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1341 makes the taxpayer whole by reducing taxable income in the
year of return by the amount of the allowable deduction or by
giving a credit in the year of return for the hypothetical
decrease in tax that would have occurred in the year of
recognition had the item been excluded from income in that year.
The taxpayer may use whichever method is most beneficial. See
sec. 1.1341-1(i), Income Tax Regs.
Prior to 1987, the payments that petitioner received from
its customers for utility services included a deferred Federal
income tax component attributable to accelerated depreciation.
Petitioner paid Federal income tax on those amounts at a rate of
46 percent. Federal income tax rates were reduced in 1986 to
39.95 percent for 1987 and to 34 percent for 1988 and years
thereafter, creating an excess in petitioner’s deferred Federal
income tax account. Petitioner corrected this excess by reducing
utility rates that were charged to its customers from 1987
through 1990. However, due to the reduction in rates, petitioner
paid a greater amount of tax in years prior to 1987 than the tax
benefit it received from 1987 to 1990 when it reduced its utility
rates. Accordingly, on its Federal income tax returns for 1987
through 1990, petitioner claimed section 1341 relief.
The first requirement of section 1341(a)(1) is that the item
in question be included in taxable income by the taxpayer because
it appeared that the taxpayer had an unrestricted right to the
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