5. Income taxes:

We are a not-for-profit membership corporation subject to federal and state income taxes. As a taxable electric cooperative, we have annually allocated income and deductions between patronage and non-patronage activities.

Although we believe that treatment of non-member sales as patronage-sourced income is appropriate, this treatment has not been examined by the Internal Revenue Service. If this treatment was not sustained, we believe that the amount of taxes on such non-member sales, after allocating related expenses against the revenues from such sales, would not have a material adverse effect on financial condition or results of operations and cash flows.

We account for income taxes pursuant to the authoritative guidance for accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

The difference between the statutory federal income tax rate on income before income taxes and our effective income tax rate is summarized as follows:



	2012		2011		2010

Statutory federal income tax rate	35.0	%	35.0	%	35.0%
Patronage exclusion	(32.7	%)	(32.6	%)	(32.9%)
Tax credits	0.0	%	0.0	%	0.0%
Other	(2.3	%)	(2.4	%)	(2.1%)

Effective income tax rate	0.0	%	0.0	%	0.0%

The components of the net deferred tax assets and liabilities as of December 31, 2012 and 2011 were as follows:



		(dollars in thousands)
		2012			2011

Deferred tax assets
Net operating losses	$	29,724		$	29,724
Tax credits (alternative minimum tax and other)		1,535			1,535
Accounting for Rocky Mountain transactions		347,867			334,423
Other assets		18,859			14,312

Deferred tax assets		397,985			379,994
Less: Valuation allowance		(31,259	)		(31,259	)

Net deferred tax assets	$	366,726		$	348,735

Deferred tax liabilities
Depreciation	$	465,598		$	485,721
Accounting for Rocky Mountain transactions		157,145			161,214
Other liabilities		44,508			39,109

Deferred tax liabilities		667,251			686,044

Net deferred tax liabilities		300,525			337,309
Less: Patronage exclusion		(300,525	)		(337,309	)

Net deferred taxes	$	–		$	–

As of December 31, 2012, we have federal and state tax net operating loss carryforwards and alternative minimum tax credits as follows:



		(dollars in thousands)

Expiration Date		Minimum Alternative Tax Credits		NOLs

2018	$	–	$	61,533
2019		–		10,516
2020		–		4,362
None		1,535		–

	$	1,535	$	76,411

The net operating loss expiration dates start in the year 2018 and end in the year 2020. Due to the tax basis method for allocating patronage and as shown by the above valuation allowance, it is not likely that the deferred tax assets related to tax credits and net operating losses will be realized.

The authoritative guidance for income taxes addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. 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.

We file a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the year 2009 forward. State jurisdictions have statutes of limitations generally ranging from three to five years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by tax authorities in major state jurisdictions include 2009 forward.