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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes |
NOTE 15—INCOME TAXES
We recognize the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. Current income tax expense represents our estimated taxes to be paid or refunded for the current period and includes income tax expense related to our uncertain tax positions, as well as tax-related interest and penalties. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. We record the effect of remeasuring deferred tax assets and liabilities due to a change in tax rates or laws as a component of income tax expense related to continuing operations for the period in which the change is enacted. We subsequently release income tax effects stranded in AOCI using a portfolio approach. Income tax benefits are recognized when, based on their technical merits, they are more likely than not to be sustained upon examination. The amount recognized is the largest amount of benefit that is more likely than not to be realized upon settlement. In the fourth quarter of 2018, we recognized a tax benefit of $284 million as a result of an approval from the IRS related to a tax methodology change on rewards costs. In the fourth quarter of 2017, we recorded charges of $1.8 billion associated with the impacts of the Tax Act, and there were no material adjustments made to this amount during the measurement period which ended in December 2018. The following table presents significant components of the provision for income taxes attributable to continuing operations for the years ended December 31, 2019, 2018 and 2017. Table 15.1: Significant Components of the Provision for Income Taxes Attributable to Continuing Operations
|  | Year Ended December 31,
(Dollars in millions) |  | 2019 |  | 2018 |  | 2017
Current income tax provision: |  |  |  |  |  |
Federal taxes |  | $ | 1,207 |  |  | $ | 210 |  |  | $ | 1,585 |
State taxes |  | 301 |  |  | 234 |  |  | 223 |
International taxes |  | 129 |  |  | 135 |  |  | 133 |
Total current provision |  | $ | 1,637 |  |  | $ | 579 |  |  | $ | 1,941 |
Deferred income tax provision (benefit): |  |  |  |  |  |
Federal taxes |  | $ | (222 | ) |  | $ | 620 |  |  | $ | 1,509 |
State taxes |  | (45 | ) |  | 115 |  |  | (69 | )
International taxes |  | (29 | ) |  | (21 | ) |  | (6 | )
Total deferred provision (benefit) |  | (296 | ) |  | 714 |  |  | 1,434 |
Total income tax provision |  | $ | 1,341 |  |  | $ | 1,293 |  |  | $ | 3,375 |
The international income tax provision is related to pre-tax earnings from foreign operations of approximately $215 million, $382 million and $410 million in 2019, 2018 and 2017, respectively. Total income tax provision does not reflect the tax effects of items that are included in accumulated other comprehensive income, which include tax provisions of $727 million and $15 million in 2019 and 2018, respectively, and a tax benefit of $134 million in 2017. See “Note 10—Stockholders’ Equity” for additional information. The following table presents the reconciliation of the U.S. federal statutory income tax rate to the effective income tax rate applicable to income from continuing operations for the years ended December 31, 2019, 2018 and 2017. Table 15.2: Effective Income Tax Rate
|  | Year Ended December 31,
|  | 2019 |  | 2018 |  | 2017
Income tax at U.S. federal statutory tax rate |  | 21.0 | % |  | 21.0 | % |  | 35.0 | %
State taxes, net of federal benefit |  | 3.1 |  |  | 3.2 |  |  | 2.2 |
Non-deductible expenses |  | 1.6 |  |  | 2.2 |  |  | 0.7 |
Affordable housing, new markets and other tax credits |  | (5.2 | ) |  | (4.0 | ) |  | (5.8 | )
Tax-exempt interest and other nontaxable income |  | (0.8 | ) |  | (0.7 | ) |  | (1.5 | )
IRS method changes |  | 0.0 |  |  | (3.9 | ) |  | 0.0 |
Impacts of the Tax Act |  | 0.0 |  |  | (0.3 | ) |  | 32.2 |
Other, net |  | (0.2 | ) |  | 0.2 |  |  | (1.3 | )
Effective income tax rate |  | 19.5 | % |  | 17.7 | % |  | 61.5 | %
The following table presents significant components of our deferred tax assets and liabilities as of December 31, 2019 and 2018. The valuation allowance below represents the adjustment of certain state deferred tax assets and net operating loss carryforwards to the amount we have determined is more likely than not to be realized. Table 15.3: Significant Components of Deferred Tax Assets and Liabilities
(Dollars in millions) |  | December 31, 2019 |  | December 31, 2018
Deferred tax assets: |  |  |  |
Allowance for loan and lease losses |  | $ | 1,729 |  |  | $ | 1,700 |
Rewards programs |  | 579 |  |  | 500 |
Lease liabilities |  | 407 |  |  | 0 |
Compensation and employee benefits |  | 301 |  |  | 167 |
Net operating loss and tax credit carryforwards |  | 284 |  |  | 271 |
Partnership investments |  | 202 |  |  | 162 |
Goodwill and intangibles |  | 161 |  |  | 187 |
Unearned income |  | 95 |  |  | 114 |
Net unrealized losses on derivatives |  | 0 |  |  | 135 |
Security and loan valuations(1) |  | 0 |  |  | 288 |
Other assets |  | 142 |  |  | 152 |
Subtotal |  | 3,900 |  |  | 3,676 |
Valuation allowance |  | (223 | ) |  | (245 | )
Total deferred tax assets |  | 3,677 |  |  | 3,431 |
Deferred tax liabilities: |  |  |  |
Original issue discount |  | 600 |  |  | 720 |
Right-of-use assets |  | 393 |  |  | 0 |
Security and loan valuations(1) |  | 234 |  |  | 0 |
Fixed assets and leases |  | 189 |  |  | 204 |
Partnership investments |  | 147 |  |  | 102 |
Loan fees and expenses |  | 100 |  |  | 75 |
Net unrealized gains on derivatives |  | 93 |  |  | 0 |
Mortgage servicing rights |  | 55 |  |  | 48 |
Other liabilities |  | 146 |  |  | 137 |
Total deferred tax liabilities |  | 1,957 |  |  | 1,286 |
Net deferred tax assets |  | $ | 1,720 |  |  | $ | 2,145 |
_________
(1) | Amount includes the tax impact of our December 31, 2019 transfer of our entire portfolio of held to maturity securities to available for sale.
