PLR 200849005: Revised nuclear decommissioning fund contribution schedule is approved

Plain-English summary

A corporate subsidiary owned an interest in a nuclear power plant and requested a revised contribution schedule for its qualified decommissioning fund. A public utility commission had recently adjusted the decommissioning costs the taxpayer could collect and supplied the assumptions used for projected returns and costs. Based on the taxpayer's representations, the IRS found that it had a qualifying interest, properly calculated its share, and proposed annual payments based on reasonable commission-approved assumptions. It approved the redacted schedule under IRC § 468A, subject to no change in the stated facts and later review after specified events or the applicable ten-year period. The approved amounts applied only to payments to the identified fund and remained limited by the applicable decommissioning costs and ruling amounts. The IRS expressed no opinion about whether a referenced liquidation qualified under any Code provision.

Ruling snapshot

• Question: May the taxpayer use its proposed revised schedule of contributions to the nuclear decommissioning fund?
• Outcome: Approved, subject to unchanged facts, future review requirements, and the stated payment limits.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1T, 1.468A-2T, 1.468A-3T, 1.468A-5T, and 1.468A-7T.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200849005
Third Party Communication: None
Release Date: 12/5/2008
Date of Communication: Not Applicable
Person To Contact:
Index Number: 468A.04-02
-----------------------, ID No. -------------
Telephone Number:
--------------------
---------------------------------
Refer Reply To:
--------------------------
CC:PSI:B06
--------------------------------
PLR-112988-08
----------------------------
Date:
--------------------------------
September 02, 2008

In re: Revised Schedule of Ruling Amounts
----------------------------------------------------------------------

LEGEND:

Taxpayer = -------------------------------------------
-----------------------
Plant = ----------------------------------------------------------------------
State A = ------------------
State B = ------
Parent = ---------------------------------
-----------------------------------------------------------
Director = ---------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Location = -------------------------------------------------------------------------
Commission = ----------------------------------------------------
Method = -------------------------------
Order = ---------------------------------
Date = -----------------------

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

This letter responds to your request, dated ---------------------, for an elective revised schedule of ruling amounts pursuant to § 1.468A-3T(f)(2).

The Taxpayers have represented the following facts and information relating to the ruling request:
 2 PLR-112988-08

Taxpayer, a subsidiary of Parent, is included in a consolidated return filed by Parent. Taxpayer is the owner of a --- percent undivided interest in the Plant.

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

Taxpayer is subject to the jurisdiction of Commission. Commission, in Order, recently reviewed and adjusted the amount of nuclear decommissioning costs of the Plant that Taxpayer is permitted to collect. Based upon the assumptions used in the Order, effective Date, it is estimated that Fund assets will earn an after-tax rate of return of -------percent from ------- to -------- and -------percent from ------- to -------. The total cost of decommissioning Plant is estimated to be $------------------in ------- dollars, of which Taxpayer’s share is $-----------------. This base cost of decommissioning Plant is escalated using various cost-escalation indices, resulting in a total future cost to decommission Plant of $-------------------, of which Taxpayer’s share is $-----------------.

The funding period for Plant begins on ----------------------, and ends on --------------- ------------. The estimated useful life of Plant is --- years, ----------------------through --------- ----------------------------and the estimated period for which the Fund will be in effect is --- years, from ----------------------through --------------------------.

Law and Analysis:

Section 468A(a) of the Internal Revenue Code provides that a taxpayer may elect to deduct the amount of payments made to a qualified decommissioning fund. However, section 468A(b) limits the amount paid into such fund for any taxable year to the lesser of the amount of nuclear decommissioning costs allocable to this fund which is included in the taxpayer's cost of service for ratemaking purposes for the tax year or the ruling amount applicable to this year.

Section 468A(d)(1) of the Code 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 section 468A(d)(2) as the amount which the Secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the total nuclear power plant as the period for which the nuclear decommissioning fund is in effect bears to 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 3 PLR-112988-08

than level funding, taking into account such discount rates as the Secretary deems appropriate.

Section 468A(g) of the Code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the tax year if the payment is made on account of this tax year and is made within 2 ½ months after the close of the tax year. Additionally, a taxpayer that files for a schedule of ruling amounts and receives such schedule of ruling amounts after the 2 ½ month deadline for making a payment to a nuclear decommissioning fund, must make such payment to the fund within 30 days after the date that the taxpayer receives the schedule of ruling amounts for the tax year.

Section 1.468A-1T(a) of the regulations provides that an eligible taxpayer may elect to deduct nuclear decommissioning costs under section 468A of the Code. An "eligible taxpayer," as defined under section 1.468A-1(b)(1) of the regulations, is a taxpayer that has a "qualifying interest" in, among other things, a direct ownership interest, including an interest as a tenant in common or joint tenant.

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 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 4 PLR-112988-08

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(a)(6) provides that the IRS may, in its discretion, provide a schedule of ruling amounts that is determined on a basis other than § 1.468A-3T if the taxpayer explains the need for the special treatment and sets forth an alternative basis for determining the schedule of ruling amounts. In addition, the IRS must determine that the special treatment is consistent with the purpose of § 468A.

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 5 PLR-112988-08

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-5T(a) sets out the qualification requirements for nuclear decommissioning funds. It provides, in part, that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a trust under state law.

Section 1.468A-5T(a)(1)(iii) provides that an electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant. If a nuclear power plant is subject to the ratemaking jurisdiction of two or more public utility commissions and any such public utility commission requires a separate fund to be maintained for the benefit of ratepayers whose rates are established or approved by the public utility commission, the separate funds maintained for such plant (whether or not established and maintained pursuant to a single trust agreement) shall be considered a single nuclear decommissioning fund.
regarding Taxpayer’s request for a revised schedule of ruling amounts, we have examined the representations and information submitted by the Taxpayers 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.
PLR-112988-08
6

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, 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.

4. Pursuant to § 1.468A-3T(a)(4), Taxpayer has demonstrated that, by following the assumptions approved by Commission, 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
AMOUNT

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

Approval of the revised schedule of ruling amounts is contingent on there being no change in the facts and circumstances described in this ruling. If any of the events described in section 1.468A-3T(f)(1) of the temporary regulations occur in future years, Taxpayer must request a review and revision of the schedule of ruling amounts. Generally, a taxpayer is required to file such a request on or before the deemed payment deadline date for the first tax 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.
PLR-112988-08
7

In particular, no opinion is expressed or implied concerning whether the liquidation described above qualifies under any section of the Code.

The approved schedule of ruling amounts is relevant only to those payments made to the Fund. Payments allocable to any funds other than the Fund, cannot qualify for purposes of the deduction under the provisions of section 468A of the Code. Payments made to such Fund can qualify only to the extent that they do not exceed the lesser of the decommissioning costs applicable to such Fund or the ruling amounts applicable to this Fund in the tax year.

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 authorized representative. We are also sending a copy of this letter ruling to the Director. Pursuant to § 1.468A-7T(a) of the temporary regulations, 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
Office of Associate Chief Counsel
Passthroughs and Special Industries

cc: