration the status of current taxing authorities' examinations of BB&T's tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment in relation to tax-advantaged transactions. The following table presents changes in unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010.

		Years Ended December 31,
		2012		2011		2010
		(Dollars in millions)
Beginning balance of unrecognized tax benefits		$	301	$	292	$	179
	Additions based on tax positions related to current year		14		―		―
	Additions for tax positions of prior years		―		6		―
	Settlements		(5)		(1)		―
	Lapse of statute of limitations		―		―		(1)
	Unrecognized deferred tax benefits from business acquisitions		(13)		4		114
Ending balance of unrecognized tax benefits		$	297	$	301	$	292

As of December 31, 2012, BB&T had $297 million of unrecognized Federal and state tax benefits that would have impacted the effective tax rate if recognized. In addition, the Company had $37 million and $39 million in liabilities for tax-related interest recorded on its Consolidated Balance Sheets at December 31, 2012 and 2011, respectively. Total interest, net of the Federal benefit, related to unrecognized tax benefits recognized in the 2012, 2011 and 2010 Consolidated Statements of Income was immaterial. BB&T classifies interest and penalties related to income taxes as a component of the provision for income taxes in the Consolidated Statements of Income.

The IRS has completed its Federal income tax examinations of BB&T through 2007. Various years remain subject to examination by state taxing authorities. In February 2010, BB&T received an IRS statutory notice of deficiency for tax years 2002-2007 asserting a liability for taxes, penalties and interest of approximately $892 million related to the disallowance of foreign tax credits and other deductions claimed by a subsidiary in connection with a financing transaction. BB&T paid the disputed tax, penalties and interest in March 2010 and filed a lawsuit seeking a refund in the U.S. Court of Federal Claims. The Court has scheduled the trial to begin March 4, 2013. BB&T recorded a receivable in other assets for the amount of this payment, less the reserve considered necessary in accordance with applicable income tax accounting guidance. On February 11, 2013, the U.S. Tax Court issued an adverse opinion in a case between the Bank of New York Mellon Corporation and the IRS involving a transaction with a structure similar to BB&T's financing transaction. BB&T has confidence in its position because, among other reasons, BB&T will raise arguments and issues in its case that were not considered by the Tax Court. Bank of New York Mellon has indicated it intends to appeal the decision. Nonetheless, BB&T recognized a charge of approximately $281 million in the first quarter of 2013 as a result of its consideration of this adverse decision. As litigation progresses, it is reasonably possible changes in the reserve for uncertain tax positions could range from a decrease of $496 million to an increase of $328 million within the next 12 months.