CMA » Topics » Income Taxes And Tax-Related Items

This excerpt taken from the CMA 10-Q filed May 8, 2009.

Note 6 — Income Taxes and Tax-Related Items

 

The provision for federal income taxes is computed by applying the statutory federal income tax rate to income before income taxes as reported in the consolidated financial statements after deducting non-taxable items, principally income on bank-owned life insurance, and deducting tax credits related to investments in low income housing partnerships. State and foreign taxes are then added to the federal tax provision.

 

Unrecognized tax benefits were $72 million and $92 million at March 31, 2009 and 2008, respectively, and accrued interest was $86 million and $80 million at March 31, 2009 and 2008, respectively.  The amount of interest accrued at March 31, 2009 includes interest for unrecognized tax benefits and interest for structured leasing transactions and foreign tax credits that the Internal Revenue Service (IRS) disallowed.  In the fourth quarter 2008, the Corporation settled open tax issues with the IRS related to structured leasing transactions and disallowed foreign tax benefits.  The Corporation deposited funds with the IRS in the first quarter 2009, which will be used to fund the settlements expected to be made in the second quarter of 2009.  The Corporation anticipates that it is reasonably possible that additional settlements of various state tax return issues will result in a decrease in unrecognized tax benefits of $40 million within the next twelve months.

 

Based on current knowledge and probability assessment of various potential outcomes, the Corporation believes that current tax reserves, determined in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” are adequate to cover the matters outlined above, and the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the Corporation’s consolidated financial condition or results of operations.  Probabilities and outcomes are reviewed as events unfold, and adjustments to the reserves are made when necessary.

 

These excerpts taken from the CMA 10-K filed Feb 24, 2009.

INCOME TAXES AND TAX-RELATED ITEMS

        The provision for income taxes was $59 million in 2008, compared to $306 million in 2007 and $345 million in 2006. The provision for income taxes in 2008 reflected the impact of lower pre-tax income and included a net after-tax charge of $9 million related to the acceptance of a global settlement offered by the IRS on certain structured leasing transactions, settlement with the IRS on disallowed foreign tax credits related to a series of loans to foreign borrowers and other tax adjustments. The provision for income taxes in 2007 included a $9 million reduction ($6 million after-tax) of interest resulting from a settlement with the Internal Revenue Service (IRS) on a refund claim.

        The effective tax rate, computed by dividing the provision for income taxes by income from continuing operations before income taxes, was 21.7 percent in 2008, 31.0 percent in 2007 and 30.6 percent in 2006. Changes in the effective tax rate in 2008 from 2007, and 2007 from 2006, are disclosed in Note 17 to these consolidated financial statements. The Corporation had a net deferred tax asset of $29 million at December 31, 2008. Included in net deferred taxes at December 31, 2008 were deferred tax assets of $625 million, net of a $1 million valuation allowance established for certain state deferred tax assets. A valuation allowance is provided when it is "more-likely-than-not" that some portion of the deferred tax asset will not be realized. Deferred tax assets are evaluated for realization based on available evidence and assumptions made regarding future events. In the event that the future taxable income does not occur in the manner anticipated, other initiatives could be undertaken to preclude the need to recognize a valuation allowance against the deferred tax asset.

        On January 1, 2007 the Corporation adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109," (FIN 48). As a result, the Corporation recognized an increase in the liability for unrecognized tax benefits of approximately $18 million at

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January 1, 2007, accounted for as a change in accounting principle via a decrease to the opening balance of retained earnings ($13 million after-tax). For further discussion of FIN 48, refer to Note 17 to these consolidated financial statements.

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX

        Income from discontinued operations, net of tax, was $1 million in 2008, compared to $4 million in 2007 and $111 million in 2006. Income from discontinued operations in 2008 reflected income accrued on a contingent note related to the sale of Munder in 2006. 2008 and 2007 also included adjustments to the initial gain recorded on the sale of Munder in 2006. For further information on the sale of Munder and discontinued operations, refer to Note 27 to the consolidated financial statements.

INCOME TAXES AND TAX-RELATED ITEMS



        The provision for income taxes was $59 million in 2008, compared to $306 million in 2007 and $345 million in 2006.
The provision for income taxes in 2008 reflected the impact of lower pre-tax income and included a net after-tax charge of $9 million related to the acceptance of a
global settlement offered by the IRS on certain structured leasing transactions, settlement with the IRS on disallowed foreign tax credits related to a series of loans to foreign borrowers and other
tax adjustments. The provision for income taxes in 2007 included a $9 million reduction ($6 million after-tax) of interest resulting from a settlement with the Internal
Revenue Service (IRS) on a refund claim.



