IRS approves a revised nuclear-decommissioning-fund contribution schedule

Plain-English summary

A regulated electric utility that owns an interest in a nuclear power
plant maintains a "nuclear decommissioning fund," a tax-favored reserve
for the eventual cost of dismantling the plant. Under Code § 468A, the
utility can deduct its cash contributions to that fund, but only up to a
"ruling amount" the IRS approves in a schedule, and the utility must
periodically request a revised schedule (here, after acquiring its
interest in the plant and joining a new consolidated group). The utility
asked the IRS to approve a revised schedule of annual contribution
limits, built on the same cost study and rate-of-return and cost-
escalation assumptions its public utility commission used in setting
decommissioning rates. The IRS found the taxpayer is an eligible taxpayer
with a qualifying interest, that its proposed schedule rests on
reasonable assumptions consistent with § 468A and the regulations, and
approved the revised schedule (a single annual ruling amount for the
funding-period years). The ruling matters to nuclear plant owners who
must keep their deductible decommissioning contributions within IRS-
approved limits.

Ruling snapshot

• Question: Does the utility's proposed revised schedule of ruling
  amounts for its nuclear decommissioning fund satisfy § 468A?
• Outcome: Approved (revised schedule of ruling amounts granted)
• Key authorities: IRC § 468A(a)-(d), (h); Treas. Reg. §§ 1.468A-1,
  1.468A-2, 1.468A-3, 1.468A-6, 1.468A-7, 1.468A-8

Full text (IRS public release)

Internal Revenue Service                     Department of the Treasury
                                             Washington, DC 20224

Number: 202050004                            Third Party Communication: None
Release Date: 12/11/2020                     Date of Communication: Not Applicable
Index Number: 468A.04-02

Person To Contact:
------------------, ID No. -----------------
Telephone Number:
--------------------
Refer Reply To:
CC:PSI:B06
PLR-107547-20
Date:
September 15, 2020

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


LEGEND

Taxpayer                 =   ----------------------------------------
Parent                   =   ----------------------------------------
Company A                =   ----------------------------------------
Company B                =   -------------------------
Company C                =   ------------------
Plant                    =   ----------------------------------------
Commission A             =   ----------------------------------------
Commission B             =   ----------------------------------------
Commission C             =   ----------------------------------------
Director                 =   ---------------------------------------
Order 1                  =   ----------------------------------------
Order 2                  =   ----------------------------------------
State A                  =   --------
State B                  =   ---------------
Location                 =   -----------------------------
Method                   =   ----------------------
Index                    =   -----------------------------------------
Date 1                   =   ------------------
Date 2                   =   ---------------------------
Date 3                   =   --------------------------
Date 4                   =   -------------------------
Date 5                   =   -------------------
Date 6                   =   ---------------------
Date 7                   =   ------------------
Date 8                   =   -------------------
Date 9                   =   ------------------
Date 10                  =   ---------------------
Year 1                   =   -------
Year 2                   =   -------
Year 3                   =   -------
Year 4                   =   -------
Year 5                   =   -------
Year 6                   =   -------
Year 7                   =   -------
Year 8                   =   -------
Year 9                   =   -------
Year 10                  =   -------
Year 11                  =   -------
a                        =   -----
b                        =   -------------
c                        =   ------
d                        =   ---
e                        =   ---
f                        =   -----------------
g                        =   -----------------
h                        =   -------------------
i                        =   ------
j                        =   ------
k                        =   ------
l                        =   ------
m                        =   ------
n                        =   ------
o                        =   ---------------

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

       This letter responds to your request, dated March 9, 2020, for a mandatory
revised schedule of ruling amounts under § 468A(d)(3) of the Internal Revenue Code
and § 1.468A-3(f)(1)(ii)(B) of the Treasury regulations. The Internal Revenue Service
(Service) has approved previous requests for a schedule of ruling amounts for the Plant,
most recently on Date 1. Taxpayer represents that, at this time this ruling request was
submitted, the facts were as follows:

