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depreciation exceeds straight-line depreciation, the timing
difference causes a utility to collect more than the utility
currently owes to the Government. This excess of Federal income
tax collected is referred to as the deferred Federal income tax
expense and represents Federal income tax to be paid by
petitioner in subsequent years when depreciation for rate-making
purposes exceeds depreciation for Federal income tax purposes.
The utility uses amounts it overcollected in earlier years to pay
Federal income tax it owes in later years. Deferred tax expense
is tracked using a deferred Federal income tax account. If
Federal income tax rates remain constant, the deferred Federal
income tax account will zero out over the useful life of the
underlying assets.
In years prior to 1987, petitioner collected revenues based
on a 46-percent Federal income tax rate and increased the
deferred Federal income tax account by the amount that
collections exceeded the current Federal income tax. The Tax
Reform Act of 1986 (TRA), Pub. L. 99-514, sec. 821, 100 Stat.
2372, effective for 1987 and years thereafter, reduced corporate
Federal income tax rates from 46 percent to 39.95 percent in 1987
and to 34 percent in 1988. As a result, petitioner’s accumulated
deferred Federal income tax as of December 31, 1986, exceeded the
amount of Federal income tax that petitioner would be expected to
pay in future years.
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