        The
effective tax rate, computed by dividing the provision for income taxes by income from continuing operations before income taxes, was 21.7 percent in 2008, 31.0 percent
in 2007 and 30.6 percent in 2006. Changes in the effective tax rate in 2008 from 2007, and 2007 from 2006, are disclosed in Note 17 to these consolidated financial statements. The
Corporation had a net deferred tax asset of $29 million at December 31, 2008. Included in net deferred taxes at December 31, 2008 were deferred tax assets of $625 million,
net of a $1 million valuation allowance established for certain state deferred tax assets. A valuation allowance is provided when it is
"more-likely-than-not" that some portion of the deferred tax asset will not be realized. Deferred tax assets are evaluated for realization based on available
evidence and assumptions made regarding future events. In the event that the future taxable income does not occur in the manner anticipated, other initiatives could be undertaken to preclude the need
to recognize a valuation allowance against the deferred tax asset.



        On
January 1, 2007 the Corporation adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes — an interpretation
of FASB Statement No. 109," (FIN 48). As a result, the Corporation recognized an increase in the liability for unrecognized tax benefits of approximately $18 million at



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January 1,
2007, accounted for as a change in accounting principle via a decrease to the opening balance of retained earnings ($13 million after-tax). For further discussion of
FIN 48, refer to Note 17 to these consolidated financial statements.



INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX



        Income from discontinued operations, net of tax, was $1 million in 2008, compared to $4 million in 2007 and
$111 million in 2006. Income from discontinued operations in 2008 reflected income accrued on a contingent note related to the sale of Munder in 2006. 2008 and 2007 also included adjustments to
the initial gain recorded on the sale of Munder in 2006. For further information on the sale of Munder and discontinued operations, refer to Note 27 to the consolidated financial statements.



This excerpt taken from the CMA 10-Q filed Oct 31, 2008.

Note 6 — Income Taxes and Tax-Related Items

 

The provision for income taxes is computed by applying statutory federal income tax rates to income before income taxes as reported in the consolidated financial statements after deducting non-taxable items, principally income on bank-owned life insurance, and deducting tax credits related to investments in low income housing partnerships. State and foreign taxes are then added to the federal tax provision.

 

The Corporation adopted the provision of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB No. 109, (FIN 48), on January 1, 2007.  Unrecognized tax benefits were $91 million and $84 million at September 30, 2008 and 2007, respectively, and accrued interest was $81 million and $80 million at September 30, 2008 and 2007, respectively.

 

The third quarter 2008 provision for income taxes reflected net after-tax charges of $1 million which included the acceptance of a global settlement offered by the Internal Revenue Service (IRS) on certain structured leasing transactions, settlement with the IRS on disallowed foreign tax credits related to a series of loans to foreign borrowers and other adjustments to tax reserves.  The second quarter 2008 provision for income taxes reflected an after-tax charge of $13 million related to the structured leasing transactions.  The Corporation anticipates that it is reasonably possible that settlements on the structured leasing transactions and foreign tax credits, along with various state tax return issues, will be paid within the next 12 months, resulting in a decrease in unrecognized tax benefits in the range of $20 million to $30 million.

 

 The reassessment of the size and timing of the tax deductions related to the structured leasing transactions discussed above resulted in an $8 million ($6 million after-tax) and a $30 million ($19 million after-tax) charge to lease income in the third and second quarters of 2008, respectively. The charges were taken in accordance with FSP 13-2 “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” and, unless the leases are terminated, will fully reverse over the next 19 years.

 

Based on current knowledge and probability assessment of various potential outcomes, the Corporation believes that current tax reserves, determined in accordance with FIN 48, are adequate to cover the matters outlined above, and the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the Corporation’s consolidated financial condition or results of operations.  Probabilities and outcomes are reviewed as events unfold, and adjustments to the reserves are made when necessary.

