PLR 200836016: Nuclear decommissioning transfer and revised funding schedule approved

Plain-English summary

A utility that owned part of a nuclear power plant asked the IRS to revise the annual contribution limits for its qualified nuclear decommissioning fund. It also sought a deduction schedule for a planned special transfer covering decommissioning costs excluded under prior law. Based on the utility's representations and the assumptions used by its regulators, the IRS approved the redacted special-transfer deduction schedule and the proposed ruling-amount schedule. The approved amounts limit the utility's contributions and deductions under section 468A, and changes in the underlying facts may require another revised schedule.

Ruling snapshot

• Question: Could the utility use its proposed annual funding limits and deduction schedule for a special transfer to its nuclear decommissioning fund?
• Outcome: Approved, subject to the stated contribution limits, assumptions, and revision requirements
• Key authorities: IRC § 468A; Temp. Treas. Reg. §§ 1.468A-1T through 1.468A-3T, 1.468A-7T, and 1.468A-8T

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200836016
Third Party Communication: None
Release Date: 9/5/2008
Date of Communication: Not Applicable
Index Number: 468A.01-00
Person To Contact:
-----------------------
-----------------------, ID No. -------------
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Telephone Number:
------------------------------------------------ ---------------------
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Refer Reply To:
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CC:PSI:B6
PLR-111045-07
Date:

May 29, 2008

Re: Revised Schedule of Ruling Amounts and Schedule of Deductions
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LEGEND:

Taxpayer = --------------------------------------------------
--------------------------------
Plant = -------------------------------------------------
Parent = --------------------------------
--------------------------------
Director = ---------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Location = ----------------------------------------
Commission A = ------------------------------------------------
Commission B = ---------------------------------------------------------
Commission C = -----------------------------------------------------
Agency = -----------------------------------------------------------------
Method = ----------------------
Fund = -------------------------------------------

Dear ---------------:

This letter responds to your request, dated February 28, 2007, (as supplemented by additional submissions dated February 20, 2008 and April 30, 2008) for a revised schedule of ruling amounts pursuant to ' 1.468A-3T(e) of the temporary Income Tax Regulations, and for a schedule of deduction amounts pursuant to section 468A(f) of the Internal Revenue Code and § 1.468A-8T. Taxpayer was previously granted schedules 2
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of ruling amounts, most recently on July 14, 2005. The request for a revised schedule of ruling amounts is elective, within the meaning of § 1.468A-3T(f)(2). Information was submitted pursuant to ' 1.468A-3T(e)(2).

Taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts and its request for a schedule of deduction amounts as follows:

Taxpayer, a subsidiary of Parent, is included in a consolidated return filed by Parent. Taxpayer has a joint and undivided ownership interest of --------percent in the Plant. Taxpayer is also the operator of the Plant.

The Plant is situated at Location. Plant=s amended operating license is scheduled to expire on -----------------------, and the Taxpayer ------------------------------------- ---------------------------------------------------------------. The estimated base cost for decommissioning Plant is based on an independent study and the proposed method of decommissioning the Plant is Method.

Taxpayer is subject to the regulatory jurisdiction of Commission A, Commission B, and Commission C. In addition, Taxpayer has a contractual agreement to sell power to Agency. The operations of Plant are allocated as follows: Commission A, ---------- percent; Commission B, ---------percent; Commission C, ---------percent; and Agency, ---- percent. Since the last amended schedule of ruling amounts, both Commission A and Commission B have increased the period over which decommissioning costs for Plant will be included in Taxpayer’s cost of service and reduced the amount of decommissioning costs to be included in Taxpayer’s cost of service each year.

Commission A, in its order dated ---------------------------, determined that the amount of decommissioning costs to be included in Taxpayer’s cost of service for ratemaking purposes to be $----------------for each year beginning in ------- and continuing until Commission A orders a change. Commission B, in its order dated ---------------------- -------, determined that the amount of decommissioning costs to be included in Taxpayer’s cost of service for ratemaking purposes to be $--------------for each year beginning in ------- and continuing until Commission B orders a change. Neither Commission C nor Agency has held any additional proceedings since the Service issued its most recent revised schedule of ruling amounts on ------------------, but the Taxpayer has requested an adjustment to the amounts allocable to Commission C and Agency in light of the 2005 statutory changes to § 468A.

Both Commission A and Commission B used the same assumptions in their ------ orders. Based on the assumptions used by Commission A and Commission B, it is estimated that assets in the Fund will earn an after-tax rate of return of -------percent 3
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and the cost of decommissioning the Plant will escalate at -- percent per year for a real rate of return of -----percent. The total cost of decommissioning Plant is estimated to be
$------------------in ------- dollars, of which Taxpayer’s share (--------%) is $-----------------, also in ------- dollars. The total estimated future cost of decommissioning Taxpayer’s share of Plant is $------------------- in ------- dollars.

