147 T.C. 230 (T.C. 2016), 29183-13, Exelon Corporation v. Commissioner of Internal Revenue

Docket Nº:29183-13, 29184-13
Citation:147 T.C. 230, 147 T.C. No. 9
Opinion Judge:LARO, Judge
Party Name:EXELON CORPORATION, as Successor by Merger to Unicom Corporation and Subsidiaries, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Exelon Corporation and Subsidiaries, Petitioner v. Commissioner of Internal Revenue, Respondent
Attorney:David F. Abbott, Joel V. Williamson, Erin G. Gladney, Kristin M. Mikolaitis, Andrew W. Steigleder, Michelle A. Spiegel, and Michael D. Educate, for petitioner. Matthew I. Root, Elizabeth P. Flores, Steven N. Balahtsis, Abigail F. Dunnigan, Lisa M. Goldberg, Casey R. Kroma, and Michael T. Shelton,...
Case Date:September 19, 2016
Court:United States Tax Court
 
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Page 230

147 T.C. 230 (T.C. 2016)

147 T.C. No. 9

EXELON CORPORATION, as Successor by Merger to Unicom Corporation and Subsidiaries, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent Exelon Corporation and Subsidiaries, Petitioner

v.

Commissioner of Internal Revenue, Respondent

Nos. 29183-13, 29184-13

United States Tax Court

September 19, 2016

David F. Abbott, Joel V. Williamson, Erin G. Gladney, Kristin M. Mikolaitis, Andrew W. Steigleder, Michelle A. Spiegel, and Michael D. Educate, for petitioner.1

Matthew I. Root, Elizabeth P. Flores, Steven N. Balahtsis, Abigail F. Dunnigan, Lisa M. Goldberg, Casey R. Kroma, and Michael T. Shelton, for respondent.

OPINION

LARO, Judge

Page 231

These cases are consolidated for purposes of trial, briefing, and opinion. Respondent determined the following deficiencies and penalties in petitioner’s2 Federal income tax in timely issued notices of deficiency:

Year Deficiency Penalty sec. 6662(a)
1999 $ 431,174,592 $ 86,234,918
2001 5,534,611 1,106,922
Petitioner timely filed petitions with the Court seeking redetermination of these deficiencies and penalties. The deficiencies at issue arise out of petitioner’s participation in six transactions that respondent labeled sale-in/lease-out Page 232 (SILO) transactions in an alleged like-kind exchange under section 1031.3 The transactions are as follows:
Counterparty Transaction name
City Public Service Spruce
Municipal Electric Authority of Ga. Scherer 1, Scherer 2, Scherer 3
Municipal Electric Authority of Ga. Wansley 1, Wansley 2
The parties have agreed, with the Court’s approval, to reduce the number of transactions to be tried to three "test transactions": Spruce, Scherer 1 (Scherer), and Wansley 1 (Wansley), and to apply the Court’s methodology in this Opinion to the remaining transactions.4 The parties have resolved two issues by filing stipulations of settled issues with the Court. The parties have agreed that petitioner is entitled to the benefits of interest netting as provided in section 6621(d) for 1999, the amount of which will be determined after the parties submit Rule 155 computations. The parties have also agreed that petitioner is not subject to the penalty under section 6662 for the 2001 tax year for an underpayment due to a substantial understatement of income tax, although petitioner still may be subject to the section 6662 penalty for 2001 on account of negligence or disregard of rules or regulations. We decide the following issues: 1. whether the substance of the test transactions is consistent with their form. We hold that it is not;

2. whether petitioner has satisfied the requirements of section 1031. We hold that it has not;

3. whether petitioner is entitled to depreciation deductions claimed for 2001 with respect to the test transactions. We hold that it is not;

4. whether petitioner must include in income in 2001 original issue discount income related to the test transactions. We hold that it must; Page 233 5. whether petitioner is entitled to deduct amortized transaction costs related to test transactions for its 2001 tax year. We hold that it is not; and

6. whether petitioner is liable for penalties under section 6662 for the 1999 and 2001 tax years. We hold that it is. FINDINGS OF FACT Some of the facts have been stipulated. The stipulations of fact and the facts drawn from stipulated exhibits are incorporated herein, and we find those facts accordingly. At the time of filing the petitions, Exelon, the primary petitioner, had its principal place of business in Chicago, Illinois. The parties agree that these cases are appealable to the Court of Appeals for the Seventh Circuit. Background I. Exelon and Its Subsidiaries Commonwealth Edison Co. (ComEd) was organized in Illinois on October 17, 1913, as a result of the merger of Cosmopolitan Electric Co. into ComEd. Unicom Corp. (Unicom) was created in January 1994 as a holding company for ComEd. Unicom Investment, Inc. (UII), was created on April 23, 1999, as a wholly owned subsidiary of Unicom. Exelon Corp. (Exelon), petitioner in these cases and the successor by merger to Unicom and its consolidated subsidiaries (Unicom Group), was incorporated in February 1999. Exelon became the parent corporation of PECO Energy Co. (PECO) and Unicom through merger on October 20, 2000. As a result of the merger of Exelon and Unicom, Unicom went out of existence. After the merger, Exelon wholly owned PECO and owned more than 99% of ComEd. Both Unicom and Exelon used the calendar year as their tax year. Both companies were accrual basis taxpayers during all relevant periods. II. Unicoms Decision To Sell Fossil Fuel Power Generation Assets A. ComEds Power Generation Business in 1999 In 1999 ComEd engaged in the production, transmission, and distribution of electricity to residential, commercial, and Page 234 industrial customers in Northern Illinois. ComEd operated in Chicago, Illinois, under a nonexclusive electric franchise ordinance. ComEd received approximately one-third of its ultimate revenues from customers in Chicago. In addition, ComEd operated its electric business outside of Chicago in 395 municipalities under nonexclusive franchises that were received under certificates of convenience and necessity granted by the Illinois Commerce Commission (ICC). ComEd owned and operated a full spectrum of assets necessary to produce and deliver electricity to its customers, including power generation plants (both fossil fueled and nuclear fueled), the high-voltage transmission system which transported the electricity from the generators to the service areas, and the low-voltage distribution system needed to provide the electricity to end users. B. Deregulation of the Electric Industry and Unicom The 1990s marked a shift in the regulatory framework for the electric industry. Before 1996 most electric utility companies were vertically integrated conglomerates which, similarly to ComEd, owned a full spectrum of assets for production and delivery of electricity to the customers. By April 1996 the Federal Energy Regulatory Commission (FERC) had issued final rules requiring nondiscriminatory access to the transmission grid controlled by vertically integrated utilities. These rules opened the market to smaller utilities and power generators and provided an opportunity for the formation of "wholesale" energy companies. Instead of investing in their own transmission capacity, smaller energy producers could now use the transmission system already in place regardless of who owned it to deliver power to their customers. Many States pursued their own restructuring strategies for electric industry deregulation, some of them requiring separation of power generation from sales to final customers. On December 16, 1997, Illinois enacted the Electric Service Customer Choice and Rate Relief Law, codified at 220 Ill.Comp.Stat. Ann. 5/16-101 to -130 (West 2013). Unlike other States, Illinois did not enact deregulation legislation requiring divestiture of power generation and allowed electric utilities a choice of how they wished to pursue the transition. Page 235 These regulatory changes resulted in the transformation of the power industry by the early 2000s from a number of separate vertically integrated utilities to a network of businesses where the various elements of the supply chain were being operated separately and interacted through market-based contracts and power exchanges. To face the challenges of the changing market, Unicom decided to evaluate its operations in Illinois, including its nuclear and fossil fuel power plants. Although Unicom management believed the...

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