 

These excerpts taken from the CMA 10-K filed Feb 26, 2008.
Income Taxes And Tax-Related Items
 
The provision for income taxes was $306 million in 2007, compared to $345 million in 2006 and $393 million in 2005. The provision for income tax in 2007 included a $9 million reduction ($6 million after-tax) of interest resulting from a settlement with the Internal Revenue Service (IRS) on a refund claim. The provision for income taxes in 2006 was impacted by the completion of an IRS audit of federal tax returns for years 1996 through 2000, the settlement of various refund claims and an adjustment to tax reserves. In the first quarter 2006, tax reserves, which include the provision for income taxes and interest expense on tax liabilities (included in “other noninterest expenses” in 2006 and 2005) were adjusted to reflect the resolution of those tax years and to reflect an updated assessment of reserves on certain types of structured lease transactions and a series of loans to foreign borrowers. Interest on tax liabilities was also reduced by $6 million in the second quarter 2006, upon settlement of various refund claims with the IRS. As previously disclosed in quarterly and annual SEC filings under the heading “Tax Contingency,” the IRS disallowed the benefits related to a series of loans to foreign borrowers. The Corporation has had ongoing discussions with the IRS related to the disallowance. In the fourth quarter 2006, based on settlements discussed, the Corporation recorded a charge to its tax reserves for the disallowed loan benefits. The following table summarizes the impact of the items described above on the Corporation’s consolidated statement of income for the year ended December 31, 2006.
 
                         
    Year Ended December 31, 2006  
    Interest on Tax Liabilities     Provision for
 
    Pre-tax     After-tax     Income Taxes  
    (in millions)  
 
Completion of IRS audit of the Corporation’s federal income tax returns for 1996-2000
  $ 24     $ 15     $ (16 )
Settlement of various refund claims
    (6 )     (4 )     (2 )
Adjustment to tax reserves on a series of loans to foreign borrowers
    14       9       22  
                         
Total tax-related items
  $ 32     $ 20     $ 4  
                         


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The effective tax rate, computed by dividing the provision for income taxes by income from continuing operations before income taxes, was 31.0 percent in 2007, 30.6 percent in 2006 and 32.5 percent in 2005. Changes in the effective tax rate in 2007 from 2006, and 2006 from 2005, are disclosed in Note 17 to the consolidated financial statements on page 103. The Corporation had a net deferred tax liability of $146 million at December 31, 2007. Included in net deferred taxes at December 31, 2007 were deferred tax assets of $514 million, net of a $2 million valuation allowance established for certain state deferred tax assets. A valuation allowance is provided when it is “more-likely-than-not” that some portion of the deferred tax asset will not be realized. Deferred tax assets are evaluated for realization based on available evidence and assumptions made regarding future events. In the event that the future taxable income does not occur in the manner anticipated, other initiatives could be undertaken to preclude the need to recognize a valuation allowance against the deferred tax asset.
 
On January 1, 2007, the Corporation adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” (FIN 48). As a result, the Corporation recognized an increase in the liability for unrecognized tax benefits of approximately $18 million at January 1, 2007, accounted for as a change in accounting principle via a decrease to the opening balance of retained earnings ($13 million net of tax). Prior disclosures on the change in unrecognized tax benefits resulting from the adoption of FIN 48 were adjusted to address an uncertain tax position that was incorrectly assessed at the time of adoption. The facts and circumstances surrounding this uncertain tax position were unchanged since January 1, 2007. For further discussion of FIN 48 refer to Note 17 to the consolidated financial statements on page 103.
 
In July, 2007, the State of Michigan replaced its current Single Business Tax (SBT) with a new Michigan Business Tax (MBT). Financial institutions are subject to an industry-specific tax which is based on net capital, effective January 1, 2008. Management believes the MBT will have an immaterial effect on the Corporation’s financial condition and results of operations when compared to the SBT. Both the SBT and MBT, when effective, are recorded in “Other noninterest expenses” on the consolidated statements of income.
 
Management expects an effective tax rate for the full-year 2008 of about 32 percent.
 
Income From Discontinued Operations, Net Of Tax
 
Income from discontinued operations, net of tax, was $4 million in 2007, compared to $111 million in 2006 and $45 million in 2005. Income from discontinued operations in 2007 reflected an adjustment to the initial gain recorded on the sale of the Corporation’s Munder subsidiary in 2006. Included in 2006 was a $108 million after-tax gain on the sale of Munder in the fourth quarter 2006. The Munder sale agreement included an interest-bearing contingent note with an initial principal amount of $70 million, which will be realized if the Corporation’s client-related revenues earned by Munder remain consistent with 2006 levels of approximately $17 million per year for the five years following the closing of the transaction (2007-2011). Future gains related to the contingent note are expected to be recognized periodically as targets for the Corporation’s client-related revenues earned by Munder are achieved. The potential future gains are expected to be recorded between 2008 and the fourth quarter of 2011, unless fully earned prior to that time. Included in 2005 was a $32 million after-tax gain in the fourth quarter 2005 that resulted from Munder’s sale of its minority interest in Framlington Group Limited (Framlington) (a London, England based investment manager). For further information on discontinued operations, refer to Note 26 to the consolidated financial statements on page 127.


