Income Taxes And Tax-Related Items

12 Months Ended

Dec. 31, 2019

INCOME TAXES AND TAX-RELATED ITEMS

The provision for income taxes is calculated as the sum of income taxes due for the current year and deferred taxes. Income taxes due for the current year is computed by applying federal and state tax statutes to current year taxable income. Deferred taxes arise from temporary differences between the income tax basis and financial accounting basis of assets and liabilities. Tax-related interest and penalties and foreign taxes are then added to the tax provision.

The current and deferred components of the provision for income taxes were as follows:



(in millions)
December 31	2019			2018			2017
Current:
Federal	$	267		$	227		$	371
Foreign	7			10			5
State and local	48			39			36
Total current	322			276			412
Deferred:
Federal	16			29			(26		)
State and local	(4		)	3			(2		)
Remeasurement of deferred taxes	—			(8		)	107
Total deferred	12			24			79
Total	$	334		$	300		$	491

Income before income taxes of $1.5 billion for the year ended December 31, 2019 included $42 million of foreign-source income.

The Tax Cuts and Jobs Act (the "Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35 percent to 21 percent. The amount recorded related to the remeasurement of the Corporation’s deferred tax balance was a reduction of $99 million, including a provisional adjustment of $107 million recognized in 2017 and an $8 million revision to the impact recorded in 2018.

The provision for income taxes does not reflect the tax effects of unrealized gains and losses on investment securities available-for-sale or the change in defined benefit pension and other postretirement plans adjustment included in accumulated other comprehensive loss. Refer to Note 14 for additional information on accumulated other comprehensive loss.

A reconciliation of expected income tax expense at the federal statutory rate to the Corporation’s provision for income taxes and effective tax rate follows:



(dollar amounts in millions)	2019					2018					2017
Years Ended December 31	Amount			Rate		Amount			Rate		Amount			Rate
Tax based on federal statutory rate	$	322		21.0	%	$	323		21.0	%	$	432		35.0	%
State income taxes	33			2.2		35			2.3		22			1.8
Employee stock transactions	(12		)	(0.8	)	(23		)	(1.5	)	(35		)	(2.8	)
Capitalization and recovery positions (a)	—			—		(17		)	(1.1	)	—			—
Affordable housing and historic credits	(11		)	(0.7	)	(12		)	(0.8	)	(21		)	(1.7	)
Bank-owned life insurance	(9		)	(0.6	)	(9		)	(0.6	)	(16		)	(1.3	)
Remeasurement of deferred taxes	—			—		(8		)	(0.5	)	107			8.7
FDIC insurance expense (b)	5			0.3		8			0.5		—			—
Other changes in unrecognized tax benefits	—			—		4			0.3		—			—
Tax-related interest and penalties	2			0.1		(3		)	(0.2	)	4			0.3
Lease termination transactions	—			—		—			—		(2		)	(0.2	)
Other	4			0.2		2			0.1		—			—
Provision for income taxes	$	334		21.7	%	$	300		19.5	%	$	491		39.8	%


(a)	Tax benefits from the review of tax capitalization and recovery positions related to software and fixed assets included in the 2017 tax return.


(b)	Beginning January 1, 2018, FDIC insurance expense is no longer deductible as a result of the enactment of the Tax Cuts and Jobs Act.

The liability for tax-related interest and penalties included in accrued expenses and other liabilities on the Consolidated Balance Sheets was $8 million and $7 million at December 31, 2019 and 2018, respectively.

In the ordinary course of business, the Corporation enters into certain transactions that have tax consequences. From time to time, the Internal Revenue Service (IRS) may review and/or challenge specific interpretive tax positions taken by the Corporation with respect to those transactions. The Corporation believes that its tax returns were filed based upon applicable statutes, regulations and case law in effect at the time of the transactions. The IRS or other tax jurisdictions, an administrative authority or a court, if presented with the transactions, could disagree with the Corporation’s interpretation of the tax law.

A reconciliation of the beginning and ending amount of net unrecognized tax benefits follows:



(in millions)	2019			2018			2017
Balance at January 1	$	14		$	10		$	15
Increase as a result of tax positions taken during a prior period	4			9			4
Decrease related to settlements with tax authorities	(1		)	(4		)	(8		)
Other	—			(1		)	(1		)
Balance at December 31	$	17		$	14		$	10

The Corporation anticipates it is reasonably possible settlements with tax authorities will result in a $5 million decrease in net unrecognized tax benefits within the next twelve months.

After consideration of the effect of the federal tax benefit available on unrecognized state tax benefits, the total amount of unrecognized tax benefits, if recognized, would affect the Corporation’s effective tax rate was approximately $14 million and $11 million at December 31, 2019 and 2018, respectively.

The following tax years for significant jurisdictions remain subject to examination as of December 31, 2019:



Jurisdiction	Tax Years
Federal	2014-2018
California	2006-2017

Based on current knowledge and probability assessment of various potential outcomes, the Corporation believes current tax reserves are adequate, and the amount of any potential incremental liability arising 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.

The principal components of deferred tax assets and liabilities were as follows:



(in millions)
December 31	2019			2018
Deferred tax assets:
Allowance for loan losses	$	134		$	141
Deferred compensation	61			68
Deferred loan origination fees and costs	8			9
Net unrealized losses on investment securities available-for-sale	—			42
Operating lease liability	77			—
Other temporary differences, net	49			42
Total deferred tax asset before valuation allowance	329			302
Valuation allowance	(3		)	(3		)
Total deferred tax assets	326			299
Deferred tax liabilities:
Lease financing transactions	(73		)	(74		)
Defined benefit plans	(91		)	(41		)
Allowance for depreciation	(21		)	(18		)
Hedging gains and losses	(10		)	—
Leasing right of use asset	(69		)	—
Net unrealized gains on investment securities available-for-sale	(20		)	—
Total deferred tax liabilities	(284		)	(133		)
Net deferred tax asset	$	42		$	166

Deferred tax assets included state net operating loss carryforwards of $3 million and $4 million at December 31, 2019 and December 31, 2018, respectively, which expire between 2019 and 2028. The Corporation believes it is more likely than not the benefit from certain of these state net operating loss carryforwards will not be realized and, accordingly, maintained a valuation allowance of $3 million at both December 31, 2019 and December 31, 2018. For further information on the Corporation’s valuation policy for deferred tax assets, refer to Note 1.