PLR 200852011: A nuclear operator gets to fund the decommissioning costs old law denied it

Plain-English summary

Taking a nuclear plant apart costs an enormous amount of money and happens decades after the plant starts producing power. Section 468A lets the owner set aside money for that in advance, in a segregated fund, and deduct the contributions as it makes them rather than waiting until the demolition bills arrive. The catch has always been that the Service controls the tap. No deduction is allowed unless the taxpayer asks for and receives a schedule of ruling amounts, which is the Service's determination of how much may go in each year.

This letter does two things at once for one plant owner: it issues an initial schedule of deduction amounts and, because the law required it, a revised schedule of ruling amounts.

The reason there are two schedules is a change Congress made in 2005. Under the original rules, a plant owner could only fund decommissioning costs attributable to years after 1983, and only if it set the fund up in 1984. Anyone who was late, or whose plant predated the cutoff, was permanently barred from funding a slice of its own decommissioning liability on a deductible basis. This taxpayer's prior schedule had qualified only a stated percentage of what full decommissioning will cost. The Energy Tax Incentives Act of 2005 removed both limits. It also removed the older restriction that tied the deduction to what a rate regulator allowed in cost of service, which had effectively confined section 468A to regulated utilities and left deregulated plants out.

Section 468A(f)(1) now lets an owner put in the whole remaining cost, including the pre-1984 amount that old law denied. Doing that is a special transfer, and a special transfer is exempt from the annual ruling-amount ceiling, which is why it needs its own schedule. The deduction for it is not immediate. It is spread ratably across the plant's remaining useful life under section 468A(f)(2)(A), and useful life here is a defined term, generally fixed by the date the plant was expected to leave rate base in the first ratemaking proceeding that included it.

The Service approved a single-year special transfer with a single-year deduction, because the useful life of this plant ends in the same period. It attached the standard conditions. The stated amount is a maximum, not a target. If the taxpayer puts in less and wants to transfer the difference later, it must come back for a new schedule of deduction amounts that accounts for the earlier transfer and recomputes the pre-2005 qualifying percentage. If it contributes property instead of cash, the deduction is capped at the lower of fair market value or basis, so appreciated property buys no extra deduction.

Most of the letter is a recitation of the temporary regulations, and one part of it is worth noting for anyone building a request. The taxpayer carries the burden of showing its assumptions are reasonable, and the cleanest way to carry it is to use the numbers a public utility commission adopted in its most recent order. Assumptions from a commission that no longer has jurisdiction can be used, with the warning that they get less weight if stale or developed for a different taxpayer. Consistency with the taxpayer's own financial statements, standing alone, is not enough.

This is one of a pair. PLR 0852010 is a companion letter of the same date from the same reviewer, with the same control-number prefix and materially identical analysis, addressed to a different taxpayer with a different employer identification number. The redactions make it impossible to tell from the released text whether the two concern the same plant.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: a reference to "the first proceeding before Commission A" where the legend defines only Commission; the description of section 1.468A-8T(b)(4) giving the fund a basis equal to "the transferee's basis in that property immediately prior to the special transfer," where the transferor is meant; "Section 1.468A-8T(c) provides that taxpayer may not make a special transfer," missing its article; the paragraph beginning "We have examined the representations and information submitted by the Taxpayer," which appears twice; and the approved schedule of ruling amounts, where the redaction leaves a two-character amount.

Ruling snapshot

• Question: May a nuclear plant owner make a special transfer funding the decommissioning costs that pre-2006 law disallowed, and on what schedule may it deduct them?
• Outcome: approved. Because the plant's useful life ends in the year identified, the taxpayer may make a special transfer of the stated amount and deduct it in that year, and the proposed revised schedule of ruling amounts is approved as consistent with section 468A and based on reasonable assumptions.
• Key authorities: Code sections 468A(a), 468A(b), 468A(d)(1), 468A(d)(2), 468A(f)(1), 468A(f)(2)(A), 468A(f)(3), 468A(h); Treas. Reg. sections 1.468A-1T(a), 1.468A-1T(b)(1), 1.468A-2T(b)(1), 1.468A-3T(a) through (f), 1.468A-7T(a), 1.468A-8T; Energy Tax Incentives Act of 2005, Pub. L. 109-58, 119 Stat. 594.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200852011 Third Party Communication: None
Release Date: 12/26/2008 Date of Communication: Not Applicable Index Number: 468A.01-00 Person To Contact:
---------------------------- -------------------------, ID No. -------------
------------------------------------------------------------ Telephone Number:

-------------------------- Refer Reply To:
------------- CC:PSI:B6
---------------------------------- PLR-114659-08
--------------------------------------- Date:
September 15, 2008

Re: Schedule of Deductions
-----------------------------------------------------------------------