Under ratemaking assumptions used during the first proceeding before Commission A, Commission B, Commission C, and Agency, the Plant would no longer be included in rate base in -------. In the prior schedule of ruling amounts, issued under section 468A of the Code as in effect prior to -------, the estimated useful life of the Plant is ---- years (--------------), and the estimated period for which the Fund is to be in effect is -----years (--------------). Thus, the percentage of the total estimated costs qualifying for deduction in the schedule of ruling amounts under prior law was ----percent.

Section 468A(a), as amended by the Energy Tax Incentives Act of 2005 (the Act), Pub. L. 109-58, 119 Stat. 594, allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund.

Section 468A(b) limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling amount applicable to that year. Prior to the changes made by the Act, the deduction was limited to the lesser of the amount included in the utility’s cost of service for ratemaking purposes or the ruling amount. Generally, as a result, only regulated utilities could take advantage of section 468A. The Act amendment of section 468A eliminated the cost-of-service limitation. Accordingly, decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund.

Section 468A(d)(1) provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the Secretary a schedule of ruling amounts. The "ruling amount" for any tax year is defined under ' 468A(d)(2) as the amount which the Secretary determines to be necessary to fund the total nuclear decommissioning cost of that nuclear power plant over the estimated useful life of the plant. This term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level funding, taking into account such discount rates as the Secretary deems appropriate.

Prior to the changes made by the Act, deductible contributions were limited to the amount necessary for an electing taxpayer to fund the plant’s post-1983 nuclear decommissioning costs (determined as if decommissioning costs accrued ratably over the estimated useful life of the plant), provided that the taxpayer elected to establish a fund in 1984. Prior law also did not allow a taxpayer electing to establish a fund later than 1984 to contribute to that fund any amount in excess of that amount necessary to 4
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fund the ratable portion of the plant’s nuclear decommissioning costs beginning in the year the fund is established.

Section 468A(f)(1) now allows a taxpayer to contribute to a nuclear decommissioning fund the entire cost of decommissioning the plant, including both the pre-1984 amount that was denied under the law prior to the Act as well as any amount attributable to any year after 1983 in which a taxpayer had not established a fund under § 468A. Section 468A(f)(2)(A) provides that the deduction for the contribution of the previously-excluded amount is allowed ratably over the remaining useful life of the nuclear plant.

Section 468A(h) provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable year if the payment is made on account of such taxable year and is made within 22 months after the close of the tax year. This section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts.

Section 1.468A-1T(a) provides that an eligible taxpayer may elect to deduct nuclear decommissioning costs under section 468A of the Code. An "eligible taxpayer," as defined under ' 1.468A-1T(b)(1) of the regulations, is a taxpayer that has a "qualifying interest" in any portion of a nuclear power plant. A qualifying interest is, among other things, a direct ownership interest.

Section 1.468A-2T(b)(1) provides that the maximum amount of cash payments made (or deemed made) to a nuclear decommissioning fund during any tax year shall not exceed the ruling amount applicable to the nuclear decommissioning fund for such taxable year. The limitation on the amount of cash payments for purposes of § 1.468A- 2T(b)(1) does not apply to any “special transfer” permitted under § 1.468A-8T.

Section 1.468A-3T(a)(1) provides that, in general, a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that, over the tax years remaining in the "funding period" as of the date the schedule first applies, will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding period equal to (and in no event more than) the "amount of decommissioning costs allocable to the fund".

Section 1.468A-3T(a)(2) provides that, to the extent consistent with the principles and provisions of this section, each schedule of ruling amounts shall be based on reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning, the total estimated cost of decommissioning the nuclear plant, and the frequency of contributions to a nuclear decommissioning fund for a taxable year. Under ' 1.468A-3T(a)(3), the Internal Revenue Service shall provide 5
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a schedule of ruling amounts identical to the schedule proposed by the taxpayer, but no such schedule shall be provided by the Service unless the taxpayer's proposed schedule is consistent with the principles and provisions of that section.

Section 1.468A-3T(a)(4) provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions. That section also provides additional guidance regarding how the Service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions. For example, if a public utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant, the taxpayer can generally satisfy this burden of proof by demonstrating that the schedule of ruling amounts is calculated using the assumptions used by the public utility commission in its most recent order. In addition, a taxpayer that owns an interest in a deregulated nuclear plant may submit assumptions used by a public utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts, with the understanding that the assumptions used by the public utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer. The use of other industry standards, such as the assumptions underlying the taxpayer's most recent financial assurance filing with the NRC, are described by the temporary regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis. Section 1.468A-3T(a)(4) further provides that consistency with financial accounting statements is not sufficient, in the absence of other supporting evidence, to meet the taxpayer’s burden of proof.

