Income Taxes

Current and Deferred Taxes

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



	Years ended December 31,
(in millions)	2011			2010			2009
Current:
Federal	$	(275	)	$	(145	)	$	(82	)
State	91			(71		)	173
	(184		)	(216		)	91
Deferred:
Federal	757			663			200
State	28			(7		)	(42		)
	785			656			158
Total	$	601		$	440		$	249

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
Regulatory balancing accounts	89		230
Unrealized gains and losses	374		389
Loss and credit carryforwards	15		—
Pensions and PBOPs	173		176
Other	480		490
Total	$	1,859	$	1,940
Deferred tax liabilities:
Property-related	$	6,492	$	5,520
Capitalized software costs	324		293
Regulatory balancing accounts	301		293
Unrealized gains and losses	374		389
Other	238		264
Total	$	7,729	$	6,759
Accumulated deferred income tax liability – net	$	5,870	$	4,819
Classification of accumulated deferred income taxes – net:
Included in deferred credits and other liabilities	$	5,781	$	4,829
Included in current liabilities	$	89	$	—
Included in other current assets	$	—	$	10

As of December 31, 2011, SCE had $10 million of federal tax credit carryforwards, $2 million of which expire in 2030 and 2031 and the remainder has no expiration date. Additionally, SCE had $5 million of federal net operating loss carryforwards which expire in 2015.

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 from continuing operations before income taxes	$	1,745		$	1,532		$	1,620
Net income attributable to noncontrolling interests in the Big 4 projects	—			—			(94		)
Adjusted income from continuing operations before income taxes	$	1,745		$	1,532		$	1,526
Provision for income tax at federal statutory rate of 35%	611			536			534
Increase (decrease) in income tax from:
Items presented with related state income tax, net
Global settlement related¹	—			(95		)	(306		)
Change in tax accounting method for asset removal costs²	—			(40		)	—
State tax – net of federal benefit	80			59			67
Health care legislation³	—			39			—
Property-related	(76		)	(47		)	(64		)
Other	(14		)	(12		)	18
Total income tax expense from continuing operations	$	601		$	440		$	249
Effective tax rate	34.4		%	28.7		%	16.3		%

Edison International and the IRS finalized the terms of a Global Settlement on May 5, 2009. The Global Settlement resolved all of SCE's federal income tax disputes and affirmative claims through tax year 2002. During 2009, SCE recorded after-tax earnings of approximately $306 million. During 2010, SCE recognized a $95 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 2010, the IRS approved SCE's request to change its tax accounting method for asset removal costs primarily related to its infrastructure replacement program. As a result, SCE 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 2010, SCE 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	$	329		$	482		$	2,066
Tax positions taken during the current year
Increases	34			47			14
Tax positions taken during a prior year
Increases	82			140			200
Decreases	(72		)	(272		)	(212		)
Decreases for settlements during the period	—			(68		)	(1,586		)
Balance at December 31	$	373		$	329		$	482

Unrecognized tax benefits were reduced by $68 million during 2010 related to the California Franchise Tax Board's acceptance of the federal Global Settlement as discussed above and $1.6 billion during 2009 primarily due to completion of the federal Global Settlement as discussed above.

As of December 31, 2011 and 2010, respectively, if recognized, $282 million and $225 million of the unrecognized tax benefits 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. This included 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 adjustment 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 SCE's income tax liabilities was $75 million and $61 million as of December 31, 2011 and 2010, respectively.

The net after-tax interest and penalties recognized in income tax expense was $8 million in 2011, compared to a benefit of $80 million and $279 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.