PLR 1035013: IRS approved revised nuclear decommissioning schedules

Plain-English summary

The IRS approved revised schedules of ruling amounts and an initial schedule of deduction amounts for a taxpayer that purchased an interest in a nuclear power plant and assumed related decommissioning liabilities. The ruling permits a special transfer to a qualified nuclear decommissioning fund under IRC § 468A and allows the contributed amount to be deducted ratably over the applicable period. The ruling also approves the proposed schedule of annual ruling amounts based on the taxpayer’s representations and an independent commissioning study. The IRS expressed no opinion on other federal income tax consequences or on whether the study conforms to industry standards.

Ruling snapshot

• Question: May the taxpayer make a special transfer to its qualified nuclear decommissioning fund and use revised schedules of ruling amounts under IRC § 468A?
• Outcome: Approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1T, 1.468A-2T, 1.468A-3T, and 1.468A-8T; IRC § 6110(k)(3) not-precedent notice

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201035013 Third Party Communication: None
Release Date: 9/3/2010 Date of Communication: Not Applicable
Index Number: 468A.01-00 Person To Contact:
------------------------ -------------------------, ID No. ------------
------------------------------------ Telephone Number:
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---------------------------- Refer Reply To:
---------------------------------------- CC:PSI:B6
PLR-155471-09
Date:
May 27, 2010

Re: ---------------------------------------
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LEGEND:
Taxpayer = ---------------------------------------------- (EIN: ----------------)
Parent = ----------------------- (EIN: ----------------)
Plant = -----------------------------------------------
Seller D = -----------------------------------------------------
Seller E = --------------------------------
Private Letter Ruling= ---------------------
Location = -----------------------
Independent Study = ---------------------------------------------------------------------------------

Method = -----------
Commission = --------------------------------------------
Fund = ------------------------------------------
Director = ---------------------------------------------------------------------------------
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Date 1 = ------------------------
Date 2 = ---------------------------
Date 3 = -----------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------

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a = -----
b = -------
c = -------
d = ------
e = ------------------
f = ------
g = ------------------
h = ---
i = ---
j = -------
k = -------
l = ------------------

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

   This letter responds to your request, dated Date 1, for a revised schedule of

ruling amounts and an initial schedule of deduction amounts pursuant to § 468A(f) of
the Internal Revenue Code and § 1.468A-8T of the temporary Income Tax Regulations.
The predecessor owners of the Plant were previously granted schedules of ruling
amounts, most recently on Date 2 and Date 3.

   Taxpayer represents the facts and information relating to its request for rulings as

follows:

   Taxpayer is a wholly-owned subsidiary of Parent that elects to be taxed as a

corporation for federal income tax purposes. Parent files a consolidated federal income
tax return with its affiliated corporations including Taxpayer.

   Taxpayer purchased a a percent interest in the Plant and related assets from

Seller D (b percent interest) and Seller E (c percent interest)(collectively Sellers). As
part of the purchase Sellers transferred the assets of the qualified and nonqualified
decommissioning trust funds related to the Plant to Taxpayer and Taxpayer assumed all
decommissioning liability for the Plant. The Service issued Private Letter Ruling to the
Taxpayer which provided that the qualified nuclear decommissioning fund of the
predecessor for the Plant were transferred to Taxpayer’s qualified fund for the Plant and
that the Taxpayer’s qualified fund would be treated as a qualified fund pursuant to
§ 468A of the Internal Revenue Code.

   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.

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   Based upon the assumptions used in Sellers’ most recent schedule of ruling

amounts it is estimated that Fund assets will earn an after-tax rate of return of d
percent. The total cost of decommissioning Plant is estimated to be e (in Year 1
dollars). This base cost of decommissioning Plant is escalated at a --percent yearly
rate, resulting in a total future cost to Taxpayer of decommissioning Plant of --(in Year 2
dollars). Under ratemaking assumptions used during the first proceeding before
Commission, the Plant would no longer be included in rate base in Year 3.

   In the prior schedule of ruling amounts, issued under § 468A of the Code as in

effect prior to 2006, Taxpayer represented that the funding period and level funding
limitation period are in effect for h years (Year 4 through Year 3) and the estimated
useful life of the Plant is i years (Year 5 through Year 3). As elected in the initial and
subsequent requests for a schedule of ruling amounts, Taxpayer calculated the
qualifying percentage, pursuant to § 1.468A-8(b)(7)(iii) of the regulations as in effect
prior to December 31, 2007. Thus, the percentage of the total estimated costs
qualifying for deduction in the schedule of ruling amounts under prior law was j 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 § 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 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.

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   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 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 § 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.

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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, Sellers were allowed to contribute j 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 k percent of the amounts necessary to decommission its ownership share of Plant.

   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 l in Year 6, and may ratably deduct the amount contributed for the Year 6 through Year 3 tax years, 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 Year 6, 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 Year 6), Taxpayer must request a new schedule of deduction amounts and in that request must take the Year 6 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.

   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. The proposed schedule of ruling amounts was derived by following the assumptions contained in an independent commissioning study that Taxpayer has represented is a standard type study used in the industry. Based on that representation, Taxpayer has demonstrated, pursuant to § 1.468A-3T(a)(4), that the proposed schedule of ruling amounts is based on reasonable assumptions and is consistent with the principles of § 468A and the regulations thereunder.

   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. The mandatory review date for this matter remains the same.

                  APPROVED SCHEDULE OF RULING AMOUNTS

               YEAR                                    RULING 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. Specifically, no determination is made whether the independent commissioning study conforms to industry standards and practices.

   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)