PLR 1036002: Nuclear decommissioning fund special transfer approved

Plain-English summary

The IRS approved a schedule of deduction amounts for a wholly owned subsidiary that owned an interest in a nuclear power plant. The taxpayer could make a special transfer to its nuclear decommissioning fund for the previously disallowed portion of estimated future decommissioning costs and deduct the contribution ratably over the plant's remaining useful life. The approved special transfer was subject to the redacted maximum amount stated in the ruling, and a smaller transfer could be deducted ratably over the specified period. The ruling also addressed special transfers of property, later requests for revised schedules, and the taxpayer's zero-dollar annual ruling amount. The conclusions were based on the taxpayer's representations and did not determine whether its independent decommissioning study met industry standards.

Ruling snapshot

• Question: May the taxpayer make a special transfer to its nuclear decommissioning fund and deduct it over the plant's remaining useful life?
• Outcome: Approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1T, 1.468A-3T, and 1.468A-8T

Full text (IRS public release)

• Internal Revenue Service Department of the Treasury
  Washington, DC 20224

Number: 201036002 Third Party Communication: None
Release Date: 9/10/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 468A.04-02 -------------------------, ID No. ------------
Telephone Number:
--------------------
---------------------------- Refer Reply To:
------------------------------------------------------------- CC:PSI:B06
----------- PLR-155813-09
------------------------------ Date:
------------------------- May 24, 2010

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

LEGEND:
Taxpayer = -------------------------------(EIN: ----------------)
Parent = --------------------------- (EIN: ----------------)
Plant = ---------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Location = -----------------------------
Independent Study = ---------------------------------------------------------------------------------

Method = -----------
Fund = ------------------------------------------
Director = ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------

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. Taxpayer was previously granted schedules of ruling amounts, most
recently on ---------------------.

      Taxpayer represents the facts and information relating to its requests 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 is the sole owner
of the Plant.
PLR-155813-09 2

   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.

     Based upon the assumptions derived from the Independent Study, it is estimated

that Fund assets will earn an average after-tax rate of return ranging from ------ to --------
percent. The present value of the future decommissioning costs with respect to
Taxpayer’s interest in the Plant on ----------------------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, 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, Taxpayer represented that the funding period and level funding
limitation period are --- years (------ --------) and the estimated useful life of the Plant is ---
--- years (---------------). 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 ------- 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.

   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 an electing taxpayer 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
PLR-155813-09 3

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-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-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
PLR-155813-09 4

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.

    Thus, Taxpayer is able to contribute the additional ------- percent of the amounts

necessary to decommission its ownership share of Plant. The total future cost of
decommissioning the Plant $--------------------(in ------ through ------- dollars). The value
of that amount on --------------------- is $-----------------(in ------ dollars).

  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
PLR-155813-09 5

Taxpayer may make a special transfer of $--------------- in ------, and may ratably deduct
the amount contributed for the ------ though ------ 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 the
years ------, 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.

   Section 1.468A-3T(f)(1)(iii) requires that a taxpayer requesting a schedule of

deduction amounts under § 1.468A-8T must also request a revised schedule of ruling
amounts for the applicable fund. However, § 1.468A-3T(f)(1)(v) provides that if a
taxpayer is required to request a revised schedule of ruling amounts and each ruling
amount in the revised schedule would equal zero, a taxpayer may, instead of requesting
a revised schedule of ruling amounts, begin treating the ruling amount as equal to zero
dollars. Taxpayer has no schedule of ruling amounts in effect for the current or future
years and therefore its annual ruling amount is zero. Pursuant to § 1.468A-3T(f)(1)(v),
Taxpayer will continue to treat its annual ruling amount as equal to zero dollars and,
accordingly, has not made a request for a revised schedule of ruling amounts.

   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 decommissioning study
conforms to industry standards and practices.
PLR-155813-09 6

   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)

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