Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
 12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
Note 17.
Income Taxes
The components of income tax (benefit) expense for the years ended December 31, 2012, 2011 and 2010 were as follows:
 
(dollars in millions)
 
Year Ended
December 31,
2012
 
Year Ended
December 31,
2011
 
Year Ended
December 31,
2010
Current income tax expense (benefit)
 

 
 

 
 

U.S. federal
$
(110
)
 
$
(5,875
)
 
$
(778
)
U.S. state
137

 
(161
)
 
34

Non-U.S. 
210

 
11

 
255

Total current expense (benefit)
237

 
(6,025
)
 
(489
)
Deferred income tax (benefit) expense
 
 
 

 
 

U.S. federal
(2,743
)
 
2,199

 
(566
)
U.S. state
(723
)
 
(288
)
 
472

Non-U.S. 
681

 
1,170

 
731

Total deferred (benefit) expense
(2,785
)
 
3,081

 
637

Total income tax (benefit) expense(1)
$
(2,548
)
 
$
(2,944
)
 
$
148

 
 
 
 
 
 
(1)
Total income tax (benefit) expense does not reflect the deferred tax effects of unrealized gains and losses on AFS debt securities, foreign currency translation adjustments, derivatives and employee benefit plan adjustments that are included in accumulated other comprehensive loss. As a result of these tax effects, accumulated other comprehensive loss decreased $238 million in the year ended December 31, 2012, increased $178 million in the year ended December 31, 2011 and decreased $322 million in the year ended December 31, 2010. In addition, total income tax (benefit) expense does not reflect the tax effects associated with employee stock compensation plans, which decreased stockholder’s equity $232 million in the year ended December 31, 2012, increased stockholder's equity $43 million in the year ended December 31, 2011 and decreased stockholders' equity $37 million in the year ended December 31, 2010.
The income tax (benefit) expense for the years ended December 31, 2012, 2011 and 2010 varied from the amount computed by applying the statutory income tax rate to (loss) income before income taxes. A reconciliation of the expected U.S. federal income tax (benefit) expense using the U.S. federal statutory tax rate of 35% to Merrill Lynch’s actual income tax (benefit) expense and resulting effective tax rate for the years ended December 31, 2012, 2011 and 2010 is presented in the table below.

(dollars in millions)
 
Year Ended
December 31,
2012
 
Year Ended
December 31,
2011
 
Year Ended
December 31,
2010
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
U.S. federal income tax at statutory rate
$
(790
)
 
35.0
 %
 
$
(1,607
)
 
35.0
 %
 
$
1,409

 
35.0
 %
U.S. state and local income taxes, net of federal effect
(381
)
 
16.9

 
(292
)
 
6.4

 
329

 
8.2

Non-U.S.tax differential (1)
(1,908
)
 
84.5

 
(20
)
 
0.4

 
(75
)
 
(1.9
)
Change in prior period UTBs (including interest)
(135
)
 
6.0

 
(102
)
 
2.2

 
31

 
0.8

Tax-exempt income, including dividends
(103
)
 
4.6

 
(96
)
 
2.1

 
(375
)
 
(9.3
)
Subsidiary sales and liquidations
—

 
—

 
(593
)
 
12.9

 
—

 
—

Non-deductible U.K. bank payroll tax
—

 
—

 
—

 
—

 
87

 
2.2

Non-U.S. statutory rate reductions (2)
781

 
(34.6
)
 
845

 
(18.4
)
 
386

 
9.6

Change in federal and non-U.S. valuation allowance
41

 
(1.8
)
 
(1,102
)
 
24.0

 
(1,657
)
 
(41.1
)
Other
(53
)
 
2.2

 
23

 
(0.5
)
 
13

 
0.2

Income tax (benefit) expense
$
(2,548
)
 
112.8
 %
 
$
(2,944
)
 
64.1
 %
 
$
148

 
3.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes in 2012 a $1.7 billion income tax benefit attributable to the excess of foreign tax credits recognized in the U.S. upon repatriation of the earnings of certain non-U.S. subsidiaries over the related U.S. tax liability.
(2) Includes charges of $781 million, $774 million, and $386 million in 2012, 2011 and 2010, respectively, to reduce the carrying value of certain U.K. net deferred tax assets due to U.K. corporate income tax rate reductions.

The reconciliation of the beginning UTB balance to the ending balance is presented in the table below.
Reconciliation of the Change in UTBs
(dollars in millions)
 
Year Ended December 31
 
2012

 
2011

 
2010

Beginning balance
$
1,547

 
$
2,261

 
$
1,714

Increases related to positions taken during the current year
52

 
38

 
97

Increases related to positions taken during prior years(1)
37

 
450

 
520

Decreases related to positions taken during prior years(1)
(181
)
 
(967
)
 
(51
)
Settlements
(9
)
 
(152
)
 
(3
)
Expiration of statute of limitations
(31
)
 
(83
)
 
(16
)
Ending balance
$
1,415

 
$
1,547

 
$
2,261

 
 
 
 
 
 
(1) 
Amounts differ from the tax rate reconciliation table due to temporary items and jurisdictional offsets, as well as the inclusion of interest in the tax rate reconciliation table.
As of December 31, 2012, 2011 and 2010, the balance of Merrill Lynch’s UTBs which would, if recognized, affect Merrill Lynch’s effective tax rate was $1.1 billion, $1.2 billion and $1.3 billion, respectively. Included in the UTB balance are some items the recognition of which would not affect the effective tax rate, such as the tax effect of certain temporary differences, the portion of gross state UTBs that would be offset by the tax benefit of the associated federal deduction and the portion of gross non-U.S. UTBs that would be offset by tax reductions in other jurisdictions.
Merrill Lynch files income tax returns in more than 100 state and non-U.S. jurisdictions each year. The Internal Revenue Service (“IRS”) and other tax authorities in countries and states in which Merrill Lynch has significant business operations, examine tax returns periodically (continuously in some jurisdictions). The table below summarizes the status of significant tax examinations, by jurisdiction, for Merrill Lynch as of December 31, 2012.
Tax Examination Status
 