Section 1.468A-3T(b)(1) provides that, in general, the ruling amount for any tax year in the funding period shall not be less than the ruling amount for any earlier tax year. Under ' 1.468A-3T(c)(1), the funding period begins on the first day of the first tax year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable year that includes the last day of the estimated useful life of the nuclear power plant to which the fund relates.

Section 1.468A-3T(c)(2) provides rules for determining the estimated useful life of a nuclear plant for purposes of § 468A. In general, under § 1.468A-3T(c)(2)(i)(A), if the plant was included in rate base for ratemaking purposes for a period prior to January 1, 2006, the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated useful life of the nuclear plant. Section 1.468A-3T(c)(2)(i)(B) provides that, If the nuclear plant is not described in § 1.468A-3T(c)(2)(i)(A), the last day of the estimated useful life of the nuclear plant is determined as of the date the plant is placed in service. Under § 1.468A-3T(c)(2)(i)(C), any reasonable method may be used 6
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in determining the estimated useful life of a nuclear power plant that is not described in
§ 1.468A-3T(c)(2)(i)(A).

Section 1.468A-3T(d)(1) provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant. Section 1.468A-3T(d)(3) provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant.

Section 1.468A-3T(e)(2) enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling amount for any taxable year.

Section 1.468A-3T(f)(2) provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts. Such a request must be made in accordance with the rules of ' 1.468A-3T(e). The Internal Revenue Service shall not provide a revised schedule of ruling amounts applicable to a taxable year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable year.

Section 1.468A-8T(a)(1) provides that, under the provisions of § 468A(f), as described above, a taxpayer may make a special transfer of cash or property to the nuclear decommissioning fund. This special transfer is not subject to the § 468A(b) limitation. The amount of the special transfer is the present value of the pre-2005 nonqualifying percentage of the estimated future costs of decommissioning the nuclear plant that was disallowed under section 468A prior to the Act.

Section 1.468A-8T(a)(2) defines the pre-2005 nonqualifying percentage as equal to 100 percent reduced by the sum of the qualifying percentage used in determining the taxpayer’s last schedule of ruling amounts for the fund under section 468A as it existed prior to the Act and the percentage transferred in any previous special transfer.

Section 1.468A-8T(a)(3) provides that the taxpayer is not required to transfer the entire amount eligible for the special transfer in one year but must take any prior special transfers into account in calculating the pre-2005 qualifying percentage. Further, pursuant to § 1.468A-8T(c)(2), a taxpayer making a special transfer in more than one year must request a new schedule of deduction amounts in connection with each transfer.

Section 1.468A-8T(b) provides that the deduction for the special transfer is allowed ratably over the remaining useful life of the nuclear plant. Under § 1.468A- 8T(b)(1)(iii), the deduction for property contributed in a special transfer is limited to the 7
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lesser of the fair market value of the property or the taxpayer’s basis in the property. Under § 1.468A-8T(b)(4), the taxpayer recognizes no gain or loss on the special transfer of property, the taxpayer’s basis in the fund is not increased by reason of the special transfer of property, and the fund’s basis in the property transferred in the special transfer is the same as the transferee’s basis in that property immediately prior to the special transfer.

Section 1.468A-8T(c) provides that taxpayer may not make a special transfer to a qualified nuclear decommissioning fund unless the taxpayer requests from the IRS a schedule of deduction amounts in connection with such transfer. A request for a schedule of deduction amounts may be made in connection with a request for a schedule of ruling amounts but in such case, the calculations for both the schedule of ruling amounts and the schedule of deduction amounts must be separately stated.

As stated above, prior to the changes made by the Act, deductible contributions were limited to the lesser of (1) the amount necessary to fund the plant’s post-1983 nuclear decommissioning costs, or (2) the amount necessary to fund the plant’s decommissioning costs for that portion of the plant’s estimated useful life for which a fund had been established. Under that prior law, Taxpayer was allowed to contribute --- percent of the amounts necessary to fully decommission its share of the Plant. Section 468A(f)(1) allows a taxpayer to contribute to the nuclear decommissioning fund the pre- 1984 amount that was denied under the law prior to the Act. Thus, Taxpayer is able to contribute the additional ---percent of the amounts necessary to decommission its ownership share of Plant. Taxpayer proposes to make a special transfer in ------- and deduct the amount of that special transfer over the remaining --- years of the estimated useful life of Plant, as defined in § 1.468A-3T(c)(2)(i)(A). Taxpayer requests a schedule of deductions with respect to that special transfer. Taxpayer’s share of the total future decommissioning costs is $--------------------(------- dollars) and ---percent of that amount is $------------------(------- dollars). The present value of that amount is $---------------- as of ----------------------. The special transfer will be made in ------- in the amount of $------------ -----------------.

