XML 70 R22.htm IDEA: XBRL DOCUMENT v3.8.0.1
Income Taxes
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 15—INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 were as follows (dollars in millions):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Current income tax expense (benefit):
 
 
 
 
 
Federal
$

 
$

 
$
(5
)
State
(11
)
 
3

 
(5
)
Foreign

 
2

 
5

Total current
(11
)
 
5

 
(5
)
Deferred income tax expense (benefit):
 
 
 
 
 
Federal
399

 
285

 
(145
)
State
51

 
(10
)
 
(31
)
Total deferred
450

 
275

 
(176
)
Non-current income tax expense(1)
11

 
6

 
4

Income tax expense (benefit)
$
450

 
$
286

 
$
(177
)
(1)
Non-current income tax expense primarily relates to amortization for investments in qualified affordable housing projects recognized under the proportional amortization method.
The federal tax reform law was enacted on December 22, 2017, which resulted in a remeasurement of certain deferred tax assets and liabilities using the new statutory federal corporate income tax rate of 21%. Accordingly, the Company recognized $58 million of additional tax expense for the year ended December 31, 2017.




Unrecognized Tax Benefits
The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015 (dollars in millions):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Unrecognized tax benefits, beginning of period
$
28

 
$
29

 
$
330

Additions based on tax positions related to prior years
1

 
1

 
5

Additions based on tax positions related to current year
11

 
4

 
2

Reductions based on tax positions related to prior years
(3
)
 
(3
)
 
(304
)
Settlements with taxing authorities
(6
)
 
(1
)
 
(3
)
Statute of limitations lapses
(6
)
 
(2
)
 
(1
)
Unrecognized tax benefits, end of period
$
25

 
$
28

 
$
29


The unrecognized tax benefits decreased $3 million to $25 million during the year ended December 31, 2017. At December 31, 2017, the Company had $20 million, net of federal benefits, of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods. In 2015, the Company settled the IRS examination of its 2007, 2009 and 2010 federal tax returns. As a result, the Company released $303 million of reserves related to the uncertain tax positions in 2015. During 2009, the Company incurred a loss on the exchange of $1.7 billion interest-bearing corporate debt for non-interest-bearing convertible debentures. The uncertain tax positions were primarily related to whether certain components of that loss were considered deductible or non-deductible for tax purposes.
The following table summarizes the tax years that are either currently under examination or remain open under the statute of limitations and subject to examination by the major tax jurisdictions in which the Company operates:
Jurisdiction
Open Tax Years
Hong Kong
2011-2017
United Kingdom
2015-2017
United States
2014-2017
Various states(1)
2008-2017
(1)
Major state tax jurisdictions include California, Georgia, Illinois, New Jersey, New York and Virginia.
It is reasonably possible that the Company's unrecognized tax benefits could be reduced by as much as $6 million within the next twelve months as a result of settlements of certain examinations or expiration of statutes of limitations.
The Company recognizes interest and penalties, if any, related to income tax matters in income tax expense. The Company has total reserves for interest and penalties of $6 million and $10 million as of December 31, 2017 and 2016, respectively. Tax expense for the year ended December 31, 2017 included a $4 million net benefit related to the reduction of interest and penalties, which was primarily due to state settlements with tax authorities and the expiration of statutes of limitations.
Deferred Taxes and Valuation Allowances
Deferred income taxes are recorded when revenues and expenses are recognized in different periods for financial statement and tax return purposes. The temporary differences and tax carryforwards that created deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are summarized in the following table (dollars in millions):
 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 
Net operating losses
$
349

 
$
676

Reserves and allowances, net
155

 
335

Financial instrument valuations
35

 
160

Deferred compensation
34

 
43

Tax credits
68

 
55

Basis differences in investments
8

 
14

Other
10

 
26

Total deferred tax assets
659

 
1,309

Valuation allowance
(23
)
 
(35
)
Total deferred tax assets, net of valuation allowance
636

 
1,274

Deferred tax liabilities:
 
 
 
Depreciation and amortization
(385
)
 
(518
)
Total deferred tax liabilities
(385
)
 
(518
)
Deferred tax assets, net
$
251

 
$
756


The Company had $1.0 billion of gross federal net operating losses, or $211 million in deferred tax assets related to these losses, at December 31, 2017. There is no valuation allowance recorded against federal net operating losses. In addition, the Company had $2.8 billion of gross state net operating losses, or $135 million in deferred tax assets related to these losses, at December 31, 2017. The Company had a $20 million valuation allowance against state net operating losses. The federal net operating losses have no expiration date and the state net operating losses expire between 2018 and 2036.
At December 31, 2017, the Company has zero undistributed earnings and profits in foreign subsidiaries.
The following table provides a reconciliation of the beginning and ending amount of valuation allowance for the years ended December 31, 2017, 2016, and 2015 (dollars in millions):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Valuation allowance, beginning of period
$
(35
)
 
$
(82
)
 
$
(91
)
Additions related to tax reform (reduced federal benefit)
(4
)
 

 

Reductions related to the wind-down of foreign operations
14

 

 
14

Reductions (additions) related to state valuation allowance release
2

 
47

 
(5
)
Valuation allowance, end of period
$
(23
)
 
$
(35
)
 
$
(82
)

The Company's valuation allowance decreased $12 million to $23 million at December 31, 2017 and decreased $47 million to $35 million at December 31, 2016. 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. The election to be treated as single member LLCs and future taxable income projections will result in the utilization of certain state deferred tax assets, primarily state net operating losses, against which the Company had recorded valuation allowances. Accordingly, the Company recognized a tax benefit of $25 million for the year ended December 31, 2016.
Effective Tax Rate
The effective tax rate differed from the federal statutory rate as summarized in the following table for the years ended December 31, 2017, 2016 and 2015:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal tax benefit
4.2

 
3.9

 
0.2

Difference between statutory rate and foreign effective tax rate

 
0.2

 
(2.4
)
Tax exempt income

 
(0.1
)
 
(0.5
)
Disallowed executive compensation
0.1

 
0.2

 
6.5

Change in valuation allowances
(0.1
)
 
(5.5
)
 
0.1

Tax credits
(0.3
)
 
(0.7
)
 
(3.8
)
Estimated reserve for uncertain tax positions
(0.3
)
 
0.1

 
4.7

Deferred tax adjustments
(0.3
)
 
1.3

 
3.5

Tax reform adjustments
5.5

 

 

Excess tax benefit on share-based compensation
(0.7
)
 

 

Tax on undistributed earnings and profits in certain foreign subsidiaries

 

 
3.9

Settled IRS examination

 

 
(241.5
)
Other
(0.9
)
 
(0.3
)
 
(0.4
)
Effective tax rate
42.2
 %
 
34.1
 %
 
(194.7
)%