2003 Annual Report: Financial Review: Statements and Notes: Note 18 Income Taxes

The components of income tax expense for 2003, 2002 and 2001 were as follows:

(Dollars in millions)			2003				2002				2001
Current expense
Federal		$	4,642			$	3,386			$	3,154
State			412				451				218
Foreign			260				349				338
Total current expense			5,314				4,186				3,710
Deferred (benefit) expense
Federal			(222	)			(270	)			(411	)
State			(45	)			(200	)			29
Foreign			4				26				(3	)
Total deferred (benefit) expense			(263	)			(444	)			(385	)
Total income tax expense(1)		$	5,051			$	3,742			$	3,325
(1)  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 and derivatives that are included in shareholders' equity. As a result of these tax effects, shareholders' equity increased by $1,806 in 2003 and decreased by $1,090 and $59 in 2002 and 2001, respectively. Also, does not reflect tax benefits associated with the Corporation's employee stock plans which increased shareholders' equity by $443, $251 and $80 in 2003, 2002 and 2001, respectively.

The Corporation's current income tax expense approximates the amounts payable for those years. Deferred income tax expense represents the change in the deferred tax asset or liability and is discussed further below.

A reconciliation of the expected federal income tax expense using the federal statutory tax rate of 35 percent to the Corporation's actual income tax expense and resulting effective tax rate for 2003, 2002 and 2001 follows:

During 2002, the Corporation reached a tax settlement agreement with the Internal Revenue Service (IRS). This agreement resolved issues for numerous tax returns of the Corporation and various predecessor companies and finalized all federal income tax liabilities through 1999. As a result of the settlement, reductions in income tax expense of $84 million in 2003 and $488 million in 2002 were recorded resulting from refunds received and reductions in previously accrued taxes.

Significant components of the Corporation's deferred tax liabilities and assets at December 31, 2003 and 2002 were as follows:

		December 31
(Dollars in millions)		2003				2002
Deferred tax liabilities
Equipment lease financing		$	5,321			$	5,767
Intangibles			955				535
Investments			905				700
State taxes			281				310
Depreciation			246				229
Employee retirement benefits			191				250
Deferred gains and losses			189				149
Securities valuation			-				350
Available-for-sale debt securities			-				266
Other			560				511
Gross deferred tax liabilities			8,648				9,067
Deferred tax assets
Allowance for credit losses			2,421				2,661
Securities valuation			1,876				-
Accrued expenses			421				412
Employee benefits			174				77
Net operating loss carryforwards			129				315
Loan fees and expenses			85				99
Available-for-sale debt securities			46				-
Other			280				212
Gross deferred tax assets			5,432				3,776
Valuation allowance			(120	)			(114	)
Gross deferred tax assets,
net of valuation allowance			5,312				3,662
Net deferred tax liabilities		$	3,336			$	5,405

The valuation allowance included in the Corporation's deferred tax assets at December 31, 2003 and 2002 represented net operating loss carryforwards for which it is more likely than not that realization will not occur and expire in 2004 to 2009. The net change in the valuation allowance for deferred tax assets resulted from net operating losses being generated by foreign subsidiaries in 2003 where realization is not expected to occur.

At December 31, 2003 and 2002, federal income taxes had not been provided on $871 million and $770 million, respectively, of undistributed earnings of foreign 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 $185 million and $171 million of tax expense, net of credits for foreign taxes paid on such earnings and for the related foreign withholding taxes, would result in 2003 and 2002, respectively.