assets will be realized through the reversal of its existing taxable temporary differences and its projected future taxable income. 

As required under U.S. GAAP, the Bancorp recognized a deferred tax asset for compensation expense recognized for financial reporting that may be deductible for tax purposes in the future for certain stock-based awards granted to its employees. As a result of the Bancorp’s stock price as of December 31, 2010, as much as $24 million of deferred tax assets previously established for these stock-based awards will not be realized within the next 12 months and will negatively impact the Bancorp’s income tax expense in 2011. The Bancorp cannot predict its stock price or whether its employees will exercise other stock-based awards with lower exercise prices in the future; therefore, it is possible that the impact to income tax expense will be greater than or less than $24 million in 2011. 

The IRS concluded its audit for 2006 and 2007 during the third quarter of 2010. As a result, all issues have been resolved with the IRS through 2007. The statute of limitations for the Bancorp’s federal income tax returns remains open for tax years 2007 through 2010. The IRS is currently auditing the Bancorp’s federal income tax returns for 2008 and 2009. On occasion, as various state and local taxing jurisdictions examine the returns of the Bancorp and its subsidiaries, the Bancorp may agree to extend the statute of limitations for a short period of time. Otherwise, with the exception of a few states with insignificant uncertain tax positions, 

## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

the statutes of limitations for state income tax returns remain open only for tax years in accordance with each state’s statutes. 

Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the Consolidated Financial Statements. During the years ended December 31, 2010 and 2009, the Bancorp recognized an interest benefit of $8 million and interest expense of $3 million, respectively, net of the related tax impact. This $3 million recognized in 2009 is exclusive of the $55 million interest reduction discussed previously. At December 31, 2010 and 2009, the Bancorp had accrued interest liabilities, net of the related tax benefits, of $1 million and $13 million, respectively. No material liabilities were recorded for penalties. 

Retained earnings at December 31, 2010 and 2009 included $157 million in allocations of earnings for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current tax law, if certain of the Bancorp’s subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current corporate tax rate. 

