Income Taxes

Current and Deferred Taxes

The sources of income (loss) before income taxes are:



	Years ended December 31,
(in millions)	2011			2010		2009
Income (loss) from continuing operations before income taxes	$	(264	)	$	1,657	$	854
Discontinued operations before income taxes	1			13		(7		)
Income (loss) before income tax	$	(263	)	$	1,670	$	847

The components of income tax expense (benefit) by location of taxing jurisdiction are:



	Years ended December 31,
(in millions)	2011			2010			2009
Current:
Federal	$	(223	)	$	(432	)	$	1,211
State	36			(86		)	361
	(187		)	(518		)	1,572
Deferred:
Federal	(9		)	892			(1,638		)
State	(92		)	(20		)	(32		)
	(101		)	872			(1,670		)
Total continuing operations	(288		)	354			(98		)
Discontinued operations	4			9			(2		)
Total	$	(284	)	$	363		$	(100	)

The components of net accumulated deferred income tax liability are:



	December 31,
(in millions)	2011		2010
Deferred tax assets:
Property and software related	$	728	$	655
Unrealized gains and losses	385		400
Loss and credit carryforwards	689		97
Regulatory balancing accounts	89		230
Pension and PBOPs	179		183
Other	1,028		890
Total	$	3,098	$	2,455
Deferred tax liabilities:
Property-related	$	7,140	$	6,637
Leveraged leases	150		177
Capitalized software costs	324		293
Regulatory balancing accounts	301		293
Unrealized gains and losses	374		389
Other	296		315
Total	$	8,585	$	8,104
Accumulated deferred income tax liability – net	$	5,487	$	5,649
Classification of accumulated deferred income taxes – net:
Included in deferred credits and other liabilities	$	5,396	$	5,625
Included in current liabilities	$	91	$	24

As of December 31, 2011, Edison International had $217 million of federal tax credit carryforwards of which $194 million expire between 2029 and 2031 and the remainder has no expiration date. Additionally, there were $476 million of net operating loss carryforwards of which $20 million expire between 2015 and 2023, and the remainder expire in 2031.

Effective Tax Rate

The table below provides a reconciliation of income tax expense computed at the federal statutory income tax rate to the income tax provision from continuing operations.



	Years ended December 31,
(in millions)	2011			2010			2009
Income (loss) from continuing operations before income taxes	$	(264	)	$	1,657		$	854
Net income attributable to noncontrolling interests in the Big 4 projects	—			—			(48		)
Adjusted income (loss) from continuing operations before income taxes	$	(264	)	$	1,657		$	806
Provision for income tax at federal statutory rate of 35%	(92		)	580			282
Increase (decrease) in income tax from:
Items presented with related state income tax, net:
Global Settlement related¹	—			(175		)	(318		)
Change in tax accounting method for asset removal costs²	—			(40		)	—
State tax – net of federal benefit	(19		)	60			48
Employee benefits	(16		)	—			—
Health care legislation³	—			39			—
Production and housing credits	(68		)	(66		)	(63		)
Property-related	(76		)	(47		)	(57		)
Other	(17		)	3			10
Total income tax expense from continuing operations	$	(288	)	$	354		$	(98	)
Effective tax rate	*			21.4		%	*


^*	Not meaningful

Edison International and the IRS finalized the terms of a Global Settlement on May 5, 2009. The Global Settlement resolved federal tax disputes related to Edison Capital's cross-border, leveraged leases through 2009, and all other outstanding federal tax disputes and affirmative claims for tax years 1986 through 2002. Pursuant to the Global Settlement, Edison Capital terminated its interests in the cross-border leases and received net proceeds of $1.385 billion. The Global Settlement and termination of the Edison Capital cross-border leases resulted in a consolidated after-tax earnings charge of $254 million recorded in 2009. During 2010, Edison International recognized a $175 million earnings benefit from the acceptance by the California Franchise Tax Board of the IRS tax positions finalized in 2009 and receipt of the final interest determination from the Franchise Tax Board.

