INCOME TAXES

Income Tax Expense

Income tax expense was $41 million for the three months ended March 31, 2016, compared to $23 million for the same period in 2015. The effective tax rate was 21% for the three months ended March 31, 2016 compared to 37% for the same period in 2015. The decrease in the effective tax rate for the three months ended March 31, 2016 was primarily due to the release of valuation allowances on certain state deferred tax assets. Effective January 1, 2016, the Company elected to treat its broker-dealers, E*TRADE Securities and E*TRADE Clearing, as single member LLCs for tax purposes. Prior to this election, E*TRADE Securities and E*TRADE Clearing were treated as separate taxable corporations for tax purposes. The election to be treated as single member LLCs and future income projections at the broker-dealers will result in the utilization of certain state deferred tax assets, primarily state NOLs, against which the Company had previously recorded valuation allowances. Accordingly, the Company recognized a tax benefit of $31 million for the three months ended March 31, 2016.

Deferred Taxes and Valuation Allowance

Deferred income taxes are recorded when revenues and expenses are recognized in different periods for financial statement and tax return purposes. As of March 31, 2016 and December 31, 2015, the Company had not established a valuation allowance against its federal deferred tax assets, as it believed that it was more likely than not that all of these assets would be realized. The Company continues to maintain valuation allowances against the portion of its state and foreign country deferred tax assets that it does not believe would be realized. The Company’s deferred tax asset, valuation allowance, and deferred tax liability balances at March 31, 2016 and December 31, 2015 are summarized in the following table (dollars in millions):



	March 31,			December 31,
	2016			2015
Total deferred tax assets	$	1,436		$	1,548
Valuation allowance	(50		)	(82		)
Total deferred tax assets, net of valuation allowance	1,386			1,466
Total deferred tax liabilities	(446		)	(433		)
Net deferred tax assets, net	$	940		$	1,033