Exelon 2014 Annual Report Download - page 227

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
Description of tax years that remain open to assessment by major jurisdiction
Taxpayer Open Years
Exelon (and predecessors) and subsidiaries consolidated Federal income tax returns ....................... 1999, 2001-2013
Constellation and subsidiaries consolidated Federal income tax returns .................................. 2011-March 2012
Exelon and subsidiaries Illinois unitary income tax returns .............................................. 2007-2013
Constellation combined New York corporate income tax returns ......................................... 2008-2013
Various separate company Pennsylvania corporate net income tax returns ................................ 2010-2013
BGE Maryland corporate net income tax returns ...................................................... 2011-2013
Various Exelon Maryland corporate net income tax returns ............................................. 2012-2013
Various Constellation (Non-BGE) Maryland corporate net income tax returns .............................. 2011-2013
Other Tax Matters
Like-Kind Exchange
Exelon, through its ComEd subsidiary, took a position on its 1999 income tax return to defer approximately $1.2 billion of tax gain on
the sale of ComEd’s fossil generating assets. The gain was deferred by reinvesting a portion of the proceeds from the sale in
qualifying replacement property under the like-kind exchange provisions of the IRC. The like-kind exchange replacement property
purchased by Exelon included interests in three municipal-owned electric generation facilities which were properly leased back to the
municipalities. The IRS disagreed with this position and asserted that the entire gain of approximately $1.2 billion was taxable in
1999.
Exelon has been unable to reach agreement with the IRS regarding the dispute over the like kind exchange position. The IRS has
asserted that the Exelon purchase and leaseback transaction is substantially similar to a leasing transaction, known as a SILO,
which the IRS does not respect as the acquisition of an ownership interest in property. A SILO is a “listed transaction” that the IRS
has identified as a potentially abusive tax shelter under guidance issued in 2005. Accordingly, the IRS has asserted that the sale of
the fossil plants followed by the purchase and leaseback of the municipal owned generation facilities does not qualify as a like-kind
exchange and the gain on the sale is fully subject to tax. The IRS has also asserted a penalty of approximately $90 million for a
substantial understatement of tax.
Exelon disagrees with the IRS and continues to believe that its like-kind exchange transaction is not the same as or substantially
similar to a SILO. Although Exelon has been and remains willing to settle the disagreement on terms commensurate with the
hazards of litigation, Exelon does not believe a settlement is possible. Because Exelon believed, as of December 31, 2012, that it
was more-likely-than-not that Exelon would prevail in litigation, Exelon and ComEd had no liability for unrecognized tax benefits with
respect to the like-kind exchange position.
On January 9, 2013, the U.S. Court of Appeals for the Federal Circuit reversed the U.S. Court of Federal Claims and reached a
decision for the government in Consolidated Edison v. United States. The Court disallowed Consolidated Edison’s deductions
stemming from its participation in a LILO transaction that the IRS also has characterized as a tax shelter.
In accordance with applicable accounting standards, Exelon is required to assess whether it is more-likely-than-not that it will prevail
in litigation. Exelon continues to believe that its transaction is not a SILO and that it has a strong case on the merits. However, in
light of the Consolidated Edison decision and Exelon’s current determination that settlement is unlikely, Exelon has concluded that
subsequent to December 31, 2012, it is no longer more-likely-than-not that its position will be sustained. As a result, in the first
quarter of 2013, Exelon recorded a non-cash charge to earnings of approximately $265 million, which represents the amount of
interest expense (after-tax) and incremental state income tax expense for periods through March 31, 2013 that would be payable in
the event that Exelon is unsuccessful in litigation. Of this amount, approximately $170 million was recorded at ComEd. Exelon
intends to hold ComEd harmless from any unfavorable impacts of the after-tax interest amounts on ComEd’s equity. As such,
ComEd recorded on its consolidated balance sheet as of March 31, 2013, a $172 million receivable and non-cash equity
contributions from Exelon. Exelon and ComEd will continue to accrue interest on the unpaid tax liabilities related to the uncertain tax
position, and the charges arising from future interest accruals are not expected to be material to the annual operating earnings of
Exelon or ComEd. In addition, ComEd will continue to record non-cash equity contributions from Exelon in the amount of the net
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