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its Federal income tax returns to reflect the difference between
tax and financial accounting for unbilled revenue.
In 1987, petitioner changed its method of accounting for
Federal income tax purposes and began including unbilled revenue
in taxable income. Consistent with its financial and regulatory
accounting method, petitioner reduced unbilled revenue by the
amount of unbilled gas costs, leaving only the nongas margin as
part of taxable income. As part of its change in method of
accounting, petitioner made a section 481 adjustment to include
in income the amount of revenue attributable to the unbilled
period as of December 31, 1986. This adjustment was reduced by
unbilled gas costs as of December 31, 1986. In years thereafter,
petitioner made Schedule M-1 adjustments to reflect the reduction
in unbilled revenue by the unbilled gas costs amounts.
Deferred Tax Expense
Federal income tax is also a component of the approved
tariff rates that petitioner charges its customers. However, the
Federal income tax that petitioner uses in determining approved
tariff rates is generally different from actual Federal income
tax currently owed to the Government. This is attributable to
timing differences of recognizing items of income and expense.
For example, straight-line depreciation is used for rate-making
purposes, while accelerated depreciation is used to calculate
current Federal income tax. In earlier years, when accelerated
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