Exelon 2014 Annual Report Download - page 228

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
after-tax interest charges attributable to ComEd in connection with the like-kind exchange position. Exelon continues to believe that it
is unlikely that the IRS’s assertion of penalties will ultimately be sustained and therefore no liability for the penalty has been
recorded.
On September 30, 2013, the IRS issued a notice of deficiency to Exelon for the like-kind exchange position. Exelon filed a petition on
December 13, 2013 to initiate litigation in the United States Tax Court. Exelon was not required to remit any part of the asserted tax
or penalty in order to litigate the issue. The litigation could take three to five years including appeals, if necessary. Decisions in the
Tax Court are not controlled by the Federal Circuit’s decision in Consolidated Edison.
In the event of a fully successful IRS challenge to Exelon’s like-kind exchange position, the potential tax and after-tax interest,
exclusive of penalties, that could become currently payable as of December 31, 2014 may be as much as $810 million, of which
approximately $310 million would be attributable to ComEd after consideration of Exelon’s agreement to hold ComEd harmless, and
the balance at Exelon. Litigation could take several years such that the estimated cash and interest impacts will increase by a
material amount.
In the first quarter of 2014, Exelon entered into an agreement to terminate its investment in one of the three municipal-owned electric
generation properties in exchange for a net early termination amount of $335 million. The termination resulted in a 2014 tax payment
of approximately $285 million by Exelon, including approximately $155 million by ComEd representing the remaining gain deferred
pursuant to the like-kind exchange transaction. In the event of a fully successful IRS challenge to Exelon’s like-kind exchange
position, Exelon will be required to pay the full amount of tax and after-tax interest discussed in the preceding paragraph but will
ultimately be entitled to a refund of the 2014 tax payment. See Note 8—Impairment of Long-Lived Assets for further details.
Accounting for Generation Repairs
On April 30, 2013, the IRS issued Revenue Procedure 2013-24 providing guidance for determining the appropriate tax treatment of
costs incurred to repair electric generation assets. Generation will change its method of accounting for deducting repairs in
accordance with this guidance beginning with its 2014 tax year. Generation has calculated that adoption of the new method will
result in a cash tax detriment of approximately $120 million.
Accounting for Electric Transmission and Distribution Property Repairs
On August 19, 2011, the IRS issued Revenue Procedure 2011-43 providing a safe harbor method of tax accounting for repair costs
associated with electric transmission and distribution property. ComEd and PECO adopted the safe harbor in the Revenue
Procedure for the 2011 and 2010 tax years, respectively. For the year ended December 31, 2011, the adoption of the safe harbor
resulted in a $35 million reduction to income tax expense at PECO, while Generation incurred additional income tax expense in the
amount of $28 million due to a decrease in its domestic production activities deduction, which was reflected in the effective income
tax rate reconciliation in 2011 in the plant basis differences and domestic production activities deduction lines, respectively. For
Exelon, the adoption had a minimal effect on consolidated earnings. In addition, the adoption of the safe harbor resulted in a cash
tax benefit at Exelon, ComEd and PECO in the amount of approximately $300 million, $250 million, and $95 million, respectively,
partially offset by a cash tax detriment at Generation in the amount of $28 million related to a decreased domestic production
activities deduction.
BGE adopted the safe harbor for the short period 2012 pre-merger tax year. For the year ended December 31, 2012, the adoption of
the safe harbor resulted in a cash tax benefit at BGE in the amount of $27 million.
See Note 3—Regulatory Matters for discussion of the regulatory treatment prescribed in the 2010 electric distribution rate case
settlement for PECO’s cash tax benefit resulting from the application of the method change to years prior to 2010.
Accounting for Gas Distribution Property Repairs
In September 2012, PECO filed an application with the IRS to change its method of accounting for gas distribution repairs for the
2011 tax year. The change to the newly adopted method for the 2011 tax year and 2012 resulted in a tax benefit of $26 million at
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