Nuclear plant owner receives revised decommissioning fund contribution schedule

Plain-English summary

A nuclear plant owner requested a mandatory revised schedule of ruling amounts for deductible contributions to its qualified nuclear decommissioning fund. The proposed schedule used cost, timing, inflation, and investment-return assumptions from an independent study that a utility commission had adopted for ratemaking. The IRS concluded that the owner had a qualifying interest, calculated its share of decommissioning costs properly, and supported the schedule with reasonable assumptions under IRC § 468A. It approved the revised annual ruling amount, subject to future review if specified events occur or after the regular ten-year period.

Ruling snapshot

• Question: Does the proposed revised schedule of nuclear decommissioning fund contributions satisfy IRC § 468A?
• Outcome: Approved. The IRS issued the requested revised schedule of ruling amounts.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, 1.468A-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201723013 Third Party Communication: None
Release Date: 6/9/2017 Date of Communication: Not Applicable
Index Number: 468A.04-02
Person To Contact:
-------------------------- -------------------------, ID No. -----------------
------------------------------------------------------- -----------------------------------------------------
----------------------------- Telephone Number:
-------------------------------------------- ---------------------
-------------------------------- Refer Reply To:
CC:PSI:B06
Re: ------------------------------------------------------ PLR-139126-16
------------------------------------------------------------ Date:
------ March 15, 2017

LEGEND:
Taxpayer = ----------------------------------------------------
Parent = ---------------------------------------------------------
X = -------------------------------------------------
Y = --------------------------------------------------
Plant = ----------------------------------------------------------
State = ------------------
Location = --------------------------------
Method = ----------
Commission A = --------------------------------------------------------
Commission B = ---------------------------------------------------------------------------------
Commission C = --------------------------------------------------------------
Order = ---------------------------------------------------------------------------------
Independent Study = ---------------------------------------------------------------------------------
a = -------
b = ------
c = -------
d = ----------------
e = ------------------
f = ------
g = ------
h = ------
i = -------------
Date 1 = -------------------
Date 2 = ------------------
Date 3 = -----------------
Year 1 = ------
Year 2 = ------
Year 3 = ------
Year 4 = ------
Fund = -----------------------------------------

PLR-139126-16 2

Director = ------------------------------------------------------------------------------------------

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

   This letter responds to your request, dated December 16, 2016, for a mandatory

revised schedule of ruling amounts under § 468A(d)(1) of the Internal Revenue Code
and § 1.468A-3(f)(1)(ii)(B) of the Income Tax Regulations.

  Taxpayer represents the facts and information relating to its request for a revised

schedule of ruling amounts as follows:

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

federal income tax return with its affiliated corporations, including Taxpayer, on a
calendar year basis using an accrual method of accounting. Taxpayer is the sole owner
of the Plant.

   Prior to Date 1, X, another member of Parent’s consolidated group, solely owned

the Plant. On Date 1, X converted its form of business organization from a State
corporation to a State limited liability company (Y). Y is disregarded as an entity
separate from Taxpayer. This event was treated as a § 332 liquidation that resulted in
the transfer of the Plant and the Fund from X to Taxpayer.

    The Plant is situated at Location and was issued an amended operating license

that is scheduled to expire on Date 3. The proposed method of decommissioning the
Plant is Method.

   Taxpayer is subject to regulatory jurisdiction of Commission A (a percent),

Commission B (b percent), and Commission C (c percent). Since the last amended
schedule of ruling amounts, Commission A issued Order effective Date 2, in which it
approved the estimated decommissioning costs for the Plant to be included in
Taxpayer’s cost of service for ratemaking purposes based on the assumptions derived
by the Independent Study.

   Based upon the assumptions used by Commission A, the estimated cost of $d (in

Year 1 dollars) was used as a base cost for decommissioning the Plant. The estimated
cost of decommissioning the Plant in future dollars is $e (in Year 3 through Year 4
dollars). Substantial decommissioning costs were first incurred in Year 3 and it is
estimated that decommissioning will be substantially complete at the end of Year 4.
The methodology used to convert the Year 1 dollars to future dollars was by escalating
the estimated costs at an inflation rate of f percent to the year of estimated expenditure.
The assumed after-tax rate of return to be earned by the amount in the Fund ranges
from g to h percent. The funding period begins in the first taxable year in which a
deductible payment was made to the Fund and ends in the taxable year that includes

PLR-139126-16 3

the date the Plant will no longer be included in Taxpayer’s rate base for ratemaking
purposes.

   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.

PLR-139126-16 4

    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
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

PLR-139126-16 5

useful life of the nuclear power plant to which the fund relates.

   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)(2) provides that any taxpayer that has previously obtained a

schedule of ruling amounts may request a revised schedule of ruling amounts. Such a
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 Taxpayer

PLR-139126-16 6

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

   3. Taxpayer, as owner of the Plant, has calculated its 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 the Independent Study and used by Commission A
      to calculate the amount of decommissioning costs to be included in
      Taxpayer’s cost of service for ratemaking purposes. 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 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 2 – Year 3                                $i

   If any of the events described in § 1.468A-3(f)(1) occur in future years, Taxpayer

must request a review and revision of the schedule of ruling amounts. Generally,
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, 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 this schedule of ruling amounts is received.

PLR-139126-16 7

   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 Study conforms to
industry standards and practices. In addition, we make no determination as to whether
the conversion, treated as a § 332 liquidation, satisfies § 1.468A-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-7(a), a copy of this letter must be attached (with the
required Election Statement) to Taxpayer’s federal income tax return for each tax year
in which Taxpayer claims a deduction for payments made to the Fund.

                                            Sincerely yours,



                                            Peter C. Friedman
                                            Senior Technician Reviewer, Branch 6
                                            Office of the Associate Chief Counsel
                                            (Passthroughs and Special Industries)

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