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Income
Taxes And Tax-Related Items



 



The provision for income taxes was $306 million in 2007,
compared to $345 million in 2006 and $393 million in
2005. The provision for income tax in 2007 included a
$9 million reduction ($6 million after-tax) of
interest resulting from a settlement with the Internal Revenue
Service (IRS) on a refund claim. The provision for income taxes
in 2006 was impacted by the completion of an IRS audit of
federal tax returns for years 1996 through 2000, the settlement
of various refund claims and an adjustment to tax reserves. In
the first quarter 2006, tax reserves, which include the
provision for income taxes and interest expense on tax
liabilities (included in “other noninterest expenses”
in 2006 and 2005) were adjusted to reflect the resolution
of those tax years and to reflect an updated assessment of
reserves on certain types of structured lease transactions and a
series of loans to foreign borrowers. Interest on tax
liabilities was also reduced by $6 million in the second
quarter 2006, upon settlement of various refund claims with the
IRS. As previously disclosed in quarterly and annual SEC filings
under the heading “Tax Contingency,” the IRS
disallowed the benefits related to a series of loans to foreign
borrowers. The Corporation has had ongoing discussions with the
IRS related to the disallowance. In the fourth quarter 2006,
based on settlements discussed, the Corporation recorded a
charge to its tax reserves for the disallowed loan benefits. The
following table summarizes the impact of the items described
above on the Corporation’s consolidated statement of income
for the year ended December 31, 2006.


 


















































































































































                         

 

 

Year Ended December 31, 2006

 

 

 

Interest on Tax Liabilities

 

 

Provision for



 

 

 

Pre-tax

 

 

After-tax

 

 

Income Taxes

 

 

 

(in millions)

 
 


Completion of IRS audit of the Corporation’s federal income
tax returns for
1996-2000


 

$

24

 

 

$

15

 

 

$

(16

)


Settlement of various refund claims


 

 

(6

)

 

 

(4

)

 

 

(2

)


Adjustment to tax reserves on a series of loans to foreign
borrowers


 

 

14

 

 

 

9

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Total tax-related items


 

$

32

 

 

$

20

 

 

$

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 









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The effective tax rate, computed by dividing the provision for
income taxes by income from continuing operations before income
taxes, was 31.0 percent in 2007, 30.6 percent in 2006
and 32.5 percent in 2005. Changes in the effective tax rate
in 2007 from 2006, and 2006 from 2005, are disclosed in
Note 17 to the consolidated financial statements on
page 103. The Corporation had a net deferred tax liability
of $146 million at December 31, 2007. Included in net
deferred taxes at December 31, 2007 were deferred tax
assets of $514 million, net of a $2 million valuation
allowance established for certain state deferred tax assets. A
valuation allowance is provided when it is
“more-likely-than-not” that some portion of the
deferred tax asset will not be realized. Deferred tax assets are
evaluated for realization based on available evidence and
assumptions made regarding future events. In the event that the
future taxable income does not occur in the manner anticipated,
other initiatives could be undertaken to preclude the need to
recognize a valuation allowance against the deferred tax asset.


 



On January 1, 2007, the Corporation adopted the provisions
of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109,” (FIN 48). As a result,
the Corporation recognized an increase in the liability for
unrecognized tax benefits of approximately $18 million at
January 1, 2007, accounted for as a change in accounting
principle via a decrease to the opening balance of retained
earnings ($13 million net of tax). Prior disclosures on the
change in unrecognized tax benefits resulting from the adoption
of FIN 48 were adjusted to address an uncertain tax
position that was incorrectly assessed at the time of adoption.
The facts and circumstances surrounding this uncertain tax
position were unchanged since January 1, 2007. For further
discussion of FIN 48 refer to Note 17 to the
consolidated financial statements on page 103.


 



In July, 2007, the State of Michigan replaced its current Single
Business Tax (SBT) with a new Michigan Business Tax (MBT).
Financial institutions are subject to an industry-specific tax
which is based on net capital, effective January 1, 2008.
Management believes the MBT will have an immaterial effect on
the Corporation’s financial condition and results of
operations when compared to the SBT. Both the SBT and MBT, when
effective, are recorded in “Other noninterest
expenses” on the consolidated statements of income.


 



Management expects an effective tax rate for the full-year 2008
of about 32 percent.


