Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
 12 Months Ended
Dec. 31, 2012
Income Taxes [Abstract]  
Income Tax Disclosure
Income Taxes
The components of income tax expense (benefit) for 2012, 2011 and 2010 are presented in the table below.
 
 
 
 
 
 
Income Tax Expense (Benefit)
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
2012
 
2011
 
2010
Current income tax expense (benefit)
 

 
 

 
 

U.S. federal
$
458

 
$
(733
)
 
$
(666
)
U.S. state and local
592

 
393

 
158

Non-U.S. 
569

 
613

 
815

Total current expense
1,619

 
273

 
307

Deferred income tax expense (benefit)
 

 
 

 
 

U.S. federal
(3,433
)
 
(2,673
)
 
(287
)
U.S. state and local
(55
)
 
(584
)
 
201

Non-U.S. 
753

 
1,308

 
694

Total deferred expense (benefit)
(2,735
)
 
(1,949
)
 
608

Total income tax expense (benefit)
$
(1,116
)
 
$
(1,676
)
 
$
915



Total income tax expense (benefit) does not reflect the deferred tax effects of unrealized gains and losses on AFS debt and marketable equity securities, foreign currency translation adjustments, derivatives and employee benefit plan adjustments that are included in accumulated OCI. As a result of these tax effects, accumulated OCI decreased $1.3 billion and $3.2 billion in 2012 and 2010, and increased $2.9 billion in 2011. In addition, total income tax expense (benefit) does not reflect tax effects associated with the Corporation’s employee stock plans which decreased common stock and additional paid-in capital $277 million and $98 million in 2012 and 2010, and increased common stock and additional paid-in capital $19 million in 2011.
Income tax expense (benefit) for 2012, 2011 and 2010 varied from the amount computed by applying the statutory income tax rate to income (loss) before income taxes. A reconciliation of the expected U.S. federal income tax expense applying the federal statutory tax rate of 35 percent to the Corporation’s actual income tax expense (benefit) and resulting effective tax rate for 2012, 2011 and 2010 are presented in the Reconciliation of Income Tax Expense (Benefit) table.
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Income Tax Expense (Benefit)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
(Dollars in millions)
Amount

Percent

Amount

Percent

Amount

Percent
Expected U.S. federal income tax expense (benefit)
$
1,075

 
35.0
 %
 
$
(81
)
 
35.0
 %
 
$
(463
)
 
35.0
 %
Increase (decrease) in taxes resulting from:
 

 
 
 
 

 
(1
)%
 
 

 
 

State tax expense (benefit), net of federal effect
349

 
11.4

 
(124
)
 


 
233

 
(17.6
)
Non-U.S. tax differential (1)
(1,968
)
 
(64.1
)
 
(383
)
 


 
(190
)
 
14.4

Low-income housing credits/other credits
(783
)
 
(25.5
)
 
(800
)
 


 
(732
)
 
55.4

Tax-exempt income, including dividends
(576
)
 
(18.8
)
 
(614
)
 


 
(981
)
 
74.2

Changes in prior period UTBs (including interest)
(198
)
 
(6.4
)
 
(239
)
 


 
(349
)
 
26.4

Non-U.S. statutory rate reductions
788

 
25.7

 
860

 


 
392

 
(29.7
)
Nondeductible expenses
231

 
7.5

 
119

 


 
99

 
(7.5
)
Leveraged lease tax differential
83

 
2.7

 
121

 


 
98

 
(7.4
)
Change in federal and non-U.S. valuation allowances
41

 
1.3

 
(1,102
)
 


 
(1,657
)
 
125.4

Goodwill – impairment and other
—

 
—

 
1,420

 


 
4,508

 
(341.0
)
Subsidiary sales and liquidations
—

 
—

 
(823
)
 


 
—

 
—

Other
(158
)
 
(5.1
)
 
(30
)
 


 
(43
)
 
3.2

Total income tax expense (benefit)
$
(1,116
)
 
(36.3
)%
 
$
(1,676
)
 
n/m

 
$
915

 
(69.2
)%

(1)  
Includes in 2012, $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.
n/m = not meaningful
The reconciliation of the beginning unrecognized tax benefits (UTB) balance to the ending balance is presented in the table below.
 
 
 
 
 
 
Reconciliation of the Change in Unrecognized Tax Benefits
 
 
 
 
 
 
(Dollars in millions)
2012
 
2011
 
2010
Beginning balance
$
4,203

 
$
5,169

 
$
5,253

Increases related to positions taken during the current year
352

 
219

 
172

Increases related to positions taken during prior years (1)
142

 
879

 
755

Decreases related to positions taken during prior years (1)
(711
)
 
(1,669
)
 
(657
)
Settlements
(205
)
 
(277
)
 
(305
)
Expiration of statute of limitations
(104
)
 
(118
)
 
(49
)
Ending balance
$
3,677

 
$
4,203

 
$
5,169

(1) 
The sum per year of positions taken during prior years differs from the $198 million, $239 million and $349 million in the Reconciliation of Income Tax Expense (Benefit) table due to temporary items and jurisdictional offsets, as well as the inclusion of interest in the Reconciliation of Income Tax Expense (Benefit) table.

