23 December 2019 Utility did not violate normalization rules in using pro rata formula to adjust rate base In PLR 201949006 , the IRS ruled that a utility did not violate the normalization rules by using the pro rata formula under Treas. Reg. Section 1.167(l)-1(h)(6)(ii) to calculate the accumulated deferred federal and state income tax (ADIT) balances in adjusting its rate base. In addition, relative to the utility’s base rate computation, not including an adjustment for deferred taxes in the forecasted incremental cost component of the rate base in the formula rate year also does not violate the normalization rules. Taxpayer supplies and distributes electricity. Taxpayer’s rates and conditions of service are regulated by Commission A and Commission B. Taxpayer files annual revenue requirement updates with Commission A to establish rates for its regulated transmission-related activities. ADIT balances are used to adjust the Commission A rate base in the computation of the prior-year transmission revenue requirement and the true-up adjustment (the difference between the revenue requirement based on actual costs incurred by Taxpayer in the prior year and the actual revenue received by Taxpayer during the prior year). The base transmission revenue requirement consists of the prior-year transmission revenue requirement plus the incremental forecast period transmission revenue requirement. Only deferred balances related to the prior year-end balances are used, and no deferred balance related to the forecasted period are considered. As such, no proration of these deferred balances is applied. The true-up adjustment compares actual to estimated amounts and applies proration to the applicable deferred tax balances. Taxpayer typically files a general rate case application with Commission B every three years to establish rates for a future three-year period for its state-regulated distribution, transmission, and generation-related business activities. In establishing its rates, Taxpayer uses its most recent calendar-year recorded costs as its starting point and forecasts annual costs and related revenue requirements for the subsequent five calendar years. ADIT balances are used to adjust the Commission B rate base in the computation of the general rate case revenue requirement. To calculate the ADIT adjustment to forecast the test-year rate base, the forecasted ADIT balance at the beginning of the test year is added to the product of the change in ADIT occurring in the test year, multiplied by the pro rata percentage. The pro rata percentage is equivalent to the 13-month average of the resulting pro rata computation of the change in ADIT occurring in the test year, as described in Treas. Reg. Section 1.167(l)-1(h)(6)(ii). Treas. Reg. Section 1.167(l)-1(h)(6)(ii) describes the pro rata methodology used in calculating the ADIT component of rate base. Under that methodology, the taxpayer’s computation determines the maximum amount of the reserve to exclude from the rate base (or to include as no-cost capital) under Treas. Reg. Section 1.167(l)-1(h)(6)(i). If solely an historical period is used to determine depreciation for federal income tax expense for ratemaking purposes, then the amount of the reserve account for the period equals the amount of the reserve (determined under § 1.167(l)-1(h)(2)) at the end of the historical period. If solely a future period is used for this determination, the amount of the reserve account for the period equals (i) the amount of the reserve at the beginning of the period, and (ii) a pro rata portion of the amount of any projected increase to be credited, or decrease to be charged, to the account during that period. Taxpayer did not violate the normalization rules by not adjusting the ADIT for the forecasted period. The IRS also concluded that the normalization rule is a maximum-allowed rule, so the ADIT would still be under the maximum allowed and therefore conform to the normalization rules if the amounts from a forecasted period were not added. Taxpayer did not violate the normalization rules by adjusting the rate base by the pro rata computation of ADIT in the true-up adjustment. Comment: As the true-up formula does not represent a future test period, this adjustment method is not required. Taxpayer chose to use the proration formula, and there is nothing that would prevent a taxpayer from using this methodology even when not required. The IRS conclusion confirms that the taxpayer’s choice to apply the pro rata computation of ADIT for the true-up calculation was acceptable. Taxpayer did not violate the normalization rules by computing the rate base adjustment in its true-up adjustment without applying the regulatory 13-month averaging convention to the pro rata portion of ADIT subject to the normalization rules. The same ruling applied to Taxpayer’s computation of the rate base adjustment in its general rate-case test year. Comment: Rulings 3 and 5 repeat other rulings saying taxpayers that use a pro rata formula for ADITs do not need to also average to be “consistent.” Taxpayer did not violate the normalization rules by applying a pro rata percentage to the increase or decrease in ADIT during the forecasted years. Comment: Taxpayer’s use of a pro rata percentage must mean that the computation of this pro rata percentage gives an answer no greater than if Taxpayer had used the proration formula as described in Treas. Reg. Section 1.167(l)-1(h)(6)(ii). It is possible that it is exactly the same, just different math and therefore accomplishes the goal of the proration formula. The themes in the IRS’s rulings may provide clarity to taxpayers in applying the normalization rules to their regulatory filings.
Document ID: 2019-2278 | |||||||||||