Our federal net operating loss carryforwards were $31 million and less than $1 million as of December 31, 2019 and 2018, respectively. These operating loss carryforwards were attributable to acquisitions and will expire from 2027 to 2037, however $12 million of these carryforwards do not have an expiration. Under IRS rules, our ability to utilize these losses against future income is limited. The net tax value of our state net operating loss carryforwards were $237 million and $253 million as of December 31, 2019 and 2018, respectively, and they will expire from 2020 to 2038. Our foreign tax credit carryforward was $40 million and $19 million as of December 31, 2019 and 2018, respectively. This carryforward will begin expiring in 2028. We recognize accrued interest and penalties related to income taxes as a component of income tax expense. We recognized $4 million, $6 million and $5 million of expense in 2019, 2018 and 2017, respectively. The following table presents the accrued balance of tax, interest and penalties related to unrecognized tax benefits. Table 15.4: Reconciliation of the Change in Unrecognized Tax Benefits
(Dollars in millions) |  | Gross Unrecognized Tax Benefits |  | Accrued Interest and Penalties |  | Gross Tax, Interest and Penalties
Balance as of January 1, 2017 |  | $ | 85 |  |  | $ | 24 |  |  | $ | 109 |
Additions for tax positions related to prior years |  | 5 |  |  | 7 |  |  | 12 |
Reductions for tax positions related to prior years due to IRS and other settlements |  | (4 | ) |  | (2 | ) |  | (6 | )
Balance as of December 31, 2017 |  | 86 |  |  | 29 |  |  | 115 |
Additions for tax positions related to the current year |  | 28 |  |  | 0 |  |  | 28 |
Additions for tax positions related to prior years |  | 402 |  |  | 25 |  |  | 427 |
Reductions for tax positions related to prior years due to IRS and other settlements |  | (76 | ) |  | (19 | ) |  | (95 | )
Balance as of December 31, 2018 |  | 440 |  |  | 35 |  |  | 475 |
Additions for tax positions related to the current year |  | 23 |  |  | 17 |  |  | 40 |
Additions for tax positions related to prior years |  | 12 |  |  | 4 |  |  | 16 |
Reductions for tax positions related to prior years due to IRS and other settlements |  | (44 | ) |  | (25 | ) |  | (69 | )
Balance as of December 31, 2019 |  | $ | 431 |  |  | $ | 31 |  |  | $ | 462 |
Portion of balance at December 31, 2019 that, if recognized, would impact the effective income tax rate |  | $ | 164 |  |  | $ | 24 |  |  | $ | 188 |
We are subject to examination by the IRS and other tax authorities in certain countries and states in which we operate. The tax years subject to examination vary by jurisdiction. During 2019, we entered into settlement agreements with states that resolved our outstanding state disputes on the economic nexus issue for prior tax years. We also continued to participate in the IRS Compliance Assurance Process (“CAP”) for our 2017, 2018 and 2019 federal income tax return years, and have been accepted into CAP for 2020. The IRS review of our 2017 federal income tax return is substantially completed, with one issue remaining open. We have proposed a resolution of this issue to the IRS and expect that the issue and the tax year will be closed on an agreed basis during the first quarter of 2020. The IRS review of our 2018 federal income tax return was substantially completed prior to its filing in the fourth quarter of 2019, with the IRS reserving a limited number of issues for further post-filing review that is expected to be completed in 2020. As in prior years, we expect that the IRS review of our 2019 federal income tax return will be substantially completed prior to its filing in 2020. It is reasonably possible that further adjustments to the Company’s unrecognized tax benefits may be made within 12 months of the reporting date as a result of future judicial or regulatory interpretations of existing tax laws. At this time, an estimate of the potential changes to the amount of unrecognized tax benefits cannot be made. The Tax Act required that all unremitted earnings of our subsidiaries operating outside the U.S. were deemed to be repatriated as of December 31, 2017. As such, a liability of $111 million was paid with our 2017 federal tax return for the deemed repatriation of $1.5 billion of undistributed foreign earnings. Upon repatriation of these earnings, there would be no additional U.S. federal income taxes. In accordance with the guidance for income taxes in special areas, these earnings are considered by management to be invested indefinitely, except for the earnings of our Philippines subsidiary as we made distributions in 2019 and expect to make distributions in the future. As of December 31, 2019, U.S. income taxes of $69 million have not been provided for approximately $287 million of previously acquired thrift bad debt reserves created for tax purposes as of December 31, 1987. These amounts, acquired as a result of previous mergers and acquisitions, are subject to recapture in the unlikely event that CONA, as the successor to the merged and acquired entities, makes distributions in excess of earnings and profits, redeems its stock or liquidates.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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