Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
 12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  
Income Taxes
Note 17.
Income Taxes
The components of income tax (benefit) expense for the years ended December 31, 2011, 2010 and 2009 were as follows:
 
(dollars in millions)
 
Year Ended
December 31,
2011
 
Year Ended
December 31,
2010
 
Year Ended
December 31,
2009
Current income tax (benefit) expense
 

 
 

 
 

U.S. federal
$
(5,875
)
 
$
(778
)
 
$
(678
)
U.S. state
(161
)
 
34

 
246

Non-U.S. 
9

 
254

 
503

Total current (benefit) expense
(6,027
)
 
(490
)
 
71

Deferred income tax expense (benefit)
 
 
 

 
 

U.S. federal
2,199

 
(566
)
 
499

U.S. state
(288
)
 
472

 
(367
)
Non-U.S. 
1,170

 
731

 
446

Total deferred expense (benefit)
3,081

 
637

 
578

Total income tax (benefit) expense(1)
$
(2,946
)
 
$
147

 
$
649

 
 
 
 
 
 
(1)
Total income tax (benefit) expense does not reflect the deferred tax effects of unrealized gains and losses on available-for-sale debt and marketable equity 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 increased $178 million in the year ended December 31, 2011 and decreased $322 million and $796 million in the years ended December 31, 2010 and 2009, respectively. In addition, total income tax (benefit) expense does not reflect the tax effects associated with employee stock plans which increased stockholder’s equity $43 million in the year ended December 31, 2011 and decreased stockholder's equity $37 million and $99 million in the years ended December 31, 2010 and 2009, respectively.
Income tax (benefit) expense for the years ended December 31, 2011, 2010 and 2009 varied from the amount computed by applying the statutory income tax rate to (loss) income before income taxes. A reconciliation between 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, 2011, 2010 and 2009 is presented in the table below.
(dollars in millions)
 
Year Ended
December 31,
2011
 
Year Ended
December 31,
2010
 
Year Ended
December 31,
2009
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
U.S. federal income tax at statutory rate
$
(1,643
)
 
35.0
%
 
$
1,373

 
35.0
%
 
$
2,796

 
35.0
%
U.S. state and local income taxes, net of federal effect
(292
)
 
6.2

 
329

 
8.4

 
(78
)
 
(1.0
)
Change in federal and non-U.S. valuation allowance
(1,102
)
 
23.5

 
(1,657
)
 
(42.2
)
 
(650
)
 
(8.1
)
Subsidiary sales and liquidations
(593
)
 
12.6

 
—

 
—

 
(595
)
 
(7.5
)
Change in prior period UTBs (including interest)
(102
)
 
2.2

 
31

 
0.8

 
(155
)
 
(1.9
)
Tax-exempt income, including dividends
(96
)
 
2.0

 
(375
)
 
(9.6
)
 
(188
)
 
(2.4
)
Non-deductible U.K. bank payroll tax
—

 
—

 
87

 
2.2

 
—

 
—

Non-U.S. statutory rate reductions
845

 
(18.0
)
 
386

 
9.8

 
—

 
—

Non-U.S.tax differential
14

 
(0.3
)
 
(40
)
 
(1.0
)
 
(489
)
 
(6.1
)
Other
23

 
(0.4
)
 
13

 
0.4

 
8

 
0.1

Income tax (benefit) expense
$
(2,946
)
 
62.8
%
 
$
147

 
3.8
%
 
$
649

 
8.1
%
 
 
 
 
 
 
 
 
 
 
 
 
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
 
2011
 
2010
 
2009
Beginning balance
$
2,261

 
$
1,714

 
$
2,006

Increases related to positions taken during the current year
38

 
97

 
129

Increases related to positions taken during prior years(1)
450

 
520

 
77

Decreases related to positions taken during prior years(1)
(967
)
 
(51
)
 
(185
)
Settlements
(152
)
 
(3
)
 
(313
)
Expiration of statute of limitations
(83
)
 
(16
)
 
—

Ending balance
$
1,547

 
$
2,261

 
$
1,714

 
 
 
 
 
 
(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, 2011, 2010 and 2009, the balance of Merrill Lynch’s UTBs which would, if recognized, affect Merrill Lynch’s effective tax rate was $1.2 billion, $1.3 billion and $1.2 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, 2011.
Tax Examination Status
 
 
 
Jurisdiction
Years under
examination(1)
 
Status at
December 31, 2011
U.S. federal
2004-2009(2)
 
See below
U.K.
2009
 
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 2011, Merrill Lynch, Bank of America and the IRS made 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 all federal examinations in the Tax Examination Status table above may be concluded during 2012.

