Bank of America | Annual Report (2005) | Financial Review

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Note 18

Income Taxes

The components of Income Tax Expense for 2005, 2004 and 2003 were as follows:


(Dollars in millions)	2005		2004 (Restated)		2003 (Restated)
Current income tax expense
Federal	$	5,229	$	6,392	$	4,642
State		676		683		412
Foreign		415		405		260

Total current expense		6,320		7,480		5,314

Deferred income tax expense (benefit)
Federal		1,577		(512)		(249)
State		85		(23)		(50)
Foreign		33		16		4

Total deferred expense (benefit)		1,695		(519)		(295)

Total income tax expense⁽¹⁾	$	8,015	$	6,961	$	5,019

Footnote (1)

Does not reflect the deferred tax effects of Unrealized Gains and Losses on AFS Debt and Marketable Equity Securities, Foreign Currency Translation Adjustments and Derivatives that are included in Accumulated OCI. As a result of these tax effects, Accumulated OCI increased $2,863 million, $303 million and $1,916 million in 2005, 2004 and 2003. Also, does not reflect tax benefits associated with the Corporation’s employee stock plans which increased Common Stock and Additional Paid-in Capital $416 million, $401 million and $443 million in 2005, 2004 and 2003. Goodwill was reduced $22 million and $101 million in 2005 and 2004, reflecting the tax benefits attributable to exercises of employee stock options issued by FleetBoston which had vested prior to the merger date.

Income Tax Expense for 2005, 2004 and 2003 varied from the amount computed by applying the statutory income tax rate to Income before Income Taxes. A reconciliation between 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 2005, 2004 and 2003 follows:


	2005			2004 (Restated)			2003 (Restated)
(Dollars in millions)	Amount		Percent	Amount		Percent	Amount		Percent
Expected federal income tax expense	$	8,568	35.0%	$	7,318	35.0%	$	5,523	35.0%
Increase (decrease) in taxes resulting from:
Tax-exempt income, including dividends		(605)	(2.5)		(526)	(2.5)		(325)	(2.1)
State tax expense, net of federal benefit		495	2.0		429	2.1		235	1.5
Goodwill amortization		—	—		—	—		12	0.1
IRS tax settlement		—	—		—	—		(84)	(0.5)
Low income housing credits/other credits		(423)	(1.7)		(352)	(1.7)		(212)	(1.3)
Foreign tax differential		(99)	(0.4)		(78)	(0.4)		(50)	(0.3)
Other		79	0.3		170	0.8		(80)	(0.6)

Total income tax expense	$	8,015	32.7%	$	6,961	33.3%	$	5,019	31.8%

During 2002, the Corporation reached a tax settlement agreement with the IRS. This agreement resolved issues for numerous tax returns of the Corporation and various predecessor companies and finalized all federal income tax liabilities, excluding those relating to FleetBoston, through 1999. As a result of the settlement, a reduction in Income Tax Expense of $84 million in 2003 was recorded representing refunds received.

The IRS is currently examining the Corporation’s federal income tax returns for the years 2000 through 2002 as well as the tax returns of FleetBoston and certain other subsidiaries for years ranging from 1997 to 2000. The Corporation’s current estimate of the resolution of these various examinations is reflected in accrued income taxes; however, final settlement of the examinations or changes in the Corporation’s estimate may result in future income tax expense or benefit.

Significant components of the Corporation’s net deferred tax liability at December 31, 2005 and 2004 are presented in the following table.


	December 31
(Dollars in millions)	2005		2004 (Restated)
Deferred tax liabilities
Equipment lease financing	$	6,455	$	6,192
Intangibles		1,138		803
Investments		238		1,088
State income taxes		168		222
Fixed assets		152		47
Loan fees and expenses		142		—
Deferred gains and losses		15		251
Other		1,122		874

Gross deferred tax liabilities		9,430		9,477

Deferred tax assets
Security valuations		2,822		2,434
Allowance for credit losses		2,623		2,973
Available-for-sale securities		1,845		146
Accrued expenses		1,235		533
Employee compensation and retirement benefits		559		648
Foreign tax credit carryforward		169		467
Loan fees and expenses		—		241
Other		416		1,288

Gross deferred tax assets		9,669		8,730

Valuation allowance⁽¹⁾		(253)		(155)

Total deferred tax assets, net of valuation allowance		9,416		8,575

Net deferred tax liabilities⁽²⁾	$	14	$	902

(1)

At December 31, 2004, $70 million of the valuation allowance related to gross deferred tax assets was attributable to the FleetBoston Merger. Future recognition of the tax attributes associated with these gross deferred tax assets would result in tax benefits being allocated to reduce Goodwill.

(2)

The Corporation’s net deferred tax liabilities were adjusted during 2005 and 2004 to include $279 million of net deferred tax liabilities and $2.0 billion of net deferred tax assets related to business combinations accounted for under the purchase method.

The valuation allowance at December 31, 2005 and 2004 is attributable to deferred tax assets generated in certain state and foreign jurisdictions. During 2005, deferred tax assets were recognized for certain state temporary differences that had previously not been recognized. The valuation allowance change for 2005 was primarily attributable to these deferred tax assets, as management continues to believe it is more likely than not that realization of these assets will not occur.

The foreign tax credit carryforward reflected in the table above represents foreign income taxes paid that are creditable against future U.S. income taxes. If not used, these credits begin to expire after 2012 and could fully expire after 2014.

The American Jobs Creation Act of 2004 (the Act) provides U.S. companies with the ability to elect to apply a special one-time tax deduction equal to 85 percent of certain earnings remitted from foreign subsidiaries, provided certain criteria are met. Management elected to apply the Act for 2005 and recorded a one-time tax benefit of $70 million for the year ended December 31, 2005.

At December 31, 2005 and 2004, federal income taxes had not been provided on $1.4 billion and $1.1 billion 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 $249 million and $221 million of tax expense, net of credits for foreign taxes paid on such earnings and for the related foreign withholding taxes, would result in 2005 and 2004.

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2005 Summary Annual Report: Form 10-K: Note 18 - Income Taxes

Note 18

Income Taxes