IRS approves a utility's revised schedule of deductible contributions to its nuclear decommissioning fund

Plain-English summary

Section 468A lets the owner of a nuclear power plant take current tax deductions for money it sets aside in a qualified fund to pay the plant's eventual decommissioning costs, but the yearly deductible amount is capped by a "schedule of ruling amounts" the IRS must approve in advance. The taxpayer is an investor-owned electric utility that owns an undivided (tenant-in-common) interest in, and operates, a nuclear plant; it asked the IRS for a mandatory revised schedule of ruling amounts, updating its earlier schedule based on a fresh independent cost study. The IRS examined the request against § 468A and its regulations and concluded the taxpayer has a qualifying interest, correctly computed its share of the total decommissioning cost, and built its proposed schedule on reasonable assumptions (after-tax rate of return, escalated cost estimates) consistent with the regulations. The IRS therefore approved the revised schedule, which sets the maximum deductible annual contributions to the fund going forward. The IRS expressed no opinion on whether the underlying cost study meets industry standards or whether any particular item is a proper decommissioning cost. This keeps the utility's tax-advantaged funding of its future cleanup obligation on track and properly sized.

Ruling snapshot

• Question: Does the utility's proposed revised schedule of ruling amounts for its nuclear decommissioning fund satisfy § 468A?
• Outcome: approved
• Key authorities: IRC § 468A(a), (b), (d), (h); 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: 202048005                                              Third Party Communication: None
 Release Date: 11/27/2020                                       Date of Communication: Not Applicable
 Index Number: 468A.00-00, 468A.04-02
                                                                Person To Contact:
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 ----------------------------------                             Telephone Number:
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 --------------------------------------------------             Refer Reply To:
                                                                CC:PSI:B06
                                                                PLR-106187-20
                                                                Date:
                                                                September 01, 2020


 In Re: Revised Schedule of Ruling Amount
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LEGEND:
Parent                              =        -----------------------------------------------------------
Taxpayer                            =        ---------------------------------------------------------------
State A                             =        -------------
State B                             =        -------------------
State C                             =        ---------------------
Plant                               =        ----------------------------------------------
Location                            =        ----------------------------
Independent Study                   =        ------------------------------------------------------------------------
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                                    ---------------------------------------------------------------------
Method                              =        -----------
Date 1                              =        ------------------
Date 2                              =        -------------------------
Commission A                        =        -----------------------------------------------
Commission B                        =        ------------------------------------------------------------
Commission C                        =        -----------------------------------------------------
Letter A                            =         -----------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
                                             --------------------------------------------------------------
                                             ------------------------------------------------
                                             ------------------------------------------------------
PLR-106187-20                                             2

Letter B                            =         -----------------------------------------------------------------------
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                                             ---------------------------------------------------
Year 1                              =        -------
Year 2                              =        -------
Year 3                              =        -------
Year 4                              =        -------
a                                   =        ----------
b                                   =        -------------------
c                                   =        -----------------
d                                   =        -----------------
e                                   =        --------
f                                   =        ------
g                                   =        ------
h                                   =        -------------
Fund                                =        ------------------------------------------
Director                            =        ---------------------------------------

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

       This letter responds to your request, dated March 2, 2020, for a mandatory
revised schedule of ruling amounts under § 468A(d) of the Internal Revenue Code and
§ 1.468A-3(f)(1)(i) of the Income Tax Regulations. Taxpayer was previously granted
schedules of ruling amounts with respect to the Plant, most recently on Date 1.

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

        Taxpayer, a limited liability company organized in State B, is an investor-owned
electric utility principally engaged in the generation, transmission, distribution, and sale
of electricity in State B and State C. Taxpayer is a wholly-owned direct subsidiary of
Parent and treated as a disregarded entity of Parent for federal income tax purposes.
Parent, a State A corporation, and its affiliated group of corporations, including
Taxpayer, file a consolidated federal income tax return on a calendar-year basis using
the accrual method of accounting.

        Taxpayer owns a a percent interest as a tenant in common in the Plant, which is
sited in Location. Taxpayer is also the operator of the Plant. The amended operating
license for the Plant is scheduled to expire on Date 2. The proposed method for
decommissioning the Plant is Method.

       Taxpayer is subject to the regulatory jurisdiction of Commission A and
Commission B with respect to its retail electric sales. Taxpayer is also subject to the
regulatory jurisdiction of Commission C. Commission A and Commission B eliminated
Taxpayer’s requirement to include the decommissioning costs of the Plant in its cost of
PLR-106187-20                                3

service for rate making purposes. Taxpayer submits periodic reports to Commission A
and Commission B to update its Independent Study and demonstrate that the Fund
contains adequate amounts for the future decommissioning of Plant. As part of these
periodic updates regarding the estimated cost of decommissioning Plant, Taxpayer
recently submitted Letter A to Commission A and Letter B to Commission B.

        Taxpayer’s proposed revised schedule of ruling amounts was derived from the
estimated base cost for decommissioning the Plant contained in Independent Study.
The total remaining estimated base cost of decommissioning the Plant is $b (Year 1
dollars). The estimated cost of decommissioning Taxpayer’s a percent interest in the
Plant is $c (Year 1 dollars). The total estimated future cost of decommissioning
Taxpayer’s interest in the Plant is $d (Year 3 – Year 4 dollars). The methodology used
to convert the Year 1 dollars to Year 3 - Year 4 dollars was by escalating the estimated
costs at a rate of e percent annually to the year of estimated expenditure. The assumed
after-tax rate of return to be earned by the assets in the Fund ranges from f percent to g
percent. Taxpayer estimates that it will first incur substantial decommissioning costs for
the Plant in Year 3 and that decommissioning will be substantially complete in Year 4.

       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
PLR-106187-20                                 4

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
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
PLR-106187-20                                 5

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,
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
PLR-106187-20                                6

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)(i) provides that any taxpayer that has obtained a schedule
of ruling amounts pursuant to § 1.468A-3(e) must file a request for a revised schedule of
ruling amounts on or before the deemed payment deadline date for the 10th taxable
year that begins after the taxable year in which the most recent schedule of ruling
amounts was received. If the taxpayer calculated its most recent schedule of ruling
amounts on any basis other than an order issued by a public utility commission, the
taxpayer must file a request for a revised schedule of ruling amounts on or before the
deemed payment deadline date for the 5th taxable year that begins after the taxable
year in which the most recent schedule of ruling amounts was received.

       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).

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

      3)     The proposed schedule of ruling amounts was derived by following the
assumptions contained in the Independent Study, as discussed above. 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.
PLR-106187-20                                 7


       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).

      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                                  Schedule of Ruling Amount
        Each Year Year 2 – Year 3                                  h


        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) 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 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.
PLR-106187-20                                           8

      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 yours,



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




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