Utility received nuclear decommissioning fund schedules

Plain-English summary

An investor-owned utility requested a deduction schedule for a special transfer to its qualified nuclear decommissioning fund and a revised schedule of annual ruling amounts. The utility owned a redacted percentage of a nuclear plant with an extended operating license and based its decommissioning estimates on studies used by state regulators. The IRS concluded that the proposed special transfer and deduction were consistent with section 468A and approved the stated deduction amount. It also found that the utility had a qualifying ownership interest, used reasonable assumptions, and properly calculated its share of decommissioning costs. The IRS therefore approved revised annual contribution limits for the fund and explained when another revised schedule would be required.

Ruling snapshot

• Question: Could the utility make and deduct a proposed special transfer to its nuclear decommissioning fund, and use its proposed revised annual ruling amounts?
• Outcome: Approved.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, 1.468A-3, 1.468A-7, and 1.468A-8.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201644013 Third Party Communication: None
Release Date: 10/28/2016 Date of Communication: Not Applicable
Index Number: 468A.00-00
Person To Contact:
-------------------- -----------------------, ID No. -------------------
----------------------------------------------------- ---------------------------------------------------
--------------------- Telephone Number:
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-------------------------------------- Refer Reply To:
CC:PSI:B06
PLR-108497-16
Date:
July 21, 2016

LEGEND:

Taxpayer = -------------------------------------------------------------------------------------
Parent = -----------------------------------------------
Plant = -----------------------------------------------------------------
Location = --------------------------------------------------
State 1 = --------------
State 2 = --------------
State 3 = ------------
State 4 = -----------------
State 5 = ------------------
Commission A = --------------------------------------------------------------
Commission B = --------------------------------------------------------------------
Commission C = ---------------------------------------------------------------------
Commission D = ------------------------------------------------------------------
Commission E = ----------------------------------------------------------------
Order = --------------------------------------------------------------------------------------
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---------------------------
Recent Study = -----------------------------------------------------------------------
Prior Study = ----------------------------------------------------------------------
Method = -----------
Date 1 = ---------------------
a = -----------
b = ---------
c = ---------
d = -----------
e = --
f = ----------------
g = -------------------
h = ------
i = ------
 2

j = ------
k = ------
l = -----------
m = -----------
n = -----------
o = -----------
p = -----------
q = -------------
r = -------------
x = -----
y = ---
z = ---
aa = -------
bb = -------
cc = ------------------------------------
dd = -------------------------------------
ee = ----------------
ff = ----------------
gg = ----------------
hh = ----------------
ii = ---------------
Year 1 = ------
Year 2 = --------
Year 3 = ------
Year 4 = ------
Year 5 = ------
Year 6 = ------
Fund = ----

Director =-----------------------------------------------------------

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

  This letter responds to your request, dated March 7, 2016, for a schedule of

deduction amounts and a revised schedule of ruling amounts pursuant to section
468A(f) of the Internal Revenue Code and § 1.468A-8 of the Income Tax Regulations.
You also provided additional information by letter dated May 11, 2016. Taxpayer was
previously granted schedules of ruling amounts, most recently on May 11, 2004, and
Taxpayer was granted a schedule of deduction amounts on July 9, 2008. Information
was submitted pursuant to § 1.468A-3(e)(2).

  Taxpayer represents the facts and information relating to its request for a

schedule of deduction amounts and request for a schedule of ruling amounts as follows:
PLR-108497-16 3

     Taxpayer is an investor-owned utility incorporated in State 1. Taxpayer, along

with an affiliate incorporated in State 2, is engaged in the operation of an electric public
utility system involving the generation, transmission, distribution and sale of electric
energy and the distribution and sale of natural gas in State 3, State 1, State 4, State 5,
and State 2. Taxpayer files a consolidated federal income tax return with its Parent on
a calendar-year basis using the accrual method of accounting. Taxpayer is under the
audit jurisdiction of the Industry Director.

   Taxpayer owns x percent of Plant. The Plant is situated at Location. The Plant’s

operating license was extended by the Nuclear Regulatory Commission and expires in
Year 4. With respect to the decommissioning costs related to the Plant which are
included in the Taxpayer’s cost of service for ratemaking purposes, the Taxpayer is
subject to regulation by Commission A (a percent), Commission B (b percent),
Commission C (c percent), Commission D (d percent), and Commission E (e percent).