LEGEND:
Taxpayer = -------------------------- (EIN: ----------------) Company A = ------------------------------------------- (EIN: ----------------) Company B = ---------------------------------------------- (EIN: ----------------) Plant = ---------------------------------------------------------------------------------
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Location = ---------------------------
Independent Study = ---------------------------------------------------------------------------------
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Method = -----------
Commission = ---------------------------------------------------- Order = ------------------------------------------------------------------ Fund = ------------------------------------------- Director = ---------------------------------------------------------------------------------
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Dear ------------:

This letter responds to your request, dated ---------------------, for an initial schedule of deduction amounts pursuant to section 1.468A-8T(c)(1) of the Income Tax Regulations and a mandatory request for a revised schedule of ruling amounts pursuant to section 468A(f)(3) of the Internal Revenue Code and Regulations section 1.468A- 3T(f)(1)(iii) for the Fund. Taxpayer was previously granted schedules of ruling amounts, most recently on ---------------------------. Taxpayer submitted supplemental information 2 PLR-114659-08

by letter on --------------------and --------------------. Information was submitted pursuant to
§ 1.468A-3T(e)(2).

Taxpayer represents the facts and information relating to its requests as follows:

Taxpayer, a corporation, is a holding company and the sole member of Company A, a single member limited liability company that is disregarded for federal income tax purposes. Company B, the legal owner of the Plant is a single-member limited liability company that is disregarded for federal income tax purposes and is wholly-owned by Company A.

Taxpayer files a consolidated federal income tax return with its affiliated companies. Taxpayer owns a --- percent interest in the Plant through Company A and Company B.

The Plant is situated at Location. 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 jurisdiction of Commission (-------- percent of Taxpayer’s --- percent interest). Commission approved Taxpayer’s request to reduce revenue recovered through the Nuclear Decommissioning Costs Adjustment with respect to the Unit by issuing Order.

Based upon the assumptions used in Taxpayer’s most recent schedule of ruling amounts (as adopted by Commission) it is estimated that Fund assets will earn an after- tax rate of return of ---- percent. The total cost of decommissioning Taxpayer’s interest in the Plant is estimated to be $----------------- (in ------- dollars). This base cost of decommissioning Plant is escalated at a ---- percent yearly rate, resulting in a total future cost of decommissioning Taxpayer’s interest in the Plant of $------------------- (in ---
------- through ------- dollars). Under ratemaking assumptions used during the first proceeding before Commission A, the Plant would no longer be included in rate base in
-------.

In the prior schedule of ruling amounts, issued under § 468A of the Code as in effect prior to 2006, 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. 3 PLR-114659-08

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 § 468A. The Act amendment of § 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 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 2½ 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 § 468A of the Code. An "eligible taxpayer," as 4 PLR-114659-08

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 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 5 PLR-114659-08

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 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. 6 PLR-114659-08

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 § 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 § 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 special 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 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. Taxpayer is able to 7 PLR-114659-08

contribute the additional -------- percent of the amounts necessary to decommission its ownership share of Plant. This special transfer occurred in -------.

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 because the useful life of the Plant (as defined by § 1.468A-3T(c)(2)) ends in -------, Taxpayer may make a special transfer of $--------------- in -------, and may deduct the amount contributed in -------, as set forth below.

SCHEDULE OF DEDUCTION AMOUNTS

YEAR DEDUCTION AMOUNT
------- $----------------

The special transfer amount stated above is the maximum amount permitted to be transferred to the fund under § 468A(f)(1). If Taxpayer transfers a lesser amount to the fund, the Taxpayer may deduct that lesser amount ratably over the period of years described above. Further, in the event that Taxpayer transfers a lesser amount for -----
-------, 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 transferred in -------), Taxpayer must request a new schedule of deduction amounts and in that request must take the ------- transfer into account and recalculate the pre-2005 qualifying percentage in such request.

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 deduction 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.

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. Pursuant to § 1.468A-3T(a)(4), Taxpayer has met its burden of demonstrating
   that the proposed schedule of ruling amounts is consistent with the principles of the Code and regulations and is based on reasonable assumptions.

2. Taxpayer has a qualifying interest in the Plant and is, therefore, an eligible
   taxpayer under § 1.468A-1T(b)(1) of the regulations.
   8
   PLR-114659-08

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

4. Pursuant to § 1.468A-3T(a)(4), Taxpayer has demonstrated that, by following
   the assumptions approved by the Commission, the proposed schedule of ruling amounts is consistent with the principles of § 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. We have approved the following revised schedule of ruling amounts.

APPROVED SCHEDULE OF RULING AMOUNTS

YEAR DEDUCTION AMOUNT
------- $--

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. 9 PLR-114659-08

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 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)