ComEd 2013 Annual Report Download - page 200

replacement propertyunder thelike-kindexchange provisionsoftheIRC. Thelike-kindexchange replacement propertypurchased
by Exelon includedinterestsinthree municipal-ownedelectric generation facilities which were properlyleasedback to the
municipalities. TheIRS disagreedwiththis position andassertedthat the entire gainofapproximately$2.8 billion wastaxable in
1999.
Exelon hasbeen unable to reach agreement withtheIRSregardingthedispute over thelikekindexchangeposition.TheIRShas
assertedthat theExelon purchaseandleaseback transaction is substantially similar to a leasingtransaction,knownasaSILO,
which theIRSdoesnot respectastheacquisition ofan ownershipinterestin property. ASILO is a“listedtransaction”that theIRS
hasidentifiedasa potentiallyabusivetaxshelter under guidanceissuedin 2005. Accordingly, theIRShasassertedthat thesale of
thefossil plantsfollowedbythe purchaseandleaseback ofthemunicipal ownedgeneration facilitiesdoesnot qualify asalike-kind
exchangeandthegainonthesale is fullysubjecttotax. TheIRShasalsoasserteda penaltyofapproximately $87 million for a
substantial understatement oftax.
Exelon disagreeswiththeIRSandcontinuesto believethat itslike-kindexchange transaction is not thesameasor substantially
similar to a SILO. Although Exelon hasbeen andremainswillingto settle thedisagreement on terms commensurate withthe
hazards oflitigation,Exelon doesnot believeasettlement is possible.BecauseExelon believed, asofDecember 31,2012,that it
wasmore-likely-than-not that Exelon wouldprevailinlitigation,Exelon andComEd hadno liabilityfor unrecognizedtaxbenefitswith
respecttothelike-kindexchangeposition.
OnJanuary9,2013,theU.S. Court ofAppealsfor theFederal CircuitreversedtheU.S. Court ofFederal Claims andreacheda
decision for thegovernment inConsolidated Edison v. UnitedStates. TheCourt disallowedConsolidated Edison’s deductions
stemmingfromitsparticipation inaLILO transaction that theIRSalsohascharacterizedasataxshelter.
Inaccordancewithapplicable accountingstandards, Exelon is requiredto assess whether itis more-likely-than-not that itwill prevail
inlitigation.Exelon continuesto believethat itstransaction is not a SILO andthat ithasastrongcaseonthemerits. However,in
lightoftheConsolidated Edison decision andExelon’s current determination that settlement is unlikely, Exelon hasconcludedthat
subsequent to December 31,2012,itis no longer more-likely-than-not that itsposition will besustained. Asaresult,inthefirst
quarter of2013,Exelon recordeda non-cash charge to earnings ofapproximately$265 million, which representstheamount of
interestexpense(after-tax) andincremental state incometaxexpensefor periods through March 31,2013 that wouldbepayable in
theevent that Exelon is unsuccessful inlitigation.Ofthis amount,approximately$170million wasrecordedat ComEd. Exelon
intends to holdComEd harmless fromanyunfavorable impactsoftheafter-taxinterestamountson ComEd’s equity. Assuch,
ComEd recordedon itsconsolidatedbalancesheet asofMarch 31,2013,a$172million receivable andnon-cash equity
contributionsfromExelon.Exelon andComEd will continue to accrue interestontheuncertaintaxposition,andthechargesarising
fromfuture interestaccrualsare not expectedto bematerial to the annual operatingearnings ofExelon or ComEd. Inaddition
ComEd will continue to recordnon-cash equitycontributionsfromExelon intheamount ofthe net after-taxinterestcharges
attributable to ComEd inconnection withthelike-kindexchangeposition.Exelon continuesto believethat itis unlikelythat the$87
million penaltyassertion will ultimatelybesustainedandtherefore no liabilityfor the penaltyhasbeen recorded.
OnSeptember 30,2013,theInternal Revenue Serviceissueda noticeofdeficiency to Exelon for thelike-kindexchangeposition.
Exelon fileda petition on December 13,2013 to initiate litigation intheUnitedStatesTaxCourt.Exelon wasnot requiredto remitany
part oftheassertedtaxor penaltyinorder to litigate theissue.Thelitigation couldtakethree to fiveyearsincludingappeals, if
necessary. DecisionsintheTaxCourt are not controlledbytheFederal Circuit’s decision inConsolidated Edison.
AsofDecember 31,2013,intheevent ofafullysuccessful IRSchallengetoExelon’s like-kindexchangeposition,the potential tax
andafter-taxinterest,exclusiveofpenalties, that couldbecomecurrentlypayable maybeasmuch as $840million,of which
approximately$305million wouldbe attributable to ComEd after consideration ofExelon’s agreement to holdComEd harmless, and
thebalanceatExelon.Litigation couldtakeseveral yearssuch that theestimatedcash impactswouldlikelychangeby amaterial
amount.
Accounting for Generation Repairs
On April30,2013,theIRS issuedRevenue Procedure 2013-24providingguidancefor determiningthe appropriate taxtreatment of
costsincurredto repair electric generation assets. Generation expectsto changeitsmethodofaccountingfor deductingrepairsin
accordancewiththis guidancebeginningwithits2014taxyear.Generation hasestimatedthat adoption ofthenewmethodwill result
inacash taxdetriment ofapproximately$100 -$120 million.
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