    Commission A, in Order dated Date 1, approved the Taxpayer’s estimated

decommissioning costs to be included in Taxpayer’s cost of service for ratemaking
purposes following Commission A’s mandatory periodic review of Taxpayer’s
decommissioning costs. The Order approves, and relies upon assumptions provided in,
the Recent Study, which takes the extension of the operating license of Plant into
account. These costs, as well as those in Prior Study, have been incorporated into the
cost of service by Commission A and Commission D. Taxpayer’s decommissioning
costs incorporated into its cost of service by Commission B and Commission C are
based on Prior Study. The proposed method of decommissioning under both studies
for the Plant is Method.

    The total estimated cost of $f (in Year 1 dollars) was used as a base cost for

decommissioning the Plant. The total estimated future cost of decommissioning the
Plant is $g (in future dollars). It is estimated that substantial decommissioning costs will
first be incurred in Year 4 and that decommissioning will be substantially complete at
the end of Year 5. The methodology used to convert the Year 1 dollars to future dollars
was by escalating the estimated costs, taking into account estimates of inflation and
escalation, at a rate of h percent for those costs related to operations and radiological
categories and i percent for those costs related to storage of spent fuel and site
restoration. The assumed after-tax rate of return to be earned by the amount collected
for decommissioning is j percent through Year 4 and is k percent thereafter.

    In the prior schedule of ruling amounts, issued under section 468A of the Code

as in effect prior to 2006, the estimated useful life of the Plant is y years, and the
estimated period for which the Fund is to be in effect is z years. Thus, the percentage
of the total estimated costs qualifying for deduction in the schedule of ruling amounts
under prior law was aa percent for Commissions A, C, and E, and bb percent for
Commissions B and D. By letter dated July 9, 2008, the Service granted Taxpayer a
PLR-108497-16 4

schedule of deduction amounts, allowing Taxpayer to make a special transfer of $cc to
the Fund.

   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 section 468A.
The Act amendment of section 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.

   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.
PLR-108497-16 5

   Section 1.468A-1(a) provides that an eligible taxpayer may elect to deduct

nuclear decommissioning costs under § 468A of the Code. An “eligible taxpayer,” as
defined under § 1.468A-1(b)(1) of the regulations, 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 shall be based on
reasonable assumptions concerning the after-tax rate of return to be earned by the
amounts collected for decommissioning, the total estimated cost of decommissioning
the nuclear plant, and the frequency of contributions to a nuclear decommissioning fund
for a taxable year. Under § 1.468A-3(a)(3), the Internal Revenue Service shall provide
a schedule of ruling amounts identical to the schedule proposed by the taxpayer, but no
such schedule shall be provided by the Service unless the taxpayer’s proposed
schedule is consistent with the principles and provisions of that section.

    Section 1.468A-3(a)(4) provides that the taxpayer bears the burden of

demonstrating that the proposed schedule of ruling amounts is consistent with the
principles of the regulations and that it is based on reasonable assumptions. That
section also provides additional guidance regarding how the Service will determine
whether a proposed schedule of ruling amounts is based on reasonable assumptions.
For example, if a public utility commission established or approved the currently
applicable rates for the furnishing or sale by the taxpayer of electricity from the plant,
the taxpayer can generally satisfy this burden of proof by demonstrating that the
schedule of ruling amounts is calculated using the assumptions used by the public utility
commission in its most recent order. In addition, a taxpayer that owns an interest in a
deregulated nuclear 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
PLR-108497-16 6

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. 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 plant will no longer be included in the taxpayer’s rate base is
the end of the estimated useful life of the nuclear plant. Section 1.468A-3(c)(2)(i)(B)
provides that, if the nuclear plant is not described in § 1.468A-3(c)(2)(i)(A), the last day
of the estimated useful life of the nuclear plant is determined as of the date the plant is
placed in service. Under § 1.468A-3(c)(2)(i)(C), any reasonable method may be used in
determining the estimated useful life of a nuclear power plant that is not described in
§ 1.468A-3(c)(2)(i)(A).

   Section 1.468A-3(d)(1) provides that the amount of decommissioning costs

allocable to a nuclear decommissioning fund is the taxpayer’s share of the total
estimated cost of decommissioning the nuclear power plant. Section 1.468A-3(d)(3)
provides that a taxpayer’s share of the total estimated cost of decommissioning a
nuclear power plant equals the total estimated cost of decommissioning such plant
multiplied by the taxpayer’s qualifying interest in the plant.

   Section 1.468A-3(e) provides the rules regarding the manner of requesting a

schedule of ruling amounts. Section 1.468A-3(e)(1)(v) provides that the Service will not
provide or revise a ruling amount applicable to a taxable year in response to a request
for a schedule of ruling amounts that is filed after the deemed payment date (as defined
in § 1.468A-2(c)(1)) for such taxable year.

