Income Taxes

6 Months Ended

Jun. 30, 2011

Note 7. Income Taxes

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.

			Three months ended June 30,						Six months ended June 30,

(in millions)			2011			2010			2011			2010

Income from continuing operations before income taxes			$	254		$	220		$	535		$	612

Provision for income tax at federal statutory rate of 35%				89			77			187			214
Increase (decrease) in income tax from:
	Items presented with related state income tax, net:
		Global Settlement related¹		—			(138	)		—			(138	)
		Change in tax accounting method for asset removal costs²		—			(40	)		—			(40	)
	State tax – net of federal benefit			4			16			13			23
	Health care legislation³			—			—			—			39
	Production and housing credits			(19	)		(19	)		(36	)		(34	)
	Property-related and other			(12	)		(32	)		(37	)		(50	)

Total income tax expense from continuing operations			$	62		$	(136	)	$	127		$	14

Effective tax rate				24%			(62%	)		24%			2%

¹: During the second quarter of 2010, Edison International recognized a $138 million earnings benefit resulting from the acceptance by the California Franchise Tax Board of the tax positions finalized with the Internal Revenue Service ("IRS") in 2009 as part of the Global Settlement.
²: 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.
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 decreased benefit provided by property-related and other items was primarily due to lower deductions for internally developed software in 2011 compared to the respective periods in 2010.

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


Balance at January 1,		$	565		$	664
Tax positions taken during the current year:
	Increases		26			35
Tax positions taken during a prior year:
	Increases		14			127
	Decreases		(10	)		(40	)
	Decreases for settlements during the period		—			(82	)

Balance at June 30,		$	595		$	704

As of June 30, 2011 and December 31, 2010, $468 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 $189 million, including interest and penalties through June 30, 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 $91 million, including interest through June 30, 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 $222 million and $213 million as of June 30, 2011 and December 31, 2010, respectively.

The net after-tax interest and penalties recognized in income tax expense was $2 million and $5 million for the three- and six-month periods ended June 30, 2011, respectively, compared to a benefit of $101 million and $88 million for the same periods in 2010.