Nuclear plant owner receives a revised decommissioning-fund contribution schedule

Plain-English summary

A holding company acquired an ownership interest in a nuclear generating unit, the related decommissioning trust assets, and the corresponding decommissioning liability. It asked the IRS to approve a revised schedule governing deductible contributions to its qualified nuclear decommissioning reserve fund. The proposed amount was based on an independent decommissioning study and assumptions about costs, investment returns, shutdown timing, and the fund's existing assets. The IRS found that the taxpayer had a qualifying ownership interest and had calculated its share of decommissioning costs under the Section 468A regulations. Relying on the taxpayer's representation that the study was a standard industry study, the IRS approved the proposed ruling amount for the listed year. The IRS did not determine whether the study actually conformed to industry standards, and the taxpayer must seek another revision if specified events occur or by the regular ten-year deadline.

Ruling snapshot

• Question: Does the proposed revised schedule of contributions to the qualified nuclear decommissioning fund satisfy Section 468A?
• Outcome: Approved (revised ruling amount accepted for the listed year)
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1 through 1.468A-3, 1.468A-6

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201850007                                              Third Party Communication: None
Release Date: 12/14/2018                                       Date of Communication: Not Applicable
Index Number: 468A.04-02
                                                               Person To Contact:
-------------------------------                                ------------------------, ID No. ------------------
--------------------------                                     ----------------------------------------------------
---------------------------                                    Telephone Number:
-----------------------------------                            ----------------------
------------------------                                       Refer Reply To:
---------------------------------                              CC:PSI:B06
                                                               PLR-105808-18
                                                               Date: Aug. 29, 2018




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


LEGEND:
Taxpayer                   =        --------------------------------------------------
Company                    =        --------------------------------------------------------------
Seller                     =        ---------------------------------------------
State                      =        -------------------
Unit                       =        ---------------------------------------------------------------------------------
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                                    ------------
Location                   =        ---------------------------------------------------
Independent Study =                 ---------------------------------------------------------------------------------
                           ---------------------------------------------------------------------------------------
                                    -----------------------------------------------------------------
Commission                 =        -----------------------------------------------------
Date 1                     =        ----------------------
Date 2                     =        ------------------------
Date 3                     =        --------------------
Date 4                     =        ----------------------
Date 5                     =        ------------------------
Date 6                     =        --------------------------
Date 7                     =        ------------------------
Date 8                     =        ------------------------
Date 9                     =        ----------------------
Year 1                     =        -------
Year 2                     =        -------
Year 3                     =        -------


Year 4                     =        -------
Year 5                     =        -------
a                          =        -----
b                          =        -----
c                          =        ----------------
d                          =        ----------------
e                          =        ------------------
f                          =        --------------------
g                          =        --------------------
h                          =        ------
i                          =        ------
j                          =        ----------------
Method                     =        -----------------------------------------
Director                   =         --------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
--


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

       This letter responds to your request dated Date 6, for a 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 with regard to Taxpayer’s qualified nuclear
decommissioning reserve fund (Fund).

   The Taxpayer, State corporation, is a holding company and the sole member of
Company, a State limited liability company, that is disregarded for federal income tax
purposes.

     Through its subsidiaries, Taxpayer is engaged in two business segments: (1) energy
delivery and (2) generation and sale of electricity at wholesale and retail. Company
owns and operates electric generation facilities, both directly and through other limited
liability companies that are wholly-owned by Company and are also disregarded for
federal income tax purposes. Company and other disregarded entities of Company are
collectively referred to herein as Group. Group is a large electric generation company
and owns a combination of nuclear, fossil, and renewable generating capacity.

    The Unit is a single-unit a megawatt reactor located on Location. Company is the
operator and owner of b percent of the Unit. The amended operating license for the Unit
is scheduled to expire on Date 2.

    Taxpayer purchased the Unit from the Seller on Date 1. As part of the purchase of
the Unit, the Taxpayer also acquired all of the assets of the Seller's qualified and
nonqualified nuclear decommissioning trust funds (NDT). The Company also acquired b


percent of the decommissioning liability with respect to the Unit. No portion of the
decommissioning liability was retained by the Seller or any previous owner of the Unit.

   In connection with the purchase of the Unit, the Taxpayer and Seller requested and
received a joint ruling from the Service, dated Date 3, concluding that the transfer of the
Seller NDT from the Seller to Taxpayer satisfied the requirements for nonrecognition
treatment pursuant to Treas. Reg. § 1.468A-6, and carryover basis in the assets of the
qualified fund.

    On Date 4, prior to the Taxpayer's purchase of the Unit, Seller contributed $c to the
Seller's qualified fund pursuant to the prior schedule. The assets of the Seller's
qualified fund were transferred to the Fund on Date 1. As of Date 1, the value of the
assets in the Fund was $d.

     The Unit is not currently subject to cost-of-service ratemaking and regulation by any
jurisdiction. The Unit was previously subject to cost-of-service ratemaking by the
Commission. The first ratemaking proceeding in which the Unit was included in rate
base before the Commission used Date 5 as the date on which the Unit would no longer
be included in rate base.

         The Proposed Revised Schedule of Ruling Amounts is based on information in
the Independent Study dated Date 8. For purposes of the Independent Study, the Unit is
assumed to be permanently shut down on Date 7. The information required by Treas.
Reg. § 1.468A-3(e)(2) with respect to the Proposed Revised Schedule of Ruling
Amounts provides that: The proposed method of decommissioning is the Method.
The estimated year in which substantial decommissioning costs will first be incurred is
Year 1. The estimated year in which the decommissioning of the Unit is expected to be
substantially complete is Year 2. The total estimated cost of decommissioning of the
Company's interest in the Unit expressed in current dollars is $f (in Year 3 dollars).
The total estimated cost of decommissioning for the Company's interest in the Unit
expressed in future dollars is $g (in Year 1 to Year 2 dollars). To obtain the estimated
cost of decommissioning expressed in future dollars, the estimated Year 3 cost of
decommissioning was escalated at a rate of h% annually until the year that the costs
will be incurred. The assumed after-tax rate of return to be earned by the assets of the
Fund is i%. The funding period for the Unit ended in Year 4. The fair market value of
the assets of the Fund at the time the Company acquired the Unit was $d. The fair
market value of the assets of the Fund as of Date 9 was $j. The amount of
decommissioning costs allocable to the Fund pursuant to Treas. Reg. § l.468A-3(d) is
$g.

       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.

       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. 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
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 (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 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.

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



       2. Taxpayer, as an owner of the Plant, has calculated its decommissioning costs
          under § 1.468A-3(d)(3) of the regulations.

       3. The proposed schedule of ruling amounts was derived by following the
          assumptions contained in the Independent 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-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.

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

                   APPROVED SCHEDULE OF RULING AMOUNTS

                Year                                     Ruling Amount
                Year 5                                         $e

       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.

       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.


       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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