Citigroup Inc.

As a result of the losses incurred in 2008 and 2009, Citi is in a threeyearcumulative pretax loss position at December 31, 2010. A cumulativeloss position is considered significant negative evidence in assessing therealizability of a DTA. Citi has concluded that there is sufficient positiveevidence to overcome this negative evidence. The positive evidence includestwo means by which Citi is able to fully realize its DTAs. First, Citi forecastssufficient taxable income in the carryforward period, exclusive of taxplanning strategies, even under stressed scenarios. Second, Citi has sufficienttax planning strategies, including potential sales of businesses and assets, inwhich it could realize the excess of appreciated value over the tax basis of itsassets. The amount of the DTAs considered realizable, however, is necessarilysubject to Citi’s estimates of future taxable income in the jurisdictions inwhich it operates during the respective carryforward periods, which is in turnsubject to overall market and global economic conditions.Based upon the foregoing discussion, as well as tax planningopportunities and other factors discussed below, Citi believes that the U.S.federal and New York state and city net operating loss carryforward period of20 years provides enough time to utilize the DTAs pertaining to the existingnet operating loss carryforwards and any NOL that would be created bythe reversal of the future net deductions that have not yet been taken on atax return. The U.S. federal NOL carryforward component of the DTAs of$3.9 billion at December 31, 2010 is expected to be utilized in 2011 basedupon Citi’s current expectations of future taxable income.The U.S. foreign tax credit carryforward period is 10 years. In addition,utilization of foreign tax credits in any year is restricted to 35% of foreignsource taxable income in that year. Further, overall domestic losses thatCiti has incurred of approximately $47 billion are allowed to be reclassifiedas foreign source income to the extent of 50% of domestic source incomeproduced in subsequent years and such resulting foreign source incomewould in fact be sufficient to cover the foreign tax credits being carriedforward. As such, the foreign source taxable income limitation will not be animpediment to the foreign tax credit carryforward usage as long as Citi cangenerate sufficient domestic taxable income within the 10-year carryforwardperiod. Under U.S. tax law, NOL carry-forwards must generally be usedagainst taxable income before foreign tax credits (FTCs) or general businesscredits (GBCs) can be utilized.Regarding the estimate of future taxable income, Citi has projected itspretax earnings, predominantly based upon the “core” businesses in Citicorpthat Citi intends to conduct going forward. These “core” businesses haveproduced steady and strong earnings in the past. Citi has already taken stepsto reduce its cost structure. In 2010, operating trends were positive and creditcosts improved. Taking these items into account, Citi is projecting that it willgenerate sufficient pretax earnings within the 10-year carryforward periodreferenced above to be able to fully utilize the foreign tax credit carryforward,in addition to any foreign tax credits produced in such period. Until theU.S. federal NOL carryforward is fully utilized, the FTCs and GBCs will likelycontinue to increase. Citi’s net DTAs will decline as additional domestic GAAPtaxable income is generated.Citi has also examined tax planning strategies available to it inaccordance with ASC 740 that would be employed, if necessary, to prevent acarryforward from expiring. These strategies include repatriating low-taxedforeign source earnings for which an assertion that the earnings havebeen indefinitely reinvested has not been made, accelerating U.S. taxableincome into or deferring U.S. tax deductions out of the latter years of thecarryforward period (e.g., selling appreciated intangible assets and electingstraight-line depreciation), accelerating deductible temporary differencesoutside the U.S., holding onto available-for-sale debt securities with lossesuntil they mature and selling certain assets that produce tax-exempt income,while purchasing assets that produce fully taxable income. In addition,the sale or restructuring of certain businesses can produce significant U.S.taxable income within the relevant carryforward periods.Citi’s ability to utilize its DTAs to offset future taxable income may besignificantly limited if Citi experiences an “ownership change,” as defined inSection 382 of the Internal Revenue Code of 1986, as amended (the “Code”).See “Risk Factors” and Note 10 to the Consolidated Financial Statementsfor a further description of Citi’s tax provision and related income tax assetsand liabilities.Approximately $13 billion of the net DTA is included in Tier 1 Commonand Tier 1 Capital.LEGAL RESERVESSee the discussion in Note 29 to the Consolidated Financial Statements forinformation regarding Citi’s policies on establishing reserves for legal andregulatory claims.ACCOUNTING CHANGES AND FUTURE APPLICATIONOF ACCOUNTING STANDARDSSee Note 1 to the Consolidated Financial Statements for a discussionof “Accounting Changes” and the “Future Application of AccountingStandards.”141