Nuclear plant owner receives special-transfer deduction and revised funding schedules

Plain-English summary

A corporation with a direct interest in a closed nuclear power plant requested a deduction schedule for a special transfer to its qualified decommissioning fund and a mandatory revised schedule of annual ruling amounts. The decommissioning estimates came from two independent studies that had been used in state regulatory proceedings, and the plant's decommissioning was expected to finish in a redacted future year. The IRS found the proposed assumptions reasonable and approved a redacted special transfer and deduction for the first specified year. It also approved a redacted ruling amount for the following year, limiting fund payments to that amount. A smaller initial transfer would require a new deduction schedule for any later special transfer, and future triggering events would require another revised ruling schedule.

Ruling snapshot

• Question: What special-transfer deduction and annual funding amounts may the taxpayer use for the nuclear decommissioning fund?
• Outcome: Approved. The IRS issued a deduction schedule for one year and a revised ruling-amount schedule for the next.
• Key authorities: IRC § 468A(a), (b), (d), (f), (h); Treas. Reg. §§ 1.468A-1 through 1.468A-3, 1.468A-8

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201721010 Third Party Communication: None
Release Date: 5/26/2017 Date of Communication: Not Applicable
Index Number: 468A.04-01, 468A.04-02
Person To Contact:
------------------ -------------------------, ID No. -----------------
------------------------------------------------ -----------------------------------------------------
--------------------------------------------- Telephone Number:
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----------------------------- Refer Reply To:
------------------------------ CC:PSI:B06
PLR-134065-16
Date:
Re: ------------------------------------------- February 28, 2017

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

LEGEND:
Taxpayer = ---------------------------------------------------------------------------------
Plant = --------------------------
Location = -----------------------------
Commission = ----------------------------------------------------------------
Method = -----------
Independent Study 1 = ---------------------------------------------------------------------------------
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Independent Study 2 = ---------------------------------------------------------------------------------
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a = -----
b = -----------------
c = -----------------
d = ----
e = ------
f = -------
g = -------
h = -----------------
i = --
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------
Year 7 = -------
Date 1 = -------------------
Date 2 = ---------------------------
Order = ---------------------------------------------------------------------------------
----------------------------------------------------
PLR-134065-16 2

Fund = -------------------------------------------
Director = -------------------------------------------------------------------

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

    This letter responds to your request, dated October 21, 2016, for an initial

schedule of deduction amounts 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) of the Income Tax
Regulations.

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

follows:

   Taxpayer, a corporation, has a direct ownership interest of a percent in Plant, a

nuclear power plant located at Location. Plant ceased operations in Year 1. When
Plant was operating, its rates were subject to the regulatory jurisdiction of and approval
by Commission. Plant was originally issued an operating license, authorizing operation
of Plant until Year 3.

     The proposed method of decommissioning the Plant is Method. The estimated

base cost for decommissioning Plant is based on assumptions supported by
Independent Study 1 and Independent Study 2. In Year 4, as part of a rate case,
Commission reviewed and approved a decommissioning cost estimate supported by
Independent Study 1. On Date 1, Commission issued Order adopting Taxpayer’s rate
filing based on these estimates. On Date 2, Taxpayer submitted a filing to Commission
to revise its decommissioning cost estimate for Year 5 through Year 7 based upon
assumptions supported by Independent Study 2. Commission is expected to
substantially adopt Taxpayer’s rate filing based on these estimates. In addition, the cost
estimates related to the expense of storing spent fuel have been used in settlement
negotiations in litigation over the removal of the spent fuel and the settlement of that
litigation (using prior cost estimates) has been approved by the judge in that case. No
public utility commission currently authorizes Taxpayer to include decommissioning
costs in Taxpayer’s cost of service for ratemaking purposes.

   The estimated cost of $b (Year 5 dollars) was used as a base cost for

decommissioning the Plant. The estimated cost of decommissioning the Plant in future
dollars is $c. Substantial decommissioning costs were first incurred in Year 2 and it is
estimated that decommissioning will be substantially complete at the end of Year 7.
The methodology used to convert the Year 5 dollars to future dollars was by escalating
the estimated costs at an inflation rate of d percent to the year of estimated expenditure.
The assumed after-tax rate of return to be earned by the amount in the Fund is e
percent.
PLR-134065-16 3

   Regarding the request for a schedule of deduction amounts, Taxpayer

represents that the percentage of the total estimated costs qualifying for deduction in
the schedule of ruling amounts under prior law was f 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.

   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-134065-16 4

   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 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
PLR-134065-16 5

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
temporary 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
PLR-134065-16 6

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-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 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-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.
PLR-134065-16 7

   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 transferee’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.

    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 f
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 g 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.
PLR-134065-16 8

   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 $h 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 the Taxpayer is permitted to make a special transfer of $h and may
deduct the amount contributed in Year 5, as set forth below.

                       SCHEDULE OF DEDUCTION AMOUNTS

               Year                                    Deduction Amount
              Year 5                                          $h

   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
market value of the property transferred or the basis of the property in the hands of the
Taxpayer immediately prior to the transfer unless the 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 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.

PLR-134065-16 9

   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 Independent Study 1 and Independent Study 2.
      The underlying assumptions for both Independent Study 1 and Independent
      Study 2 were used by Commission 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.

   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.

  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

               Year                                      Ruling Amount
              Year 6                                           $i

   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.
PLR-134065-16 10

   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 whether the either Independent Study conforms
to industry standards and practices.

   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 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 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 the Associate Chief Counsel
                                        (Passthroughs & Special Industries)

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