At December 31, 2012, 2011 and 2010, the balance of the Corporation’s UTBs which would, if recognized, affect the Corporation’s effective tax rate was $3.1 billion, $3.3 billion and $3.4 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.
The Corporation files income tax returns in more than 100 state and non-U.S. jurisdictions each year. The IRS and other tax authorities in countries and states in which the Corporation has significant business operations examine tax returns periodically (continuously in some jurisdictions). The Tax Examination Status table summarizes the status of significant examinations (U.S. federal unless otherwise noted) for the Corporation and various subsidiaries as of December 31, 2012.
 
 
 
 
Tax Examination Status
 
 
 
 
 
 
 
 
Years under
Examination
 
Status at December 31 2012
Bank of America Corporation – U.S.
2001 – 2009
 
See below
Bank of America Corporation – U.S.
2010 – 2011
 
Field examination
Bank of America Corporation – New York (1)
2004 – 2008
 
Field examination
Merrill Lynch – U.S. 
2004 – 2008
 
See below
Various – U.K.
2011
 
Field examination
(1) 
All tax years subsequent to the years shown remain open to examination.
During 2012, the Corporation and the IRS continued to make progress toward resolving all federal income tax examinations for Bank of America Corporation 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, the Corporation believes that these examinations may be concluded during 2013.
Considering all examinations, it is reasonably possible that the UTB balance may decrease by as much as $2.6 billion during the next twelve months, since resolved items will be removed from the balance whether their resolution results in payment or recognition. If such decrease were to occur, it likely would primarily result from outcomes consistent with management expectations.
During 2012, the Corporation recognized a $99 million expense and, in 2011, a benefit of $168 million for interest and penalties, net-of-tax, in income tax benefit. At December 31, 2012 and 2011, the Corporation’s accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $775 million and $787 million.
Significant components of the Corporation’s net deferred tax assets and liabilities at December 31, 2012 and 2011 are presented in the Deferred Tax Assets and Liabilities table.
 
 
 
 
Deferred Tax Assets and Liabilities
 
 
 
 
 
 
 
 
December 31
(Dollars in millions)
2012
 
2011
Deferred tax assets
 

 
 

Net operating loss carryforwards
$
13,863

 
$
14,307

Tax credit carryforwards
9,529

 
4,510

Allowance for credit losses
8,463

 
11,824

Accrued expenses
8,099

 
8,340

Employee compensation and retirement benefits
4,612

 
4,792

Security, loan and debt valuations
2,712

 
1,091

State income taxes
2,766

 
2,489

Other
725

 
1,654

Gross deferred tax assets
50,769

 
49,007

Valuation allowance
(2,211
)
 
(1,796
)
Total deferred tax assets, net of valuation allowance
48,558

 
47,211

 
 
 
 
Deferred tax liabilities
 

 
 

Equipment lease financing
3,371

 
3,042

Long-term borrowings
3,215

 
3,360

Available-for-sale securities
2,877

 
1,811

Mortgage servicing rights
1,986

 
1,993

Intangibles
1,708

 
1,894

Fee income
901

 
1,038

Other
1,462

 
2,074

Gross deferred tax liabilities
15,520

 
15,212

Net deferred tax assets
$
33,038

 
$
31,999


The table below summarizes the deferred tax assets and related valuation allowances recognized for the NOL and tax credit carryforwards at December 31, 2012.
 
 
 
 
 
 
 
 
Net Operating Loss and Tax Credit Carryforwards
 
 
 
 
 
 
 
 
(Dollars in millions)
Deferred
Tax Asset
 
Valuation
Allowance
 
Net
Deferred
Tax Asset
 
First Year
Expiring
Net operating losses – U.S. 
$
4,911

 
$
—

 
$
4,911

 
After 2027
Net operating losses – U.K.
8,483

 
—

 
8,483

 
None (1)
Net operating losses – other non-U.S. 
469

 
(296
)
 
173

 
Various
Net operating losses – U.S. states (2)
2,136

 
(932
)
 
1,204

 
Various
General business credits
3,349

 
—

 
3,349

 
After 2027
Foreign tax credits
6,180

 
(271
)
 
5,909

 
After 2017
(1) 
The U.K. net operating losses may be carried forward indefinitely.
(2) 
The net operating losses and related valuation allowances for U.S. states before considering the benefit of federal deductions were $3.3 billion and $1.4 billion.

Management concluded that no valuation allowance is necessary to reduce the U.K. NOL carryforwards and U.S. NOL and general business credit carryforwards since estimated future taxable income will be sufficient to utilize these assets prior to their expiration. The majority of the Corporation’s U.K. net deferred tax assets, which consist primarily of NOLs, are realizable by certain 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 a substantial and prolonged worsening of the condition of Europe’s capital markets, could lead management to reassess its U.K. valuation allowance conclusions.
At December 31, 2012, U.S. federal income taxes had not been provided on $17.2 billion of undistributed earnings of non-U.S. subsidiaries that management has determined have been reinvested for an indefinite period of time. If the Corporation were to record a deferred tax liability associated with these undistributed earnings, the amount would be approximately $4.3 billion at December 31, 2012.