Dive Brief:
- The U.S. Tax Court this week said Exelon owns more than $1.4 billion in taxes, penalties and interest, related to the 1999 sale of coal plants in Illinois owned by Commonwealth Edison, Crain's Chicago Business reports.
- At the time, Exelon rolled over the tax gain into long-term leases in power plants, but ultimately the Internal Revenue Service saw this as a tax dodge.
- The court's ruling was announced Monday and Exelon's stock dipped but has since recovered and continued to rise. Crain's Chicago Business reported the decision was not a surprise, following a court decision in a similar case several years ago. Exelon is still evaluating the ruling and said it has not decided how to proceed, but did specify that it would not seek recovery from ComEd ratepayers.
Dive Insight:
A bill from the tax man is always tough, but Exelon's is an extreme example. The company deferred $1.2 billion in tax gains 17 years ago when it sold older coal plants in Illinois, and now penalties and interest will be added to the bottom line.
According to an 8-K filed this week, the gain was then reinvested in qualifying replacement property under IRS like-kind exchange provisions. The replacement assets included interests in three municipal-owned electric generation facilities, which Exelon then leased back to the municipalities.
Plus interest and penalties, Exelon could owe $1.45 billion, though Crain's reports the bottom line impact will likely be closer to $1.1 billion because the company will deduct interest payments.
While Exelon said it has not decided how to move forward, in order to appeal it would need to post a bond or pay the tax, penalties and interest. The company estimates the potential tax and after-tax interest, exclusive of penalties, that could become payable may be as much as $870 million. Of that, about $300 million would be attributable to ComEd, but Exelon said it would not look to the utility for financial support.
"Exelon has not yet determined whether a charge to earnings for the penalties assessed is appropriate at this time. In any event, Exelon will not seek recovery from ComEd ratepayers for the effect of the penalties assessed," according to the 8-K. "Exelon is still evaluating the Tax Court’s decision and considering next steps."
