PLR 1039012: IRS approved nuclear decommissioning deduction and ruling schedules

Plain-English summary

A nuclear plant owner requested schedules governing deductions and annual ruling amounts for contributions to its qualified nuclear decommissioning fund. The IRS concluded that the taxpayer could make a special transfer of a redacted amount and deduct it ratably over the specified remaining years. It also approved a revised schedule of ruling amounts based on the taxpayer's ownership interest, an independent decommissioning study, and other stated assumptions. The ruling did not determine whether the study conformed to industry standards beyond the taxpayer's representations.

Ruling snapshot

• Question: Could the taxpayer use the requested special transfer deduction schedule and revised schedule of ruling amounts for its nuclear decommissioning fund?
• Outcome: Approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1T, 1.468A-2T, 1.468A-3T, and 1.468A-8T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201039012 Third Party Communication: None
Release Date: 10/1/2010 Date of Communication: Not Applicable
Index Number: 468A.01-00
Person To Contact:
------------------------- -----------------------, ID No. -------------------
------------------- ---------------------------------------------------
------------------------------------------- Telephone Number:
--------------------------- ---------------------
---------------------------------- Refer Reply To:
CC:PSI:B6
PLR-111502-10
Date:
July 02, 2010

Re: ---------------------------------

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

LEGEND:
Taxpayer = ---------------------------------------------------------------------------------

Parent = -------------------------------------------------------------
Plant = -----------------------------------------------------
Location = -------------------
Independent Study = ---------------------------------------------------------------------------------

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

----------

Method = -------------------------------------------------
Commission A = ----------------------------------------------------
Commission B = -----------------------------------------------
Commission C = ----------------------------------------------------------------
Group A = --------------------------
Group B = -----------------------------------------------
Group C = ------------------------
Group D = ----------------------
Amount GA = ---------------
Amount GB = -----------
Amount GC = -------------
Amount GD = -------------
Amount T = ---------------
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Year A = -------
Year B = -------
Year C = -------
Year D = -------
Year E = -------
Year F = -------
Year G = -------
Year H = -------
Year I = -------
BA = ------------------
FV = ---------------------
X = ------------
Y = --------
P = -----
A = ---
B = ---
C = ---
D = ---
ST = -----------------
AD = -----------------
Fund = ------------------------------------------
Director = ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------

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

    This letter responds to your request, dated March 15, 2010, for 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 and for a mandatory revised
schedule of ruling amounts under § 468A(f)(3). You were previously granted schedules
of ruling amounts, most recently on September 10, 2007.

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

follows:

   Taxpayer is a wholly-owned subsidiary of Parent. Parent files a consolidated

federal income tax return with its affiliated corporations including Taxpayer.

   Taxpayer has a direct ownership interest of P percent in Plant. The estimated

base cost for decommissioning Plant is based on an independent study and the
proposed method of decommissioning the Plant is Method. The original operating
license for Plant would have expired in Year G. The license has been extended to Year
H. Several public utility commissions have established or approved rates for the
furnishing or sale of electricity generated by Plant, including Commission A,
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Commission B, and Commission C. However, no public utility commission currently
specifically authorizes Taxpayer to currently include decommissioning costs in
Taxpayer’s cost of service for ratemaking purposes. Therefore the Taxpayer has based
the request for the revised schedule of ruling amounts on the Independent Study.

   The estimated cost of $BA (Year A dollars) was used as a base cost for

decommissioning the Plant. The estimated cost of decommissioning the Plant in future
dollars is $FV. It is estimated that substantial decommissioning costs will first be
incurred in Year B and that decommissioning will be substantially complete at the end of
Year C. The methodology used to convert the Year A dollars to future dollars was by
escalating the estimated costs at an inflation rate of X percent to the year of estimated
expenditure. The assumed after-tax rate of return to be earned by the amount collected
for decommissioning is Y percent. The funding period for the Fund extends through
Year H, the termination date of the operating license.

    Regarding the request for a schedule of deduction amounts, in a prior schedule

of ruling amounts, issued under § 468A of the Code as in effect prior to 2006, Taxpayer
represented that the funding period for the Plant extends from Year F through Year G
and the level funding limitation period for the Plant extends from Year F through Year G.
The estimated period for which the Fund will be in effect is A years (Year F through
Year G). The estimated useful life of the Plant is B years (Year E through Year G).
Thus, percentage of the total estimated costs qualifying for deduction in the schedule of
ruling amounts under prior law was C 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
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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."
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    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
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
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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
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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 C
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 D 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 $ST in Year I, and may ratably deduct the
amount contributed for the Year I through Year G tax years, as set forth below.

                        SCHEDULE OF DEDUCTION AMOUNTS

             YEAR                                     DEDUCTION AMOUNT
    Each Year Year I – Year G                                $AD

   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
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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
I, 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 I), Taxpayer must request a new schedule of
deduction amounts and in that request must take the Year I 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 decommissioning 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.
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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 Group A Group B Group C Group D Total

Each Year Amount GA Amount GB Amount GC Amount GD Amount T
Year A -
Year D

    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 decommissioning 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)