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:



	2014			2013			2012
	(In millions)
Income before income taxes	$	1,275		$	922		$	960
Income tax expense at 35% statutory rate	$	446		$	323		$	336
Production tax credits	(119		)	(68		)	(49		)
Investment tax credits	(6		)	(6		)	(6		)
Depreciation	(4		)	(4		)	(4		)
AFUDC - Equity	(7		)	(5		)	(4		)
Employee Stock Ownership Plan dividends	(4		)	(4		)	(4		)
Domestic production activities deduction	—			(14		)	(14		)
State and local income taxes, net of federal benefit	51			37			37
Enactment of New York Corporate Income Tax Legislation, net of federal benefit	8			—			—
Other, net	(1		)	(5		)	(6		)
Income tax expense	$	364		$	254		$	286
Effective income tax rate	28.5		%	27.5		%	29.8		%

Components of income tax expense were as follows:



	2014			2013		2012
	(In millions)
Current income tax expense (benefit)
Federal	$	(16	)	$	74	$	190
State and other income tax	24			16		49
Total current income taxes	8			90		239
Deferred income tax expense
Federal	289			122		39
State and other income tax	67			42		8
Total deferred income taxes	356			164		47
Total income taxes from continuing operations	364			254		286
Discontinued operations	—			—		(29		)
Total	$	364		$	254	$	257

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:



	2014			2013
	(In millions)
Property, plant and equipment	$	(3,832	)	$	(3,372	)
Securitized regulatory assets	(2		)	(127		)
Tax credit carry-forwards	296			266
Pension and benefits	(152		)	(30		)
State net operating loss and credit carry-forwards	39			43
Other	(19		)	(92		)
	(3,670		)	(3,312		)
Less valuation allowance	(31		)	(37		)
	$	(3,701	)	$	(3,349	)
Current deferred income tax assets (liabilities)	$	75		$	(28	)
Long-term deferred income tax liabilities	(3,776		)	(3,321		)
	$	(3,701	)	$	(3,349	)
Deferred income tax assets	$	861		$	934
Deferred income tax liabilities	(4,562		)	(4,283		)
	$	(3,701	)	$	(3,349	)

Tax credit carry forwards include $29 million of general business credits that expire through 2034 and $267 million of alternative minimum tax credits that may be carried forward indefinitely. The alternative minimum tax credits are production tax credits earned prior to 2006 but not utilized. The majority of these alternative minimum tax credits were generated from projects that had received a private letter ruling (PLR) from the 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 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 $39 million and $43 million at December 31, 2014 and 2013, respectively. The state net operating loss and credit carry-forwards expire from 2015 through 2034. The Company has recorded valuation allowances at December 31, 2014 and 2013 of approximately $31 million and $37 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:



	2014			2013			2012
	(In millions)
Balance at January 1	$	10		$	11		$	48
Reductions for tax positions of prior years	—			—			(2		)
Additions for tax positions of current year	—			—			1
Settlements	—			—			(30		)
Lapse of statute of limitations	(1		)	(1		)	(6		)
Balance at December 31	$	9		$	10		$	11

The Company had $2 million of unrecognized tax benefits at December 31, 2014 and 2013, that, if recognized, would favorably impact its effective tax rate. During the next twelve months, it is reasonably possible that the statute of limitation will expire on various state tax returns. As a result, the Company believes that it is possible that there will be a decrease in unrecognized tax benefits of up to $6 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 at December 31, 2014 and 2013. The Company had no accrued penalties pertaining to income taxes. The Company recognized interest expense (income) related to income taxes of a nominal amount in 2014 and 2013 and $(1) million in 2012.

In 2014, the Company settled a federal tax audit for the 2012 tax year. The Company's federal income tax returns for 2013 and subsequent years remain subject to examination by the IRS. The Company's MBT and MCIT 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.