  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.
PLR-108497-16 7

   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 request a revised schedule of ruling amounts for the fund if the taxpayer
requests a schedule of deduction amounts. 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 Internal
Revenue 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.

    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-2006
nonqualifying percentage of the estimated future costs of decommissioning the nuclear
plant that was disallowed under section 468A prior to the Act.

    Section 1.468A-8(a)(2) defines the pre-2005 nonqualifying 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 section 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.

   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.
Under § 1.468A-8(b)(4), 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 transferee’s basis in that property immediately prior to the
special transfer.
PLR-108497-16 8

    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.

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

were limited to the lesser of (1) the amount necessary found 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 to
Commissions A, C, and E jurisdictions, aa percent of the amounts necessary to fully
decommission its share of the Plant and to Commissions B and D jurisdictions, bb
percent. 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.

    Taxpayer made a special transfer to Fund of $dd, pursuant to the letter from the

Service dated July 9, 2008. Under the provisions of § 468A(f), Taxpayer was permitted
to make a special transfer of $cc (in Year 2 dollars) at that time to fully make up for the
pre-1984 amount that was denied under the law prior to the Act. The amount of $dd is
ee percent of $cc. Taxpayer now proposes to make a special transfer of the remaining
ff percent of the special deduction allowed by the Service in the July 9, 2008, ruling.
Escalating $dd to Year 1 dollars is accomplished by multiplying $dd by an escalating
factor of gg, the same factor representing the escalation of total estimated
decommissioning costs between Year 2 and Year 1 dollars. The amount that Taxpayer
is allowed to contribute to the Fund as a special transfer is $hh. Taxpayer has
requested that it be allowed to contribute to the Fund as a special transfer in Year 3 is
$ii.

   We have examined the representations and information submitted by the

Taxpayer in relation to the requirements set forth in § 468A and the regulations
thereunder. We find that Taxpayer’s proposal to contribute $ii to the Fund and to
deduct the amount transferred is consistent with the principles and provisions of section
468A and the regulations thereunder. Based solely upon these representations of the
facts, we conclude that the Taxpayer is permitted to make a special transfer of $ii.
Under § 1.468A-8(a)(3), a taxpayer must take any prior special transfers into account in
calculating the pre-2005 qualifying percentage.
PLR-108497-16 9

                         SCHEDULE OF DEDUCTION AMOUNTS

YEAR DEDUCTION AMOUNT

Year 3 $ii

   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 transfer is the lesser of the fair market
value of the property transferred or the basis of the property in the hands of the
Taxpayer immediately prior to the transfer. In addition, because Taxpayer has elected
to make a special transfer of less than the $hh permitted, Taxpayer is entitled to make
an additional special transfer of the difference between the amount permitted to be
transferred and the amount transferred. To make an additional special transfer,
Taxpayer must request an additional schedule of deductions. Such request must take
the prior schedule of deductions into account in calculating the permissible amount of
the special transfer.

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

amounts, we have examined the representations and information submitted by the
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 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 Recent Study and Prior Study that have been
        considered and approved by Commission A. The underlying assumptions
        were used by Commission A to calculate the amount of decommissioning
        costs to be included in Taxpayer’s cost of service for ratemaking purposes.
        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-108497-16 10

    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.

  Based solely on the determinations above, we conclude that the Taxpayer’s

proposed schedule of ruling amounts satisfies the requirements of § 468A of the Code.
We have approved the following revised schedule of ruling amounts.

                   APPROVED SCHEDULE OF RULING AMOUNTS

Years Commission A Commission D Commission C Totals

Year 3 $l $n $p $q
Each Year,
Year 6- Year 4 $m $o $p $r

   If any of the events described in § 1.468A-3(f)(1) occur in future years, the

Taxpayer must request a review and revision of the schedule of ruling amounts.
Generally, the Taxpayer is required to file such a request on or before the deemed
payment deadline date for the first taxable year in which the rates reflecting such action
became effective. When no such event occurs, the Taxpayer must file a request for a
revised schedule of ruling amounts on or before the deemed payment deadline of the
tenth taxable year following the close of the tax year in which this schedule of ruling
amounts is received.

  Except as specifically determined above, no opinion is expressed or implied

concerning the Federal income tax consequences of the transaction described above.
PLR-108497-16 11

   This ruling is directed only to the 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 the
Taxpayer. 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 the Taxpayer’s federal income tax return for each tax year in which the
Taxpayer claims a deduction for payments made to the Fund.

                                 Sincerely,



                                 Peter C. Friedman
                                 Senior Technician Reviewer, Branch 6
                                 Office of Associate Chief Counsel
                                 (Passthroughs & Special Industries)

cc: