8-KOther Events

EXELON CORP 8-K Report, Corporate Update (Sep 20, 2016)

Filed September 20, 2016For Securities:EXC

Summary

This Form 8-K filing by Exelon Corporation and its subsidiary Commonwealth Edison Company (ComEd) reports on the unfavorable outcome of a tax dispute concerning a 1999 like-kind exchange. The U.S. Tax Court ruled against Exelon's position to defer approximately $1.2 billion in tax gain from the sale of ComEd's fossil generating assets, deeming the transaction not a qualifying like-kind exchange and thus the gain is fully taxable. Furthermore, the Tax Court also ruled that Exelon is liable for accuracy-related penalties, contrary to the company's prior assessment. Exelon estimates the potential tax and after-tax interest, excluding penalties, could be up to $870 million, with approximately $300 million attributable to ComEd after considering Exelon's commitment to hold ComEd harmless. The penalties and associated interest could add an additional $190 million. Exelon is evaluating the decision and considering next steps, including a potential appeal which would require posting a bond or paying the disputed amounts. Importantly, Exelon has stated it will not seek recovery from ComEd ratepayers for the effect of the penalties.

Key Highlights

  • 1U.S. Tax Court ruled against Exelon's 1999 like-kind exchange tax deferral claim.
  • 2The ruling makes approximately $1.2 billion in tax gain on the sale of fossil generating assets fully taxable.
  • 3Exelon is liable for accuracy-related penalties, a finding contrary to the company's prior assessment.
  • 4Estimated potential tax and after-tax interest liability (excluding penalties) is up to $870 million.
  • 5Approximately $300 million of the tax/interest liability is attributable to ComEd, with Exelon holding ComEd harmless from unfavorable after-tax interest impacts.
  • 6Penalties and after-tax interest could add an additional $190 million to the liability.
  • 7Exelon will not seek recovery from ComEd ratepayers for the effect of the assessed penalties.

Frequently Asked Questions

The dispute centered on Exelon's (via ComEd) attempt to defer approximately $1.2 billion in tax gain from the 1999 sale of its fossil generating assets by utilizing like-kind exchange provisions under the Internal Revenue Code. The IRS challenged this, asserting the transaction was structured like a SILO (Sale-Leaseback) which it does not recognize as a valid like-kind exchange.

The Tax Court ruled against Exelon, meaning the $1.2 billion gain is taxable. Exelon estimates the total tax and after-tax interest (excluding penalties) could be up to $870 million. Additionally, penalties and associated interest could amount to approximately $190 million. A portion of the tax/interest liability is allocated to ComEd.

No, Exelon has explicitly stated that it will not seek recovery from ComEd ratepayers for the effect of the penalties assessed by the Tax Court.

Exelon is evaluating the Tax Court's decision and considering its next steps. To appeal the ruling, Exelon would need to post a bond or pay the disputed tax, penalties, and interest. The company has not yet determined if a charge to earnings for the penalties is appropriate.