During the second quarter of 2010, the IRS approved Edison International's request to change its tax accounting method for asset removal costs primarily related to SCE's infrastructure replacement program. As a result, Edison International recognized a $40 million earnings benefit (of which $28 million relates to asset removal costs incurred prior to 2010) from deducting asset removal costs earlier in the construction cycle. These deductions were recorded on a flow-through basis as required by the CPUC.


³	During the first quarter of 2010, Edison International recorded a $39 million non-cash charge to reverse previously recognized federal tax benefits eliminated by the federal health care legislation enacted in March 2010. The health care law eliminated the federal tax deduction for retiree health care costs to the extent those costs are eligible for federal Medicare Part D subsidies.

The CPUC requires flow-through ratemaking treatment for the current tax benefit arising from certain property-related and other temporary differences which reverse over time. The accounting treatment for these temporary differences results in recording regulatory assets and liabilities for amounts that would otherwise be recorded to deferred income tax expense.

Accounting for Uncertainty in Income Taxes

Authoritative guidance related to accounting for uncertainty in income taxes requires an enterprise to recognize, in its financial statements, the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates it is more likely than not, based solely on the technical merits, that the position will be sustained upon examination. The guidance requires the disclosure of all unrecognized tax benefits, which includes both the reserves recorded for tax positions on filed tax returns and the unrecognized portion of affirmative claims.

Unrecognized Tax Benefits

The following table provides a reconciliation of unrecognized tax benefits:



(in millions)	2011			2010			2009
Balance at January 1,	$	565		$	664		$	2,237
Tax positions taken during the current year:
Increases	39			42			102
Tax positions taken during a prior year:
Increases	102			273			201
Decreases	(75		)	(332		)	(224		)
Decreases for settlements during the period	—			(82		)	(1,652		)
Balance at December 31,	$	631		$	565		$	664

As of December 31, 2011 and 2010, $532 million and $455 million, respectively, of the unrecognized tax benefits, if recognized, would impact the effective tax rate.

Edison International's federal income tax returns and its California combined franchise tax returns are currently open for years subsequent to 2002. In addition, specific California refund claims made by Edison International for years 1991 through 2002 are currently under review by the Franchise Tax Board. The IRS examination phase of tax years 2003 through 2006 was completed in the fourth quarter of 2010, which included proposed adjustments for the following two items:


•	A proposed adjustment increasing the taxable gain on the 2004 sale of EMG's international assets, which if sustained, would result in a federal tax payment of approximately $193 million, including interest and penalties through December 31, 2011 (the IRS has asserted a 40% penalty for understatement of tax liability related to this matter).


•	A proposed adjustment to disallow a component of SCE's repair allowance deduction, which if sustained, would result in a federal tax payment of approximately $93 million, including interest through December 31, 2011.

Edison International disagrees with the proposed adjustments and filed a protest with the IRS in the first quarter of 2011.

Accrued Interest and Penalties

The total amount of accrued interest and penalties related to Edison International's income tax liabilities was $242 million and $213 million as of December 31, 2011 and 2010, respectively.

The net after-tax interest and penalties recognized in income tax expense was $18 million in 2011, compared to a benefit of $153 million and $80 million in 2010 and 2009, respectively.

Repair Deductions

In 2009, Edison International made a voluntary election to change its tax accounting method for certain repair costs incurred on SCE's transmission, distribution and generation assets. The change in tax accounting method resulted in a $192 million cash benefit realized in the fourth quarter of 2009. In August of 2011 the IRS issued guidance on repair deductions and changes in accounting method related to transmission and distribution assets. Based on this guidance, SCE will include a second change in tax accounting method in its 2011 tax return. SCE does not expect any cash impact in 2011 due to its current net operating loss position. Regulatory treatment for the incremental deductions taken after the voluntary election to change SCE's tax accounting method for certain repair costs will be addressed in SCE's 2012 GRC. Due to the pending regulatory decision, SCE has not recognized an earnings benefit or regulatory asset related to this method change and incremental deductions taken in 2009, 2010 and 2011.