We have examined the representations and information submitted by the Taxpayer in relation to the requirements set forth in ' 468A and the regulations thereunder. Based solely upon these representations of the facts, we conclude that the Taxpayer may make a special transfer of $----------------in -------, and may ratably deduct the amount contributed in the -------------------- tax years, as set forth below.

SCHEDULE OF DEDUCTION AMOUNTS

YEAR
DEDUCTION AMOUNT

------------
-------------------
----------------------------------------
-------------------
8
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The special transfer amount stated above is the maximum permitted to be transferred to the Fund under § 468A(f)(1). If Taxpayer transfers a lesser amount to the Fund in -------, the Taxpayer may deduct the lesser amount ratably over the years described above for the special transfer. Further, in the event that the Taxpayer transfers a lesser amount in -------, in order to make an additional special transfer in a later year (including a special transfer of the difference between the special transfer amount stated above and the lesser amount actually transferred), Taxpayer must request a new schedule of deduction amounts and that in that request must take all special transfers made into account and recalculate the pre-2005 qualifying percentage in such request. For example, if Taxpayer chooses to transfer only $--------------to the Fund in -------, Taxpayer may deduct that $--------------ratably over the ---------------tax years. If Taxpayer then wanted to transfer the additional $--------------approved above for transfer in ------- in -------, Taxpayer would need to request a new schedule of deduction amounts in order to do so.

We note that, if Taxpayer elects to make a special transfer of property for all or a portion of this special transfer, the amount of the transfer is the lesser of the fair market value of the property transferred or the basis of the property in the hands of the Taxpayer immediately prior to the transfer. In either event, the deduction of the Taxpayer with respect to the property is limited to the Taxpayer’s basis in the property.

Furthermore, regarding Taxpayer’s request for a revised schedule of ruling amounts, we have examined the representations and information submitted by the Taxpayer in relation to the requirements set forth in ' 468A and the regulations thereunder. Based solely upon these representations of the facts, we reach the following conclusions:

1. Taxpayer has a qualifying interest in the Plant and is, therefore, an eligible taxpayer under § 1.468A-1T(b)(1) of the regulations.

2. Taxpayer, as owner of the Plant, has calculated its share of the total decommissioning costs under § 1.468A-3T(d)(3) of the regulations.

3. Taxpayer has proposed a schedule of ruling amounts which meets the requirements of §§ 1.468A-3T(a)(1) and (2) of the regulations. The annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by Commission A and Commission B, and will result in a projected fund balance at the end of the funding period equal to or less than the amount of decommissioning costs allocable to the Fund.
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4. Pursuant to § 1.468A-3T(a)(4), Taxpayer has demonstrated that, by following the assumptions approved by the Commissions, the proposed schedule of ruling amounts is consistent with the principles of section 468A and the regulations thereunder and that such schedule is based on reasonable assumptions.

5. The maximum amount of cash payments made (or deemed made) to the Fund during any tax year is restricted to the ruling amount applicable to the Fund, as set forth under § 1.468A-2T(b)(1) of the regulations.

Based solely on the determinations above, we conclude that the Taxpayer’s proposed schedule of ruling amounts satisfies the requirements of § 468A of the Code.

APPROVED SCHEDULE OF RULING AMOUNTS

YEAR COMMISSION COMMISSION COMMISSION AGENCY TOTAL
A B C

--------------
-------------- ------------------- ------------------- ------------------- --------------- --------------
---------- --- --- ---- --------
--------------
-------------- ------------------- ------------------- ------------------- --------------- --------------
---------- --- --- ---- ----------

Approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances, known or assumed, at the time the current ruling is issued. If any of the events described in ' 1.468A-3T(f)(1) occur in future years, the Taxpayer must request a review and revision of the schedule of ruling amounts. Generally, the Taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable year in which the rates reflecting such action became effective. When no such event occurs, the Taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable year following the close of the tax year in which the most recent schedule of ruling amounts was received.

Except as specifically determined above, no opinion is expressed or implied concerning the Federal income tax consequences of the transaction described above.

This ruling is directed only to the Taxpayer who requested it. Section 6110(k)(3) of the Code provides it may not be used or cited as precedent. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your 10
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designated representatives. We are also sending a copy of this letter ruling to the Director. Pursuant to ' 1.468A-7T(a), a copy of this letter must be attached (with the required Election Statement) to the Taxpayer's federal income tax return for each tax year in which the Taxpayer claims a deduction for payments made to the Fund.

Sincerely,

Peter C. Friedman
Senior Technician Reviewer, Branch 6
(Passthroughs & Special Industries)