Notes to Consolidated Financial Statements
Note 8 Income Taxes
We have two categories of income taxes in our consolidated statements of income: current and deferred. Current income tax expense consists of federal and state income tax less applicable tax credits related to the current year. Deferred income tax expense generally is equal to the changes in the deferred income tax liability and regulatory tax liability during the year.
Investment and Other Tax Credits
Deferred investment tax credits associated with distribution operations are included as a regulatory liability in our consolidated statements of financial position (see Note 1, “Accounting Policies and Methods of Application”). These investment tax credits are being amortized over the estimated life of the related properties as credits to income in accordance with regulatory requirements. In 2007, we invested in a guaranteed affordable housing tax credit fund. We reduce income tax expense in our consolidated statements of income for the investment tax credits and other tax credits associated with our nonregulated subsidiaries, including the affordable housing credits. Components of income tax expense shown in the consolidated statements of income are shown in the following table.
Income Tax Expense
The relative split between current and deferred taxes is due to a variety of factors including true ups of prior year tax returns, and most importantly, the timing of our property-related deductions.
In millions Current income taxes Deferred income taxes Amortization of investment tax credits
The reconciliations between the statutory federal income tax rate, the effective rate and the related amount of tax for the years ended December 31, 2009, 2008 and 2007 on our consolidated statements of income are presented in the following table. Our adoption of the authoritative guidance relating to consolidations (see Note 5) had no effect on the total income tax expense reported in our consolidated statements of income or on our accrued federal and state income taxes, including accumulated deferred income taxes as reported in our consolidated statements of financial position.
In millions Computed tax expense at statutory rate State income tax, net of federal income tax benefit Tax effect of net income attributable to the noncontrolling interest Amortization of investment tax credits Affordable housing credits Flexible dividend deduction Other – net
Accumulated Deferred Income Tax Assets and Liabilities
We report some of our assets and liabilities differently for financial accounting purposes than we do for income tax purposes. We report the tax effects of the differences in those items as deferred income tax assets or liabilities in our consolidated statements of financial position.We measure the assets and liabilities using income tax rates that are currently in effect. Because of the regulated nature of the utilities’ business, we recorded a regulatory tax liability in accordance with authoritative guidance related to income taxes, which we are amortizing over approximately 30 years (see Note 1). Our deferred tax assets include $74 million related to an unfunded pension and postretirement benefit obligation a decrease of $11 million from 2008.
We have provided a valuation allowance for some of these items that reduce our net deferred tax assets to amounts we believe are more likely than not to be realized in future periods.With respect to our continuing operations, we have net operating losses in various jurisdictions. Components that give rise to the net accumulated deferred income tax liability are as follows.
In millions Accumulated deferred income tax liabilities Property – accelerated depreciation and other property-related items Mark to market Other Accumulated deferred income tax assets Deferred investment tax credits Unfunded pension and postretirement benefit obligation Net operating loss – NUI Corporation Other (1) Valuation allowance is due to the net operating losses on a former non-operating subsidiary that are not allowed in New Jersey.
Tax Benefits
The authoritative guidance related to income taxes requires us to determine whether tax benefits claimed or expected to be claimed on our tax return should be recorded in the consolidated financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2008 and December 31, 2009, we did not have a liability for unrecognized tax benefits. Based on current information, we do not anticipate that this will change materially in 2010.
We recognize accrued interest and penalties related to uncertain tax positions in operating expenses in the consolidated statements of income, which is consistent with the recognition of these items in prior reporting periods. As of December 31, 2009, we did not have a liability recorded for payment of interest and penalties associated with uncertain tax positions.
We file a U.S. federal consolidated income tax return and various state income tax returns.We are no longer subject to income tax examinations by the Internal Revenue Service for years before 2008 or any state for years before 2002.