 
 
Jurisdiction
Years under
examination(1)
 
Status at
December 31, 2012
U.S. federal
2004-2009(2)
 
See below
U.S. federal
2010-2011(2)
 
Field examination
U.K.
2011
 
Field examination
(1) 
All tax years subsequent to the above years remain open to examination.
(2) 
From the date of its acquisition by Bank of America, Merrill Lynch has been included in Bank of America's consolidated federal income tax return.

During 2012, Merrill Lynch, Bank of America and the IRS continued to make significant progress toward resolving all federal income tax examinations for Bank of America tax years through 2009 and Merrill Lynch tax years through 2008. While subject to final agreement, including review by the Joint Committee on Taxation of the U.S. Congress for certain years, Merrill Lynch believes that these examinations may be concluded during 2013.

Considering all examinations, it is reasonably possible that the UTB balance will decrease by as much as $0.9 billion during the next twelve months, since resolved items will be removed from the balance whether their resolution resulted in payment or recognition. If such a decrease were to occur, it likely would primarily result from outcomes consistent with management's expectations.

During 2012 and 2011, Merrill Lynch recognized in income tax expense, a benefit of $40 million and a benefit of $135 million, respectively, of interest and penalties, net-of-tax. At December 31, 2012 and 2011, Merrill Lynch's accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $102 million and $137 million, respectively.
Significant components of Merrill Lynch’s net deferred tax assets at December 31, 2012 and 2011 are presented in the table below.
(dollars in millions)
 
December 31,
2012
 
 
December 31,
2011
Deferred tax assets
 

 
 
 

Net operating loss carryforwards
$
14,584

 
 
$
14,815

Tax credit carryforwards
3,120

 
 
317

Employee compensation and retirement benefits
2,283

 
 
2,367

Deferred interest
726

 
 
881

Accrued expenses
577

 
 
899

Allowance for credit losses
363

 
 
490

Securities, loan and debt valuations and investments
321

 
 
—

Capital loss carryforwards
89

 
 
72

Other
150

 
 
556

Gross deferred tax assets
22,213

 
 
20,397

Valuation allowance
(1,057
)
 
 
(1,047
)
Total deferred tax assets, net of valuation allowance
21,156

 
 
19,350

Deferred tax liabilities
 
 
 
 
Long-term borrowings
3,820

 
 
3,924

Intangibles
1,166

 
 
1,798

Securities, loan and debt valuations and investments
—

 
 
583

Other
852

 
 
749

Gross deferred tax liabilities
5,838

 
 
7,054

Net deferred tax assets
$
15,318

 
 
$
12,296

 
 
 
 
 


The table below summarizes the deferred tax assets and related valuation allowances recognized for the net operating loss and tax credit carryforwards at December 31, 2012.

(dollars in millions)
 
 
 
 
 
 
 
Net
 
 
Deferred
Valuation
Deferred
First Year
 
Tax Asset
Allowance
Tax Asset
Expiring
 
 
 
 
 
Net operating losses - U.S.
$
4,742

$
—

$
4,742

After 2028
Net operating losses - U.K. (1)
8,483

—

8,483

None
Net operating losses - other non-U.S.
282

(222
)
60

Various
Net operating losses - U.S. states(2)
1,166

(358
)
808

Various
Tax credits(3)
3,120

(271
)
2,849

After 2017
(1) The U.K. net operating losses may be carried forward indefinitely.
(2) Amounts above include capital losses. The losses and related valuation allowances for U.S. states before considering
the benefit of federal deductions were $1.8 billion and $(551) million, respectively.
(3) Primarily U.S. foreign tax credits.

Realization of the deferred tax assets recognized for net operating loss and tax credit carryforwards in the table
above is dependent on Merrill Lynch's or Bank of America's ability to generate sufficient taxable income prior to their expiration. Management concluded that no valuation allowance was necessary to reduce the U.K. NOL carryforwards and U.S. federal NOL carryforwards since estimated future taxable income will more-likely-than-not be sufficient to utilize these assets prior to expiration. The majority of Merrill Lynch's U.K. net deferred tax assets, which consist primarily of NOLs, are realizable by a few non-U.S. subsidiaries that have a recent history of cumulative losses. For the deferred tax assets of those subsidiaries, the cessation of certain business activities, changes to capital and funding, forecasts of business volumes and the indefinite period to carry forward NOLs represent significant positive evidence supporting management's conclusion. However, significant changes to those estimates, such as changes that would be caused by substantial and prolonged worsening of the condition of Europe's capital markets, could lead management to reassess its U.K. valuation allowance conclusions.
 
Merrill Lynch is included in the consolidated U.S. federal income tax return and certain combined and unitary state income tax returns of Bank of America. At December 31, 2012, Merrill Lynch had a current tax payable to Bank of America of approximately $0.2 billion as a result of its inclusion in consolidated, combined, and unitary tax return filings with Bank of America.

At December 31, 2012, U.S. federal income taxes had not been provided on $7.9 billion of undistributed earnings of non-U.S. subsidiaries that management has determined have been reinvested for an indefinite period of time. If Merrill Lynch were to record a deferred tax liability associated with these undistributed earnings, the amount would be approximately $1.6 billion at December 31, 2012.