Approval of a revised funding schedule for a nuclear plant's decommissioning fund

Plain-English summary

Owners of nuclear power plants can set aside money for the eventual cost of dismantling the plant and take a tax deduction for those contributions, but only up to an annual "ruling amount" that the IRS approves in advance under Section 468A. The amount is meant to fully fund decommissioning over the plant's life without over-funding it or front-loading it faster than level funding. This taxpayer, which owns a share of a nuclear plant through a disregarded subsidiary, already had an approved schedule and asked the IRS for a revised one, based on an independent decommissioning study's cost estimate, inflation rate, and assumed after-tax return. The IRS reviewed the assumptions, found the taxpayer met its burden of showing they are reasonable and consistent with the rules, confirmed the taxpayer is an eligible owner with a qualifying interest, and approved the revised schedule of annual ruling amounts. The specific dollar figures, percentages, and years are redacted. The ruling lets the taxpayer keep deducting its yearly contributions to the decommissioning fund up to the approved amounts.

Ruling snapshot

• Question: Should the IRS approve the taxpayer's proposed revised schedule of ruling amounts for its nuclear decommissioning fund under Section 468A?
• Outcome: approved (revised schedule granted)
• Key authorities: IRC § 468A(a), (b), (d); Treas. Reg. §§ 1.468A-3(a), (c), (d), (f)(2)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202034005 Third Party Communication: None
Release Date: 8/21/2020 Date of Communication: Not Applicable
Index Number: 468A.04-02
Person To Contact:
------------------------ ---------------, ID No. ------------
--------------------------------------- Telephone Number:
-------------------------- --------------------
---------------------------------- Refer Reply To:
----------------------- CC:PSI:B06
------------------------------------ PLR-128076-19
Date:
May 18, 2020
In Re: Elective Revised Schedule of Ruling
Amounts Under § 468A(d)(3)

Legend

Taxpayer = ---------------------------------------------------
Company A = -----------------------------------------------------------------------
Plant = -----------------------------
Location = ---------------------------------------------------
Method = -----------------------------
Independent Study = ---------------------------------------------------------------------------------
-----------------------------------------------------
Commission = -----------------------------------------
Amount = -----------------
Year A = -------
Year B = -------
Year C = -------
Year D = -------
Year E = -------
Year F = -------
Year G = -------
BA = ---------------------
FV = ---------------------
X = ---------
Y = ---------
P = --------
Director = ---------------------------------------

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

This letter responds to your request, dated November 15, 2019, for a revised schedule
of rulings amounts under § 468A(d)(1) of the Internal Revenue Code (Code) and §
1.468A-3(f)(2) of the Income Tax Regulations.
PLR-128076-19 2

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

Taxpayer, a corporation, is a holding company and the sole member of Company A, a
single member limited liability company that is disregarded for federal income tax
purposes. Company A is the legal owner of Plant located at Location.

Taxpayer, for Federal income tax purposes, owns P percent of 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 Plant is not currently
subject to cost of service ratemaking by any jurisdiction. Plant was previously subject to
ratemaking by Commission. The first ratemaking proceeding in which Plant was
included in rate base before Commission was in Year A. In that rate proceeding,
Commission used Year B as the year in which Plant would no longer be included in rate
base.

The estimated cost of $BA (Year C dollars) was used as a base cost for
decommissioning P percent of the Plant. The estimated cost of decommissioning P
percent of the Plant in future dollars is $FV. It is estimated that substantial
decommissioning costs will first be incurred in Year D and that decommissioning will be
substantially complete in Year E. 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 assets contained in the qualified nuclear decommissioning fund is Y 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’s 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 costs of the nuclear power plant over the
PLR-128076-19 3

estimated useful life of the plant and to prevent excessive funding of nuclear
decommissioning costs or funding of such 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 2 ½ 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 than an eligible taxpayer may elect to deduct nuclear
decommissioning costs under § 468A. An “eligible taxpayer,” as defined under §
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.

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
PLR-128076-19 4

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 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 table year that includes the last day of the estimated useful life of the
nuclear power plan 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.
PLR-128076-19 5

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(e)(1)-(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 the 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 Plant and is, therefore, an eligible
taxpayer under § 1.468A-1(b)(1) of the regulations.
3. Taxpayer 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. The
annual payments specified in the proposed schedule of ruling amounts are
based on the reasonable assumptions and determinations provided by
Independent Study, which will result in a projected fund balance at the end of
the funding period equal to or less than the amount of decommissioning costs
allocable to the Fund. Under §1.468A-3(c)(2)(i)(A), the funding period ends in
Year B. 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.
PLR-128076-19 6

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
               Years                                  Ruling Amount




    Each Year, Year F - Year G                            $Amount

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 rulings amounts by the date provided in
this regulation. When no such event occurs, Taxpayer must file a request for a revised
schedule of ruling amounts by the date provided in § 1.468A-3(f)(1)(i). 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 as to whether the documents submitted by Taxpayer conform 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 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 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 the
Taxpayer claims a deduction for payments made to the Fund.

                                 Sincerely,

                                 Patrick S. Kirwan
                                 Branch Chief, Branch 6
                                 Office of Associate Chief Counsel (Passthroughs
                                 & Special Industries)

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