                                     FACTS

      Taxpayer is engaged, through its disregarded regulated utility subsidiaries, in the
generation and purchase of electricity, and the distribution and sale of such electricity at
retail and wholesale. Taxpayer is a State A limited liability company that elected to be
treated as a corporation for federal income tax purposes. Taxpayer is a subsidiary of
Parent, which is the common parent of an affiliated group of corporations filing a
consolidated federal income tax return on a calendar year basis using the accrual
method of accounting. Taxpayer joined Parent's consolidated group on Date 2 and will
be included in its Year 1 consolidated federal income tax return beginning Date 2. Prior
to Date 2, Taxpayer was the common parent of an affiliated group of corporations filing
a consolidated federal income tax return on a calendar year basis using the accrual
method of accounting.

       Taxpayer maintains a nuclear decommissioning fund (Fund) for the Plant. The
Plant is a nuclear power plant situated near Location. Taxpayer acquired an undivided
qualifying interest of a percent in the Plant from Company A, effective Date 3. The
Service issued a ruling addressing the income tax treatment of the Fund transfer under
§ 1.468A-6.

       With respect to the decommissioning costs of the Plant included in the cost of
service, Taxpayer is subject to regulation by Commissions A, B, and C. Prior to the
transfer of the Plant to Taxpayer, Commissions A, B, and C determined the amount of
decommissioning costs for the Plant to be included in Company A's cost of service for
ratemaking purposes.

       In Order 1, issued on Date 4, Commission A authorized a decommissioning
revenue requirement of $b for Year 1 to fund contributions to the Fund. The Year 1
revenue requirement also contemplates revenue collections and additional contributions
to the Fund for Year 2 through Year 3. Order 1 applies to Taxpayer as the successor to
Company A.

        In Order 2, issued on Date 5, Commission B authorized collection of the c
percent annual wholesale portion of the decommissioning revenue requirement,
effective Date 6. Order 2 applies to Taxpayer as the successor to Company A.

        State B has enacted legislation exempting Commission A ratemaking orders
affecting residential customers in State B from separate approval proceedings through
Commission C.

       The operation, permanent shutdown, and decommissioning of the Plant are
subject to the jurisdiction of the Nuclear Regulatory Commission (NRC). The original
operating license for the Plant was issued by the NRC in Year 4 for d years of
operation, with expiration at midnight on Date 7. On Date 8, the NRC renewed the
Plant's operating license for an additional e years to Date 9.

       The proposed method of decommissioning the Plant is Method. The estimated
year in which substantial decommissioning costs will first be incurred is Year 3. The
estimated year in which the decommissioning of the Plant will be substantially complete
is Year 5.

       The estimated decommissioning costs are based on a study by Company B
prepared in Year 6 (Study). The Study was provided to Commission A and was used in
determining the decommissioning revenue requirement in Order 1. The total estimated
cost of decommissioning expressed in Year 6 dollars is $f. The total estimated cost of
decommissioning escalated to Year 1 dollars is $g. The total estimated cost of
decommissioning expressed in Year 3 dollars (the year decommissioning costs are first
expected to be incurred) is $h.

       Taxpayer's share of total and annual estimated costs of decommissioning
expressed in future dollars for each year from Year 3 to Year 5 were computed by
applying the cost escalation factors used in determining the decommissioning revenue
requirement in Order 1. The cost escalation factors were based on the Index, as
forecasted by Company C, and range from i percent to j percent (with the average rate
of k percent from Year 9 through Year 10 used for each year beginning in Year 11).
The assumed after-tax rates of return to be earned by the Fund assets are the rates
used in determining the decommissioning revenue requirement in Order 1, and are also
based on forecasts by Company C. The after-tax rates of return range from l percent to
m percent from Year 1 through Year 3, and then drop to n percent for each year
beginning after Year 3.

        The funding period began on Date 10 and ends in Year 3. The first taxable year
for which a deductible payment was made to the Fund was Year 7. Under § 1.468A-
3(c)(2)(i)(A), the taxable year that includes the date the Plant will no longer be included
in the rate base for ratemaking purposes, as of the first ratemaking proceeding, was
Year 8. Because the operating license of the Plant has been extended to Year 3,
Taxpayer elects to use Year 3 as the last year of the Plant's estimated useful life under
§ 1.468A-3(c)(2)(ii), and consistent with the last schedule of ruling amounts received for
the Plant.