 




Income
From Discontinued Operations, Net Of Tax



 



Income from discontinued operations, net of tax, was
$4 million in 2007, compared to $111 million in 2006
and $45 million in 2005. Income from discontinued
operations in 2007 reflected an adjustment to the initial gain
recorded on the sale of the Corporation’s Munder subsidiary
in 2006. Included in 2006 was a $108 million after-tax gain
on the sale of Munder in the fourth quarter 2006. The Munder
sale agreement included an interest-bearing contingent note with
an initial principal amount of $70 million, which will be
realized if the Corporation’s client-related revenues
earned by Munder remain consistent with 2006 levels of
approximately $17 million per year for the five years
following the closing of the transaction
(2007-2011).
Future gains related to the contingent note are expected to be
recognized periodically as targets for the Corporation’s
client-related revenues earned by Munder are achieved. The
potential future gains are expected to be recorded between 2008
and the fourth quarter of 2011, unless fully earned prior to
that time. Included in 2005 was a $32 million after-tax
gain in the fourth quarter 2005 that resulted from Munder’s
sale of its minority interest in Framlington Group Limited
(Framlington) (a London, England based investment manager). For
further information on discontinued operations, refer to
Note 26 to the consolidated financial statements on
page 127.





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Income Taxes and Tax-Related Items
 
The provision for income taxes was $345 million in 2006, compared to $393 million in 2005 and $349 million in 2004. In the first quarter 2006, the IRS completed the examination of the Corporation’s federal tax returns for the years 1996 through 2000. Tax reserves, which includes the provision for income taxes and interest on tax liabilities (included in “other noninterest expenses”) were adjusted to reflect the resolution of those tax years, and to reflect an updated assessment of reserves on certain types of structured lease transactions and a series of loans to foreign borrowers. Tax-related interest expense was also reduced by $6 million in the second quarter 2006, upon settlement of various refund claims with the IRS. As previously disclosed in quarterly and annual SEC filings under the heading “Tax Contingency,” the examination staff with the Internal Revenue Service (IRS) disallowed the benefits related to a series of loans to foreign borrowers. The Corporation has had ongoing discussions with the IRS related to the disallowance. In the fourth quarter 2006, based on settlements discussed, the Corporation recorded a charge to its tax reserves for the disallowed loan benefits. The following table summarizes the impact of the items described above on the Corporation’s consolidated statement of income for the year ended December 31, 2006.
 
                         
    Year Ended December 31, 2006  
    Interest on Tax Liabilities     Provision for
 
    Pre-tax     After-tax     Income Taxes  
    (in millions)  
 
Completion of IRS audit of the Corporation’s federal income tax returns for 1996-2000
  $ 24     $ 15     $ (16 )
Settlement of various refund claims
    (6 )     (4 )     (2 )
Adjustment to tax reserves on a series of loans to foreign borrowers
    14       9       22  
                         
Total tax-related items
  $ 32     $ 20     $ 4  
                         
 
The effective tax rate, computed by dividing the provision for income taxes by income before income taxes, was 30.6 percent in 2006, 32.5 percent in 2005 and 31.8 percent in 2004. Changes in the effective tax rate in 2006 from 2005, and 2005 from 2004, are shown in Note 17 to the consolidated financial statements on page 99. The Corporation had a net deferred tax liability of $111 million at December 31, 2006. Included in net deferred taxes were deferred tax assets of $558 million, which the Corporation’s management believes will be realized in future periods. In the event that the future taxable income does not occur in the manner anticipated, other initiatives could be undertaken to preclude the need to recognize a valuation allowance against the deferred tax asset.
 
Management expects an effective tax rate for the full-year 2007 of about 32 percent.
 
Income from Discontinued Operations, Net of Tax
 
Income from discontinued operations, net of tax, was $111 million in 2006, compared to $45 million in 2005 and $9 million in 2004. The increase in 2006, compared to 2005, was primarily due to the $108 million after-tax gain on the sale of the Corporation’s Munder subsidiary in the fourth quarter 2006, partially offset by an $8 million after-tax transition adjustment expense related to SFAS No. 123(R) recorded in the first quarter 2006 and the $32 million after-tax gain in the fourth quarter 2005 that resulted from Munder’s sale of its minority interest in Framlington Group Limited (Framlington) (a London, England based investment manager). The increase in 2005, when compared to 2004, primarily resulted from Munder’s 2005 gain on the sale of Framlington discussed above. For further information on discontinued operations, refer to Note 26 to the consolidated financial statements on page 121.


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