INCOME TAXES

Income Tax Summary

The Company files a consolidated federal income tax return. Total income tax expense varied from the statutory federal income tax rate for the following reasons:



	2012			2011			2010
	(In millions)
Income before income taxes	$	960		$	991		$	962
Income tax expense at 35% statutory rate	$	336		$	347		$	337
Production tax credits	(49		)	(6		)	(33		)
Investment tax credits	(6		)	(6		)	(6		)
Depreciation	(4		)	(4		)	(4		)
Employee Stock Ownership Plan dividends	(4		)	(4		)	(5		)
Domestic production activities deduction	(14		)	(7		)	(7		)
Settlement of Federal tax audit	—			—			(12		)
State and local income taxes, net of federal benefit	37			37			44
Enactment of Michigan Corporate Income Tax, net of federal expense	—			(87		)	—
Other, net	(10		)	(2		)	1
Income tax expense	$	286		$	268		$	315
Effective income tax rate	29.8		%	27.0		%	32.7		%

Components of income tax expense were as follows:



	2012			2011			2010
Current income tax expense (benefit)	(In millions)
Federal	$	190		$	27		$	(168	)
State and other income tax	49			21			26
Total current income taxes	239			48			(142		)
Deferred income tax expense (benefit)
Federal	39			318			415
State and other income tax	8			(98		)	42
Total deferred income taxes	47			220			457
Total income taxes from continuing operations	286			268			315
Discontinued operations	(29		)	(1		)	(4		)
Total	$	257		$	267		$	311

Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts in the financial statements. Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related assets or liabilities. Deferred tax assets and liabilities not related to assets or liabilities are classified according to the expected reversal date of the temporary differences. Consistent with rate making treatment, deferred taxes are offset in the table below for temporary differences which have related regulatory assets and liabilities.

Deferred tax assets (liabilities) were comprised of the following at December 31:



	2012			2011
	(In millions)
Property, plant and equipment	$	(3,389	)	$	(3,131	)
Securitized regulatory assets	(256		)	(360		)
Alternative minimum tax credit carry-forwards	254			294
Merger basis differences	42			50
Pension and benefits	(33		)	(39		)
Other comprehensive income	101			99
Derivative assets and liabilities	66			64
State net operating loss and credit carry-forwards	37			30
Other	41			(45		)
	(3,137		)	(3,038		)
Less valuation allowance	(33		)	(27		)
	$	(3,170	)	$	(3,065	)
Current deferred income tax assets	$	21		$	51
Long-term deferred income tax liabilities	(3,191		)	(3,116		)
	$	(3,170	)	$	(3,065	)
Deferred income tax assets	$	1,038		$	1,048
Deferred income tax liabilities	(4,208		)	(4,113		)
	$	(3,170	)	$	(3,065	)

Production tax credits earned in prior years but not utilized totaled $254 million and are carried forward indefinitely as alternative minimum tax credits. The majority of the production tax credits earned, including all of those from our synfuel projects, were generated from projects that had received a private letter ruling (PLR) from the Internal Revenue Service (IRS). These PLRs provide assurance as to the appropriateness of using these credits to offset taxable income, however, these tax credits are subject to IRS audit and adjustment.

The above table excludes deferred tax liabilities associated with unamortized investment tax credits that are shown separately on the Consolidated Statements of Financial Position. Investment tax credits are deferred and amortized to income over the average life of the related property.

The Company has state deferred tax assets related to net operating loss and credit carry-forwards of $37 million and $30 million at December 31, 2012 and 2011, respectively. The state net operating loss and credit carry-forwards expire from 2013 through 2031. The Company has recorded valuation allowances at December 31, 2012 and 2011 of approximately $33 million and $27 million, respectively, with respect to these deferred tax assets. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2012			2011			2010
	(In millions)
Balance at January 1	$	48		$	28		$	81
Additions for tax positions of prior years	—			27			4
Reductions for tax positions of prior years	(2		)	(4		)	(4		)
Additions for tax positions of current year	1			1			—
Settlements	(30		)	(3		)	(53		)
Lapse of statute of limitations	(6		)	(1		)	—
Balance at December 31	$	11		$	48		$	28

The Company had $3 million and $4 million of unrecognized tax benefits at December 31, 2012 and at December 31, 2011, respectively, that, if recognized, would favorably impact its effective tax rate. During the next twelve months, it is reasonably possible that the Company will settle certain federal and state tax examinations and audits. As a result, the Company believes that it is possible that there will be a decrease in unrecognized tax benefits of up to $1 million within the next twelve months.

The Company recognizes interest and penalties pertaining to income taxes in Interest expense and Other expenses, respectively, on its Consolidated Statements of Operations. Accrued interest pertaining to income taxes totaled $1 million and $2 million at December 31, 2012 and December 31, 2011, respectively. The Company had no accrued penalties pertaining to income taxes. The Company recognized interest expense (income) related to income taxes of $(1) million, $(2) million and $1 million in 2012, 2011 and 2010, respectively.

In 2012, the Company settled a federal tax audit for the 2009 and 2010 tax years, which resulted in the recognition of $30 million of unrecognized tax benefits. The Company's federal income tax returns for 2011 and subsequent years remain subject to examination by the IRS. The Company's Michigan Business Tax returns for the year 2008 and subsequent years remain subject to examination by the State of Michigan. The Company also files tax returns in numerous state and local jurisdictions with varying statutes of limitation.

Michigan Corporate Income Tax (MCIT)

On May 25, 2011, the Michigan Business Tax (MBT) was repealed and the MCIT was enacted and became effective January 1, 2012. The MCIT subjects corporations with business activity in Michigan to a 6 percent tax rate on an apportioned income tax base and eliminates the modified gross receipts tax and nearly all credits available under the MBT. The MCIT also eliminated the future deductions allowed under MBT that enabled companies to establish a one-time deferred tax asset upon enactment of the MBT to offset deferred tax liabilities that resulted from enactment of the MBT.

As a result of the enactment of the MCIT, the net state deferred tax liability was remeasured to reflect the impact of the MCIT tax rate on cumulative temporary differences expected to reverse after the effective date. The net impact of this remeasurement was a decrease in deferred income tax liabilities of $36 million attributable to our regulated utilities that was offset against the regulatory asset established upon the enactment of the MBT. Due to the elimination of the future tax deductions allowed under the MBT, the one-time MBT deferred tax asset that was established upon the enactment of the MBT has been remeasured to zero. The net impact of this remeasurement is a reduction of the net deferred tax assets of $308 million, with $395 million of this decrease in deferred tax assets attributable to our regulated utilities, partially offset by an $87 million decrease in deferred tax liabilities attributable to our non-utilities. The $395 million decrease in deferred tax assets at our regulated utilities was offset against the regulatory liabilities established upon enactment of the MBT. The $87 million is primarily due to a lower apportionment factor from inclusion of non-utility entities in DTE Energy's unitary Michigan tax return and was recognized as a reduction to income tax expense in 2011.

Consistent with the original establishment of these deferred tax liabilities (assets), no recognition of these non-cash transactions have been reflected in the Consolidated Statements of Cash Flows.