Nuclear plant owner receives a special-transfer deduction and revised funding schedule

Plain-English summary

An owner of a shut-down nuclear power plant asked for a schedule allowing a
special transfer to its qualified nuclear decommissioning fund and for a
revised annual funding amount. The owner had largely completed
decommissioning, but work on a remaining facility was expected to continue
through a later year. It based its updated costs on an independent study and
estimates accepted by its regulator. The IRS found the assumptions reasonable
under IRC § 468A and approved a redacted maximum special transfer and deduction
for the requested year. It also approved a revised ruling amount for the
following year, which limits the deductible cash payment to the fund. A smaller
special transfer would require a new deduction schedule before an additional
later transfer.

Ruling snapshot

• Question: May the plant owner make and deduct a special transfer to its
  nuclear decommissioning fund and use its proposed revised ruling schedule?
• Outcome: Approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1 through 1.468A-3
  and 1.468A-8

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202042004 Third Party Communication: None
Release Date: 10/16/2020 Date of Communication: Not Applicable
Index Number: 468A.04-01, 468A.04-02
Person To Contact:
----------------------- ------------------------------
------------------------------------------------ , ID No. -----------------
--------------------------------------------- Telephone Number:
----------------------- --------------------
------------------------------ Refer Reply To:
---------------------------- CC:PSI:B06
PLR-101517-20
Date:
July 08, 2020

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

LEGEND:
Taxpayer = ----------------------------------------------------------------------
Plant = --------------------------
State = --------------------
Location = -----------------------------
Facility = ---------------------------------------------------------------------------------

                                ---------

Commission = ----------------------------------------------------------------
Method = -----------
Independent Study = ---------------------------------------------------------------------------------

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

Order = -------------------------------------------------------
------------------------------------
a = -----
b = -----------------
c = ---------------
d = -----------------
e = -----------------
f = -----------------
g = ----
h = --
i = --------
j = --------
PLR-101517-20 2

k = ---------------
l = --
Date 1 = -------------------------
Date 2 = -------------------
Date 3 = ---------------------------
Date 4 = -------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------
Year 7 = -------
Fund = ------------------------------------------
Director = ------------------------------------------

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

   This letter responds to your request, dated December 19, 2019, for a subsequent

schedule of deduction amounts for a special transfer pursuant to § 468A(f) of the
Internal Revenue Code and § 1.468A-8(c)(1) of the Income Tax regulations and for a
mandatory revised schedule of ruling amounts under § 468A(f)(3) and
§ 1.468A-3(f)(1)(iii). Taxpayer previously received a schedule of deduction amounts for
a special transfer on Date 1.

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

follows:

    Taxpayer is a State corporation that files its federal income tax return on a

calendar year basis using the accrual method of accounting. Taxpayer has a direct
ownership interest of a percent in the Plant, located in Location. The Plant ceased
operations in Year 1. Taxpayer generally completed decommissioning the Plant in Year
4, except for the Facility. The method of decommissioning the Plant (including the
Facility) is Method.

   Taxpayer is subject to regulation by the Commission with respect to the

decommissioning costs of the Plant which are included in Taxpayer’s whole-sale power
sales contracts.

  On Date 1, the Service issued an initial schedule of deduction amounts and a

schedule of ruling amounts to Taxpayer allowing a special transfer totaling $b. On Date
2, Taxpayer made a special transfer and a corresponding deduction totaling $c.
PLR-101517-20 3

  On Date 3, Taxpayer submitted a filing to the Commission to update its

decommissioning cost estimates for Year 5 through Year 7 based, in part, on the
assumptions in the Independent Study. On Date 4, the Commission issued Order
accepting Taxpayer’s Year 5 through Year 7 updated decommissioning cost estimates.

    The estimated cost of $d (Year 5 Dollars) was used as a base cost for

decommissioning the Plant. The estimated decommissioning of the Plant in future
dollars is $e (Year 5 to Year 7 dollars). As of January 1, -------, the present value of the
estimated future decommission cost of the Plant was $f. Substantial decommissioning
cost were first incurred in Year 2. It is estimated that the total decommissioning of the
Plant and Facility will be complete at the end of Year 7. To calculate the estimated cost
of decommissioning in future dollars, Year 5 dollars were escalated at an annual
inflation rate of g percent to the year of estimated expenditure. The assumed after-tax
rate of return to be earned by the assets in the Fund is h percent.

