Revised nuclear decommissioning fund schedule approved

Plain-English summary

A taxpayer requested mandatory review of its nuclear decommissioning fund schedule after the Nuclear Regulatory Commission extended the plant’s operating license. The proposed amounts used a recent independent decommissioning study, an inflation assumption, an after-tax return assumption, and a revised funding period that reflected the license extension. The IRS found that the taxpayer had a qualifying ownership interest, was eligible to use section 468A, properly calculated its share of decommissioning costs, and supported its assumptions. It approved the proposed annual ruling amount for each year in the revised funding period. The approval remains contingent on unchanged facts and requires later review when specified events occur or after the prescribed ten-year interval.

Ruling snapshot

• Request: Approve a revised schedule of nuclear decommissioning fund ruling amounts after a license extension
• Outcome: Approved for the specified funding years and annual amount
• Key authorities: I.R.C. § 468A; Treas. Reg. §§ 1.468A-1 through 1.468A-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201542006                                              Third Party Communication: None
Release Date: 10/16/2015                                       Date of Communication: Not Applicable
Index Number: 468A.04-02
                                                               Person To Contact:
---------------------------------------                        ------------------------, ID No. ------------------
-------------------------------------------------------        ----------------------------------------------------
-------------------------------                                Telephone Number:
-----------------------------------                            ----------------------
--------------                                                 Refer Reply To:
------------------------                                       CC:PSI:B06
--------------------------------------                         PLR-108975-15
                                                               Date:
                                                               July 07, 2015




LEGEND:
Taxpayer                   =        ----------------------------------------------------
Company                    =        ---------------------------------------------------------------------------------
Plant                      =        ---------------------------------------------------
Location                   =        ----------------------------------
Year A                     =        -------
Year B                     =        -------
Year C                     =        -------
Year D                     =        -------
Year E                     =        -------
Year F                     =        -------
Independent Study =                 ---------------------------------------------------------------------------------
--------------------------------------------
Method                     =        ------------
Commission                 =        ---------------------------------------------------------
Date A                     =        -------------------------
Date B                     =        --------------------
Date C                     =        ----------------------
BA                         =        -------------------
FV                         =        ----------------------
X                          =        -------
Y                          =        -------
Amount                     =        ------------------
Fund                       =        --------------------------------------------
Director                   =        ---------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
PLR-108975-15                                2



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

       This letter responds to your request, dated March 11, 2015, for a schedule of
ruling amounts pursuant to section 468A(f) of the Internal Revenue Code and
§ 1.468A-3 of the Income Tax Regulations. Information was submitted pursuant to
§ 1.468A-3(e)(2). As the result of the Nuclear Regulatory Commission (NRC) having
recently granted a license extension with respect to Plant, Taxpayer requests a
mandatory review of the most recent revised schedule of ruling amounts pursuant to
§ 1.468A-3(f)(1)(iv).

      Taxpayer represents the facts and information relating to its request for a revised
schedule of ruling amounts as follows:

       Taxpayer, a corporation, is a holding company and the sole member of
Company. Company is a single-member liability company that is the sole legal owner of
the Plant. Because Company is disregarded for Federal income tax purposes,
Taxpayer is treated as the owner of Plant for Federal income tax purposes. The Plant is
situated at Location. The Plant’s operating license was scheduled to expire in Year A
but was extended by the NRC on Date A. Plant’s operating license is now scheduled to
expire in Year B.

              Taxpayer is subject to the jurisdiction of Commission. Commission has
issued a rate order, effective on Date C, allowing Taxpayer to recover decommissioning
costs from ratepayers based on a prior independent study. Taxpayer was previously
granted a revised schedule of ruling amounts on Date B, prior to the renewal of the
license for Plant. As a result of the license extension, Taxpayer now requests a
mandatory review of the proposed schedule of ruling amounts pursuant to § 1.468A-
3(f)(1) (iv).

         The estimated base cost for decommissioning plant is based on the Independent
Study and the proposed method of decommissioning the Plant is Method. The
estimated cost of $BA (Year C dollars) was used as a base cost for decommissioning
Plant. The estimated cost of decommissioning Plant in future dollars is $FV (escalated
to year of expected expenditure). 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 D. The methodology used to convert the Year C 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 Plant is
from Year E to Year F.
PLR-108975-15                                3

       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-1(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-1(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-2(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-
2(b)(1) does not apply to any “special transfer” permitted under § 1.468A-8.

       Section 1.468A-3(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
PLR-108975-15                                 4

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-3(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-3(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-3(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
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-3(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-3(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-3(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.
PLR-108975-15                                5

         Section 1.468A-3(c)(2) provides rules for determining the estimated useful life of
a nuclear plant for purposes of § 468A. In general, under § 1.468A-3(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-3(c)(2)(i)(B) provides
that, if the nuclear plant is not described in § 1.468A-3(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-3(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-3(c)(2)(i)(A).

       Section 1.468A-3(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-3(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-3(e) provides the rules regarding the manner of requesting a
schedule of ruling amounts. Section 1.468A-3(e)(1)(v) provides that the Service will not
provide or revise a ruling amount applicable to a taxable year in response to a request
for a schedule of ruling amounts that is filed after the deemed payment date (as defined
in § 1.468A-2(c)(1)) for such taxable year.

      Section 1.468A-3(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-3(e)(3) provides that the Service may prescribe administrative
procedures that supplement the provisions of §§ 1.468A-3(e)(1) and (2). In addition,
that section provides that the Service may, in its discretion, waive the requirements of
§§ 1.468A-3(e)(1) and (2) under appropriate circumstances.

       Section 1.468A-3(f)(1) describes the circumstances in which a taxpayer must
request a revised schedule of ruling amounts. Section 1.468A-3(f)(1)(iv) requires that a
taxpayer request a revised schedule of ruling amounts for the fund if the operating
license of the nuclear plant to which the fund relates is extended. The request for the
revised schedule of ruling amounts must be submitted on or before the deemed
payment deadline for the taxable year that includes the date on which the license
extension is granted.

      Section 1.468A-3(f)(2) provides that any taxpayer that has previously obtained a
schedule of ruling amounts may request a revised schedule of ruling amounts. Such a
PLR-108975-15                                6

request must be made in accordance with the rules of § 1.468A-3(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.

       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-3(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 ownership interest in Plant and is, therefore, an
          eligible taxpayer under § 1.468A-1(b)(1) of the regulations.

       3. Taxpayer, as an eligible taxpayer under § 1.468A-1(b)(1), has calculated its
          share of the total decommissioning costs under § 1.468A-3(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.
          Thus, Taxpayer has demonstrated, pursuant to § 1.468A-3(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-2(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                                     Ruling Amount

       Each year, Year E – Year F                               $Amount
PLR-108975-15                                7

        Approval of the schedule of ruling amounts is contingent on there being no
change in the facts and circumstances, known or assumed, at the time the current ruling
is issued. If any of the events described in § 1.468A-3(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.
In particular, while we have approved the proposed schedule of ruling amounts based
on cost estimates contained in Independent Study, we make no ruling, express or
implied, whether any particular item contained in that study constitutes a nuclear
decommissioning cost within the meaning of § 1.468A-1(b)(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. We are sending a copy
of this letter ruling to the Director and the Taxpayer’s authorized representative.
Pursuant to § 1.468A-7(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
                                         Office of Associate Chief Counsel
                                         (Passthroughs & Special Industries)

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