                              LAW AND ANALYSIS

        Sections 468A(a) and 1.468A-1(a) provide that a taxpayer that elects to apply
§ 468A shall be allowed as a deduction for any taxable year the amount of cash
payments made by the taxpayer to a nuclear decommissioning fund during such taxable
year. Section 1.468A-1(b)(1) provides that an eligible taxpayer is a taxpayer that
possesses a qualifying interest in a nuclear power plant. Under § 1.468A-1(b)(2), the
definition of the term "qualifying interest" includes a direct ownership interest.

       Sections 468A(b) and 1.468A-2(b)(1) provide that the amount of payments made
(or deemed made) by a taxpayer to a nuclear decommissioning fund during any taxable
year shall not exceed the ruling amount applicable to such fund for such taxable year.
Under § 1.468A-8(a), the ruling amount limitation in § 468A(b) does not apply to a
special transfer permitted under § 1.468A-8.

       Section 468A(h) provides that a taxpayer shall be deemed to have made a
payment to a nuclear decommissioning fund on the last day of a taxable year if such
payment is made on account of such taxable year and is made within 2 ½ months after
the close of such taxable year.

        Section 468A(d)(1) provides that no deduction shall be allowed for any payment
to a nuclear decommissioning fund unless the taxpayer requests and receives from the
Secretary a schedule of ruling amounts. Section 468A(d)(2) provides that the term
"ruling amount" means, with respect to any taxable year, the amount which the
Secretary determines to be necessary to – (A) fund the total nuclear decommissioning
cost of a nuclear power plant over the estimated useful life of such plant, and (B)
prevent any excessive funding of such costs, or the 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(d)(3) provides that the Secretary shall at least once during
the useful life of the nuclear power plant (or more frequently, upon the request of the
taxpayer), review, and revise if necessary, the schedule of ruling amounts determined
under § 468A(d)(1).

       Section 1.468A-3(a)(1) provides that, in general, a schedule of ruling amounts for
a nuclear decommissioning fund is a ruling specifying the annual payments (ruling
amounts) that, over the taxable years remaining in the funding period as of the date the
schedule first applies, will result in a projected balance of such 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 such fund.

       Section 1.468A-3(a)(2) provides that each schedule of ruling amounts must be
consistent with the principles and provisions of § 1.468A-3 and must be based on
reasonable assumptions concerning – (i) The after-tax rate of return to be earned by the
assets of the nuclear decommissioning fund; (ii) The total estimated cost of
decommissioning the nuclear power plant; and (iii) The frequency of contributions to
such fund for a taxable year. Under § 1.468A-3(a)(3), the Service shall provide a
schedule of ruling amounts identical to the schedule proposed by the taxpayer, but no
schedule of ruling amounts shall be provided by the Service unless the taxpayer's
proposed schedule is consistent with the principles and provisions of § 1.468A-3 and is
based on reasonable assumptions.

       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 and provisions of § 1.468A-3 and is based on reasonable assumptions. If a
public utility commission established or approved the currently applicable rates for the
furnishing or sale by the taxpayer of electricity from the nuclear power 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.

       Section 1.468A-3(b)(1) provides that, in general, the ruling amount specified in a
schedule of ruling amounts for any taxable year in the funding period shall not be less
than the ruling amount specified in such schedule for any earlier taxable year.

       Section § 1.468A-3(c)(1) provides that the funding period for a nuclear
decommissioning fund is the period that – (i) Begins on the first day of the first taxable
year for which a deductible payment is made (or deemed made) to such fund; and (ii)
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 such fund relates.

       Under § 1.468A-3(c)(2)(i)(A), except as provided in § 1.468A-3(c)(2)(ii), the last
day of the estimated useful life of a nuclear power plant that has been included in the
rate base for ratemaking purposes in any ratemaking proceeding that established rates
for a period before January 1, 2006, is the date used in the first such ratemaking
proceeding as the estimated date on which such plant will no longer be included in the
taxpayer's rate base for ratemaking purposes.