   Regarding the request for a schedule of deduction amounts, Taxpayer’s

maximum special transfer amount is calculated by subtracting from 100 percent the
Taxpayer’s qualifying percentage computed under prior law and the percentage of prior
special transfers made by Taxpayer (i percent), and multiplying i percent by the present
value of the future decommissioning liability. This results in Taxpayer having a non-
qualifying percentage of j 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
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.
PLR-101517-20 4

   Prior to the changes made by the Act, deductible contributions were limited to the

amount necessary for an electing taxpayer to fund the plant's post-1983 nuclear
decommissioning costs (determined as if decommissioning costs accrued ratably over
the estimated useful life of the plant), provided that the taxpayer elected to establish a
fund in 1984. Prior law also did not allow a taxpayer electing to establish a fund later
than 1984 to contribute to that fund any amount in excess of that amount necessary to
fund the ratable portion of the plant's nuclear decommissioning costs beginning in the
year the fund is established.

    Section 468A(f)(1) now allows a taxpayer to contribute to a nuclear

decommissioning fund the entire cost of decommissioning the plant, including both the
pre-1984 amount that was denied under the law prior to the Act as well as any amount
attributable to any year after 1983 in which a taxpayer had not established a fund under
§ 468A. Section 468A(f)(2)(A) provides that the deduction for the contribution of the
previously-excluded amount is allowed ratably over the remaining useful life of the
nuclear plant.

   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), 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 must be based on
reasonable assumptions concerning the after-tax rate of return to be earned by the
assets of the qualified nuclear decommissioning fund, the total estimated cost of
PLR-101517-20 5

decommissioning the nuclear power 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. Section 1.468A-3(b)(3) provides that the ruling amount specified in a schedule of
ruling amounts for the last taxable year in the funding period may be less than the ruling
amount specified in such schedule for an earlier taxable year if, when annualized under
the rules provided § 1.468A-3(b)(3), the amount specified for the last taxable year is not
less than the amount specified for such earlier taxable 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,
PLR-101517-20 6

2006, the date used in the first such ratemaking proceeding as the estimated date on
which the nuclear power plant will no longer be included in the taxpayer’s rate base is
the end of the estimated useful life of the nuclear power plant.

   Section 1.468A-3(c)(2)(i)(B) provides that, if the nuclear power plant is not

described in § 1.468A-3(c)(2)(i)(A), the last day of the estimated useful life of the
nuclear power 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 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)(iii) requires that a
taxpayer requesting a schedule of deduction amounts must also request a revised
schedule of ruling amounts for the fund. The revised schedule of ruling amounts must
apply beginning with the first taxable year following the first year in which a deduction is
allowed under the schedule of deduction amounts.

   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
PLR-101517-20 7

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-8(a)(1) provides that, under the provisions of § 468A(f), as

described above, a taxpayer may make a special transfer of cash or property to the
nuclear decommissioning fund. This special transfer is not subject to the
§ 468A(b) limitation. The amount of the special transfer is the present value of the pre-
2005 non- qualifying percentage of the estimated future costs of decommissioning the
nuclear plant that was disallowed under § 468A prior to the Act.

   Section 1.468A-8(a)(2) defines the pre-2005 non-qualifying percentage as equal

to 100 percent reduced by the sum of the qualifying percentage used in determining the
taxpayer's last schedule of ruling amounts for the fund under § 468A as it existed prior
to the Act and the percentage transferred in any previous special transfer.

   Section 1.468A-8(a)(3) provides that the taxpayer is not required to transfer the

entire amount eligible for the special transfer in one year but must take any prior special
transfers into account in calculating the pre-2005 qualifying percentage. Further,
pursuant to § 1.468A-8(c)(2), a taxpayer making a special transfer in more than one
year must request a new schedule of deduction amounts in connection with each
special transfer.

   Section 1.468A-8(a)(4)(i) provides that the amount of any special transfer made

by a taxpayer on or before the 15th day of the third calendar month after the close of
any taxable year (the deemed payment deadline date) shall be deemed made during
that taxable year if the taxpayer irrevocably designates the amount of the special
transfer as relating to that taxable year.

    Section 1.468A-8(b) provides that the deduction for the special transfer is

allowed ratably over the remaining useful life of the nuclear plant. Under
§ 1.468A-8(b)(2)(i), the deduction for property contributed in a special transfer is limited
to the lesser of the fair market value of the property or the taxpayer's basis in the
property, except as provided in § 1.468A-8(b)(2)(ii). Under § 1.468A-8(b)(5), the
taxpayer recognizes no gain or loss on the special transfer of property, the taxpayer's
basis in the fund is not increased by reason of the special transfer of property, and the
fund's basis in the property transferred in the special transfer is the same as the
transferor's basis in that property immediately prior to the special transfer.

