IRS approves revised nuclear decommissioning fund schedule

Plain-English summary

The owner of a permanently closed nuclear power plant requested a revised schedule of ruling amounts for deductible contributions to its qualified nuclear decommissioning fund. Based on the taxpayer’s industry-standard cost study and representations, the IRS found that the taxpayer had a qualifying interest, used reasonable assumptions, and met its burden under section 468A. The IRS approved the proposed revised schedule, subject to contribution limits, future revision requirements, and no ruling on whether individual study items were qualifying decommissioning costs.

Ruling snapshot

• Question: Does the proposed revised schedule of ruling amounts for a nuclear decommissioning fund satisfy section 468A?
• Outcome: approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1 through 1.468A-3, 1.468A-6, 1.468A-7

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202014013 Third Party Communication: None
Release Date: 4/3/2020 Date of Communication: Not Applicable
Index Number: 468A.04-02
Person To Contact:
-------------------------------------- ------------------------------, ID No. ------------
--------------------------------------------------- -----------------
--------------------------- Telephone Number:
----------------------------------- --------------------
Refer Reply To:
In Re: Revised Schedule of Ruling Amounts CC:PSI:B06
PLR-116801-19
Date:
January 03, 2020

LEGEND:

Taxpayer = ---------------------------------------------------------------------------------

Parent = ----------------------------------------------------
Operator = --------------------------------------------
Plant = ----------------------------------------
Location = ----------------------------------
Commission = ----------------------------------------------------------------
Study = ---------------------------------------------------------------------------------

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

Method = --------------
Date 1 = -----------------------
Date 2 = ------------------
Date 3 = ------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
a = ---------------------
b = ----
c = ----------------------
d = ------
e = ------------------
Director = --------------------------------------
Fund = -------------------------------------------------------

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

This letter responds to your request, dated July 16, 2019, for an elective revised
schedule of ruling amounts under § 468A(d)(3) of the Internal Revenue Code and
PLR-116801-19 2

§ 1.468A-3(f)(2) of the Income Tax Regulations. Taxpayer was previously granted
revised schedules of ruling amounts, most recently on Date 1.

  Taxpayer represents that, at the time this private letter ruling request was

submitted, the facts were as follows:

    Taxpayer is an indirect wholly-owned subsidiary of Parent and a member of

Parent’s affiliated group of corporations that files a consolidated federal income tax
return on a calendar year basis using the accrual method of accounting. Taxpayer is
engaged in the generation of electricity produced by the Plant and the sale of that
electricity at wholesale.

   Taxpayer is the sole owner of the Plant, which is situated at Location. The Plant

is operated by Operator, a corporate affiliate of Taxpayer.

    Taxpayer and the Plant are not subject to the retail ratemaking jurisdiction of any

regulator. Taxpayer sells power generated by the Plant at market rates or to customers
under negotiated power purchase agreements. Taxpayer and the Plant are subject to
the jurisdiction of the Commission with regard to wholesale rates for power sales.

   The operation, permanent shutdown, and decommissioning of the Plant are

subject to the jurisdiction of the Nuclear Regulatory Commission (NRC). The Plant is
authorized to continue operations under a renewed license, issued by the NRC, which
expires on Date 3. However, the Plant permanently ceased operations on Date 2.

    The estimated decommissioning costs for the Plant are based on the Study and

the proposed method for decommissioning is Method. Based upon the assumptions
derived from the Study, it is estimated the total cost of decommissioning the Plant is
estimated to be a (in Year 1 dollars). The base cost for decommissioning the Plant was
escalated at a rate of b percent annually, resulting in an estimated future cost of
decommissioning the Plant of c (in Year 1 to Year 3 dollars). The assumed after-tax
rate of return the assets of the Fund will earn is d percent. Substantial
decommissioning costs for the Plant were first incurred in Year 1 and it is estimated that
decommissioning will be substantially complete in Year 3.

   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,
PLR-116801-19 3

decommissioning cost 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 such costs at a rate more rapid than level funding, taking into account
discount rates as the Secretary deems appropriate.

   Section 468A(h) provides that a taxpayer shall be deemed to have made a

payment to the nuclear decommissioning fund on the last day of a taxable year if the
payment is made on account of such taxable year and is made within 2½ months after
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 cost under § 468A. An “eligible taxpayer,” as defined under
§ 1.468A-1(b)(1), is a taxpayer that has a “qualifying interest” in any portion of a nuclear
power plant. As provided by § 1.468A-1(b)(2)(i), a qualifying interest means, 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 amount 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 amount must be based on
reasonable assumptions concerning the after-tax rate of return to be earned by the
assets of the qualified nuclear decommissioning fund, the total estimated cost of
decommissioning the nuclear power plant, and the frequency of contributions to a
nuclear decommission 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
PLR-116801-19 4

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
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 may be given less weight if they are out
of date or were developed in a proceeding for a different taxpayer. The use of other
industry standards, such as the assumptions underlying the taxpayer’s most recent
financial assurance filing with the NRC, are described by the regulations as an
alternative means of demonstrating 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 power 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 place in service. Under § 1.468A-3(c)(2)(i)(C),
any reasonable method may be used in determining the useful life of a nuclear plant
that is not described in § 1.468A-3(c)(2)(i)(A). Section 1.468A-3(c)(2)(ii) provides that if
PLR-116801-19 5

it can be established that the estimated useful life of a the 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.
Section 1.468A-3(e) provides the rules regarding the manner of requesting
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-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)(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 rulings 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 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 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. 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-116801-19 6

4) 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 the regulations and is based on reasonable assumptions.

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 requirement of § 468A. We have
approved the following revised schedule of ruling amounts.

               APPROVED SCHEDULE OF RULING AMOUNTS

                Year                                       Amount
               Year 2                                        e

   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 request on or before the deemed
payment deadline date for the first taxable year in which rate 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. 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.

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

concerning the federal income tax consequences of the transaction 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, expressed or implied,
whether any particular item contained in that 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, the 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)

of the Code provides it may not be used or cited as precedent. In accordance with the
power of attorney on file with this office, a copy of this letter is being sent to your
authorized representatives. We are also sending a copy of this letter to the Director.
PLR-116801-19 7

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 payment to the Fund.

                                            Sincerely yours,



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

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