PLR 1047009: IRS approves a revised nuclear decommissioning funding schedule

Plain-English summary

The IRS considered a wholly owned subsidiary's request for a revised schedule of ruling amounts for contributions to a nuclear decommissioning reserve fund. The taxpayer owned a qualifying interest in a nuclear power plant, and its operating license had been extended. The IRS concluded that the proposed schedule was based on reasonable assumptions and satisfied the requirements of section 468A and the related regulations. It approved the proposed schedule, which required the same redacted amount for each year from Year C through Year G. The ruling also explains when the taxpayer must seek a future review or revision of the schedule.

Ruling snapshot

• Question: May the taxpayer use its proposed 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-7T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201047009 Third Party Communication: None
Release Date: 11/26/2010 Date of Communication: Not Applicable
Index Number: 468A.01-00
Person To Contact:
-----------------------, ID No. -------------------
---------------------------------------------------
Telephone Number:
---------------------
Refer Reply To:
------------------------- CC:PSI:B6
---------------------------- PLR-109882-10
---------------------- Date:
------------------------------- August 19, 2010
----------------------------

Re: Revised Schedule of Ruling Amounts
----------------------------------------------------------------

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

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

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

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

Method = -----------
Commission = -------------------------------------------------------
Year A = -------
Year B = -------
Year C = -------
Year D = -------
Year E = -------
Year F = -------
Year G = -------
BA = -------------------
BA-P = -------------------
FV = ---------------------
FV-P = ---------------------
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X = ----
Y = ----
P = ----
Amount A = -----------------
Fund = -------------------------------------------
Director = ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------

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

  This letter responds to your request, dated March 3, 2010, and revised by letter

dated June 18, 2010, for a mandatory revised schedule of ruling amounts under §
468A(f)(1)(iv). You were previously granted schedules of ruling amounts, most recently
on June 20, 2002.

   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 an ownership interest, through its subsidiaries that are disregarded

for federal tax purposes, 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 A. The license has been extended to Year B. Commission has
approved inclusion of nuclear decommissioning costs of the Plant in a competitive
transition charge through Year C. This approval did not take into account the license
extension. 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 a new Independent Study.

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

decommissioning the Plant. Taxpayer’s share (P percent) is $BA-P. The estimated
cost of decommissioning the Plant in Year E dollars is $FV. Taxpayer’s share of that
amount is $FV-P. It is estimated that substantial decommissioning costs will first be
incurred in Year E and that decommissioning will be substantially complete at the end of
Year F. The methodology used to convert the Year D dollars to future dollars was by
escalating the estimated costs at a rate of X percent to Year E. 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 A, the original termination date of
the operating license.
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   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.

   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,
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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
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.
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   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-3T(f)(1) describes the circumstances under which a taxpayer

must request a revised schedule of ruling amounts. Section 1.468A-3T(f)(1)(iv)
provides that a taxpayer must request a revised schedule of ruling amounts if the
operating license of the nuclear power plant to which a nuclear decommissioning fund
relates is extended.

   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.

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   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.
We have approved the following revised schedule of ruling amounts.

                  APPROVED SCHEDULE OF RULING AMOUNTS

YEAR AMOUNT

Each Year Year C through Year G $Amount A

    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
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power of attorney on file with this office, a copy of this letter is being sent to your
authorized representative. We are also sending a copy of this letter ruling to the
Director. Pursuant to § 1.468A-7T(a), 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)