    Section 1.468A-8(c) provides that taxpayer may not make a special transfer to a

qualified nuclear decommissioning fund unless the taxpayer requests from the IRS a
schedule of deduction amounts in connection with such transfer. A request for a
schedule of deduction amounts may be made in connection with a request for a
schedule of ruling amounts but in such case, the calculations for both the schedule of
ruling amounts and the schedule of deduction amounts must be separately stated.
PLR-101517-20 8

   Section 1.468A-8(d) describes the manner of requesting a schedule of deduction

amounts. Section 1.468A-8(d)(1)(v) provides that, except as provided in
§ 1.468A-8(d)(1)(vi), the Service will not provide or revise a deduction amount
applicable to a taxable year in response to a request for a schedule of deduction
amounts that is filed after the deemed payment deadline date for such taxable year.

   As stated above, prior to the changes made by the Act, deductible contributions

were limited to the lesser of (1) the amount necessary to fund the plant's post-1983
nuclear decommissioning costs, or (2) the amount necessary to fund the plant's
decommissioning costs for that portion of the plant's estimated useful life for which a
fund had been established. Under that prior law, Taxpayer was allowed to contribute i
percent of the amounts necessary to fully decommission the Plant. Section 468A(f)(1)
allows a taxpayer to contribute to the nuclear decommissioning fund the pre-1984
amount that was denied under the law prior to the Act. Thus, Taxpayer is able to
contribute the additional j percent of the amounts necessary to fully decommission the
Plant.

   Under § 1.468A-8(b) the deduction for the special transfer is allowed ratably over

the remaining useful life of Plant. The useful life of Plant, for purposes of
§§ 1.468A-3(c)(2) and 1.468A-8(b), ends in Year 3.

    We have examined the representations and information submitted by Taxpayer

in relation to the requirements set forth in § 468A and the regulations thereunder. We
find that Taxpayer's proposal to contribute $k to the Fund and to deduct the amount
transferred is consistent with the principles and provisions of § 468A and the regulations
thereunder. Based solely upon these representations of the facts, we conclude that
Taxpayer is permitted to make a special transfer of $k and may deduct the amount
contributed in Year 5, as set forth below.

                   SCHEDULE OF DEDUCTION AMOUNTS

                Year                                   Deduction Amount
               Year 5                                          $k

   The special transfer amount stated above is the maximum amount permitted to

be transferred to the fund under § 468A(f)(1). If Taxpayer transfers a lesser amount to
the fund in Year 5, in order to make an additional special transfer in a later year
(including a special transfer of the difference between the special transfer amount
stated above and the lesser amount transferred in Year 5), Taxpayer must request a
new schedule of deduction amounts and in that request must take the Year 5 transfer
into account and recalculate the pre-2005 qualifying percentage in such request.

   We note that, if Taxpayer elects to make a special transfer of property for all or a

portion of this special transfer, the amount of the deduction is the lesser of the fair
PLR-101517-20 9

market value of the property transferred or the basis of the property in the hands of
Taxpayer immediately prior to the transfer unless Taxpayer makes the election as
described in § 1.468A-8(b)(2)(ii).

   Furthermore, regarding Taxpayer's request for a revised schedule of ruling

amounts, 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. 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 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 the Independent Study. The underlying assumptions
   contained in the Independent Study were used by the Commission to calculate
   the amount of decommissioning costs to be included in Taxpayer's whole-sale
   power sales contracts. 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.

   Taxpayer has been granted, above, a schedule of deduction amounts relating to
   

   Year 5. 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. Further, § 468A(f)(3) and § 1.468A-3(f)(1)(iii)
   requires that a taxpayer requesting a schedule of deduction amounts must also request
   a revised schedule of ruling amounts for the fund and provides that the revised
   schedule of ruling amounts must apply beginning with the first taxable year following the
   first year in which a deduction is allowed under the schedule of deduction amounts.
   PLR-101517-20 10

   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
              Year 6                                          $l
   
   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 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 Independent Study conforms to
   industry standards and practices or whether any particular item contained in that study
   constitutes a nuclear decommissioning cost under § 1.468A-1(b)(6).

   This ruling is directed only to Taxpayer, who requested it. Section 6110(k)(3)
   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.

   This letter ruling is being issued electronically in accordance with Rev. Proc.
   2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayer.

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

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