       Under § 1.468A-3(c)(2)(i)(B), except as provided in § 1.468A-3(c)(2)(ii), the last
day of the estimated useful life of a nuclear power plant that is not described in
§ 1.468A-3(c)(2)(i)(A) is the last day of the estimated useful life of such plant
determined as of the date it is placed in service. Under § 1.468A-3(c)(2)(i)(C), except
as provided in § 1.468A-3(c)(2)(ii), a taxpayer with an interest in a plant that is not
described in § 1.468A-3(c)(2)(i)(A) may use any reasonable method for determining the
last day of such estimated useful life.

       Under § 1.468A-3(c)(2)(ii), if it can be established that the estimated useful life of
a nuclear power plant will end on a date other than the date determined under
§ 1.468A-3(c)(2)(i), the taxpayer may use such other date as the last day of the
estimated useful life but is not required to do so. If the last day of the estimated useful
life was determined under § 1.468A-3(c)(2)(i)(A) and the most recent ratemaking
proceeding used an alternative date as the estimated date on which a nuclear power
plant will no longer be included in the rate base, the most recent ratemaking proceeding
will generally be treated as establishing such alternative date as the last day of the
estimated useful life.

       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 to which the fund relates.

      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 deadline date (as defined in § 1.468A-
2(c)(1)) for such taxable year. Under § 1.468A-2(c)(1), the deemed payment deadline
date is the fifteenth day of the third calendar month after the close of any taxable year.

      Section 1.468A-3(e)(2) enumerates the information that must be contained in a
request for a schedule of ruling amounts.

       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), and 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 tenth 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 fifth taxable year that begins after the taxable
year in which the most recent schedule of ruling amounts was received.

       Section 1.468A-3(f)(1)(ii)(B) provides that any taxpayer that has determined its
ruling amount for any taxable year under a formula prescribed by § 1.468A-6 must file a
request for a revised schedule of ruling amounts on or before the deemed payment
deadline for its first taxable year that begins after the disposition.

       Section 1.468A-6(e)(2)(ii) provides that a transferee of a qualifying interest in a
nuclear power plant must file a request for a revised schedule of ruling amounts with
respect to that interest on or before the deemed payment deadline for the first taxable
year of the transferee beginning after the disposition.

        Section 1.468A-3(f)(2) provides that any taxpayer that has obtained a schedule
of ruling amounts pursuant to § 1.468A-3(e) can 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 will not provide a revised 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 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 facts as represented by Taxpayer on the date of the request, 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 owner of the Plant, has calculated its decommissioning costs
          under § 1.468A-3(d)(1).

       3. The proposed schedule of ruling amounts was derived by following the
          assumptions contained in a Study that Taxpayer has represented is a
          standard type used in the industry, and that was used by Commission A in
          determining the decommissioning revenue requirement in Order 1.

       4. 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 shall not exceed the ruling amount applicable to the
          Fund for such taxable year as provided by § 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

                  Years                                  Annual Ruling Amount
          Year 1 through Year 3                                   $o

        Except as specifically determined above, no opinion is expressed or implied
concerning the federal income tax consequences of the matters described above. In
particular, while we have approved the proposed schedule of ruling amounts based on
cost estimates contained in the Study, we make no ruling, express or implied, whether
any particular item contained in the Study constitutes a nuclear decommissioning cost
within the meaning of § 1.468A-1(b)(6). Additionally, if an event described in § 1.468A-
6(a) occurs during a taxable year to which this schedule of ruling amounts relates,
Taxpayer is limited to making payments to the Fund prior to the date of such event,
regardless of the amount approved in this schedule of ruling amounts.

       This ruling is directed only to the Taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent. In accordance with the power of
attorney on file with this office, copies of this letter ruling are being sent to your
authorized representatives. A copy of this letter ruling is also being sent 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 year in which
Taxpayer claims a deduction for payment to the Fund.


                                        Sincerely,



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



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