Revised nuclear decommissioning fund contribution schedule approved

Plain-English summary

A holding company owned a nuclear power plant and its qualified decommissioning fund through a disregarded subsidiary. It requested a revised schedule limiting annual deductible contributions to the fund, using decommissioning costs and assumptions from an independent study accepted by the utility commission. The IRS found that the taxpayer had a qualifying interest, calculated its share of costs properly, and supported the proposed amounts with reasonable assumptions. It approved the revised schedule for the specified years, subject to the payment deadlines and future review rules under section 468A. The ruling also requires the taxpayer to attach a copy to each return claiming a deduction for fund payments.

Ruling snapshot

• Question: May the taxpayer use its proposed revised schedule of ruling amounts for contributions to a qualified nuclear decommissioning fund?
• Outcome: approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, 1.468A-3, 1.468A-7

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202016016                                              Third Party Communication:
Release Date: 4/17/2020                                        Date of Communication: Not Applicable
Index Number: 468A.04-02                                       Person To Contact:
                                                               ---------------, ID No. ------------
------------------------                                       Telephone Number:
----------------------------------------------                 --------------------
--------------------------                                     Refer Reply To:
------------------------------                                 CC:PSI:B06
----------------------                                         PLR-121650-19
--------------------------------                               Date:
                                                               January 9, 2020
In Re: Elective Revised Schedule of Rulings
Amounts Under § 468A(d)(3)

LEGEND:
Taxpayer                   =        ---------------------------------------------------
Company A                  =        ---------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Company B                  =        ----------------------------------------------------------
Plant                      =        ----------------------------------------------------------------
Location                   =        ----------------------------------------------
Independent Study          =        ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Method                     =        --------------------------
Commission                 =        ----------------------------------------------------
Amount                     =        ---------------
Year A                     =        -------
Year B                     =        ------
Year C                     =        -------
Year D                     =        -------
Year E                     =        -------
Year F                     =        -------
BA                         =        ------------------
FV                         =        ------------------
X                          =        ------
Y                          =        ------
P                          =        -----
Director                   =        --------------------------------------

PLR-121650-19                                   2

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

This letter responds to your request, dated ---------------------------, 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 for rulings as
follows:

Taxpayer is a holding company and the sole member of Company A, a single member
limited liability company that is disregarded for federal income tax purposes. Company
A is the legal owner of Plant which is located at Location. Under Federal tax law,
Taxpayer is treated as the owner of Plant and the Qualified Decommissioning Fund
(Fund) established to provide for the costs of decommissioning Plant.

Company B, a wholly-owned subsidiary of Taxpayer and the former owner of the Plant,
is authorized to collect funds for decommissioning the Plant through regulated rates.
Funds collected by Company B are remitted to Company A and deposited into the
Fund. The amounts collected from ratepayers are subject to the approval of
Commission.

Taxpayer has a direct ownership interest of P percent in Plant. The estimated base
cost for decommissioning Plant is based on an Independent Study and the proposed
method of decommissioning the Plant is Method. Company B filed a request with
Commission for a rate adjustment to its nuclear decommissioning cost adjustment with
respect to Plant based on the information included in the Independent Study. The
Commission accepted this material when filed. Taxpayer has based this request for a
revised schedule of ruling amounts on the Independent Study.

The estimated cost of $BA (Year A dollars) was used as a base cost for
decommissioning P percent of the Plant. The estimated cost of decommissioning P
percent of the Plant in future dollars is $FV. It is estimated that substantial
decommissioning costs will first be incurred in Year B and that decommissioning will be
substantially complete at the end of Year C. The methodology used to convert the Year
A dollars to future dollars was by escalating the estimated costs at an inflation rate of X
percent to the year of estimated expenditure. The assumed after-tax rate of return to be
earned by the amount collected for decommissioning is Y 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

PLR-121650-19                              3

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
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.

PLR-121650-19                                 4

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 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

PLR-121650-19                                 5

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.

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 10th 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:

       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-121650-19                               6

      3. Taxpayer 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 an independent decommissioning study. The
         Independent Study was accepted by Commission and used as part of the
         basis for determining what amounts Company B is allowed to collect from
         ratepayers for the decommissioning of Plant. 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.

      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
                  Years                      Ruling Amount

       Each Year, Year E - Year F                            $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

PLR-121650-19                                7

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.

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
                                                 (Passthroughs & Special Industries)