Decommissioning unit receives revised nuclear fund schedule

Plain-English summary

A taxpayer indirectly owned a nuclear unit that had begun incurring decommissioning costs and requested an elective revised schedule of contributions to its qualified nuclear decommissioning fund. The revised estimate came from an independent study adjusted for changed decommissioning facts. The IRS found that the taxpayer had a qualifying interest, properly calculated its share of costs, and supported the proposed schedule with reasonable assumptions. It approved the revised ruling amount for the specified year, with the amount redacted in the public release, while retaining the existing mandatory review date and prohibiting contributions after an applicable deemed-payment deadline.

Ruling snapshot

• Question: Does the proposed revised nuclear decommissioning fund schedule satisfy Section 468A?
• Outcome: Approved, subject to the contribution timing and future review rules.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1 through 1.468A-3 and 1.468A-7

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202111006
Third Party Communication: None
Release Date: 3/19/2021
Date of Communication: Not Applicable
Index Number: 468A.04-02
Person To Contact:
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--------------- ID No. ------------
Telephone Number:
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-------------------------------------------- Refer Reply To:
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CC:PSI:B06
----------------------------------------- PLR-114089-20 Date:
December 17, 2020

Re: ---------------------------------------------------------
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LEGEND:

Taxpayer = --------------------------------------------------------------
Company A = ----------------------------------------------------
Company B = -----------------------------
Unit = ----------------------------------------------
Commission A = -------------------------------------------
Commission B = --------------------------------------------------
State A = -------------
State B = -------------
Plant = ------------------------------------
Location = ------------------------------------------------------------------------
------
Independent Study = ------------------------------------------------------------------------
---------------------------------------
Method = --------------
BA = -----------------
FV = -------------------
a = -----
b = ------------------
c = ------
d = ------
Year A = -------
Year B = -------
Year C = -------
Year D = -------
Amount = -----------------
Director = ---------------------------------------
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Dear --------------:

This letter responds to your request, dated June 12, 2020, for an elective revised schedule of rulings amounts under § 468A(d)(3) of the Internal Revenue Code (Code) and § 1.468A-3(f)(2) of the Income Tax Regulations.

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

Taxpayer is a limited liability company formed under State A law and is indirectly wholly- owned by Company A. Taxpayer is not a member of any consolidated group and files its separate tax return on a calendar year basis using the accrual method of accounting.

Taxpayer through its wholly-owned disregarded subsidiary, Company B, owns the Unit which is located at Location. The Unit is subject to the regulatory jurisdiction of Commission A and Commission B. Since Year A, the Unit has since been maintained in Method. The proposed decommissioning method for the Unit is Method.

Taxpayer purchased the Unit in Year B along with a% of the rights in the master decommissioning trust for the Unit which included both a qualified fund (the Fund) and a nonqualified decommissioning fund. Taxpayer previously contributed $b to the Fund as provided in a schedule of ruling amounts issued by the Service.

Taxpayer has based this request for a revised schedule of ruling amounts on a revised decommissioning cost estimated based on Independent Study.

Taxpayer’s revised decommissioning cost estimate is $BA (Year C dollars) The estimated cost of decommissioning a% of the Unit in future dollars is $FV. The unit has already started incurring decommissioning costs and the decommissioning will be substantially complete at the end of Year D. The methodology used to convert the Year C dollars to future dollars was by escalating the estimated costs at an inflation rate of c% to the year of estimated expenditure. The assumed after-tax rate of return to be earned by the amount collected for decommissioning is d%.

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
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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 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 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
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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 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.
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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(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)(1) provides, in part, 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 10 th taxable year that begins after the taxable year in which the most recent schedule of ruling amounts was received. 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 the representations of the facts, we reach the following conclusions:

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.

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

Taxpayer has calculated its share of the total decommissioning costs under § 1.468A- 3(d)(3) of the regulations.
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The proposed schedule of ruling amounts was derived by following the assumptions contained in Independent Study after adjustments were made to reflect changed facts regarding decommissioning of the Unit. The Independent Study projected the fund balance will be equal to (and in no event greater than) the amount of decommissioning costs allocable to the Fund. 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.

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 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. The mandatory review date for this matter remains the same.

APPROVED SCHEDULE OF RULING AMOUNTS

Year
Ruling Amount

Year C
$Amount

As noted above, § 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 and that such 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. We have approved the revised schedule of ruling amounts as set forth above. However, pursuant to § 468A(h), Taxpayer is not permitted to contribute these additional amounts to the Fund if the deemed payment deadline has passed for a particular year.

If any of the events described in § 1.463A-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. 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.
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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 the Associate Chief Counsel
(Passthroughs & Special Industries)

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