Considering all examinations, it is reasonably possible that the UTB balance will decrease by as much as $1.0 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 Merrill Lynch's expectations.

During 2011 and 2010, Merrill Lynch recognized in income tax expense, a benefit of $135 million and an expense of $71 million, respectively, of interest and penalties, net-of-tax. At December 31, 2011 and 2010, Merrill Lynch's accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $137 million and $329 million, respectively.
Significant components of Merrill Lynch’s net deferred tax assets at December 31, 2011 and 2010 are presented in the table below.
(dollars in millions)
 
December 31,
2011
 
 
December 31,
2010
Deferred tax assets
 

 
 
 

Net operating loss carryforwards
$
14,815

 
 
$
16,869

Employee compensation and retirement benefits
2,367

 
 
2,291

Accrued expenses
899

 
 
282

Deferred interest
881

 
 
894

Allowance for credit losses
490

 
 
412

Tax credit carryforwards
317

 
 
408

Foreign currency
125

 
 
262

Capital loss carryforwards
72

 
 
1,588

Other
431

 
 
935

Gross deferred tax assets
20,397

 
 
23,941

Valuation allowance
(1,047
)
 
 
(2,275
)
Total deferred tax assets, net of valuation allowance
19,350

 
 
21,666

Deferred tax liabilities
 
 
 
 

Long-term borrowings
3,924

 
 
3,075

Intangibles
1,798

 
 
1,859

Securities valuations and investments
583

 
 
811

Other
749

 
 
409

Gross deferred tax liabilities
7,054

 
 
6,154

Net deferred tax assets
$
12,296

 
 
$
15,512

 
 
 
 
 

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, 2011.

(dollars in millions)
 
 
 
 
 
 
 
Net
 
 
Deferred
Valuation
Deferred
First Year
 
Tax Asset
Allowance
Tax Asset
Expiring
 
 
 
 
 
Net operating losses - U.S.
$
4,796

$
—

$
4,796

After 2028
Net operating losses - U.K.
8,836

—

8,836

None
Net operating losses - other non-U.S.
362

(230
)
132

Various
Net operating losses - U.S. states(1)
893

(428
)
465

Various
Tax credits(2)
317

(246
)
71

After 2017

( 1)Amounts above include capital losses. The losses and related valuation allowances for U.S. states before considering
the benefit of federal deductions were $1.4 billion and ($658) million, respectively.
(2)Primarily U.S. foreign tax credits.

Realization of the deferred tax assets above is dependent on Merrill Lynch's or Bank of America's ability to generate sufficient taxable income prior to their expiration. After examining all available evidence, Merrill Lynch concluded that no valuation allowance was necessary to reduce the U.K. NOL and U.S. federal NOL since estimated future taxable income will more-likely-than-not be sufficient to utilize these assets prior to expiration. As of December 31, 2011, none of the U.S. federal capital loss carryforward remained unutilized. The valuation allowance also increased, primarily against operating loss carryforwards in non-U.S. and state jurisdictions.

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, 2011, Merrill Lynch had a current tax receivable from Bank of America of approximately $4.4 billion as a result of its inclusion in consolidated, combined, and unitary tax return filings with Bank of America.

At December 31, 2011 and 2010, U.S. federal income taxes had not been provided on $10.4 billion and $11.0 billion of undistributed earnings of non-U.S. subsidiaries earned prior to 1987 and after 1997 that have been reinvested for an indefinite period of time. If the earnings were distributed, an additional $0.8 billion and $1.3 billion of tax expense, net of credits for non-U.S. taxes paid on such earnings and for the related non-U.S. withholding taxes, would have resulted as of December 31, 2011 and 2010.