January 16, 2024 IRS rules that utility can adjust its amortization schedule under the normalization rules
In PLR 202402003, the IRS ruled that a public utility may reduce it amortization schedule for depreciation costs under the normalization rules after the remaining regulatory life of its public utility property (PUP) was recalculated. Facts Taxpayer is a regulated public utility that primarily transports and stores natural gas. Taxpayer uses an accrual method of accounting and reports on a calendar-year basis. Taxpayer determines transportation and storage rates, including depreciation costs, on a cost-of-service basis that is approved by Commission. The depreciation rates are based on depreciation studies, which are also used to estimate the remaining average life of the PUP. After enactment of the Tax Cuts and Jobs Act, Taxpayer adjusted its deferred income tax reserve to reflect the TCJA's reduction of the corporate income tax rate. Taxpayer then began amortizing the resulting excess deferred income tax (EDIT) over the remaining average life of the PUP using the Reverse South Georgia Method and the depreciation rates approved by Commission. Taxpayer's books and underlying records do not contain vintage account data, which track each year's asset additions separately for purposes of deferred tax reporting. After a rate case, Commission subsequently approved the use of new depreciation rates. The rate case settlement altered the expected remaining life of the assets and adjusted the amortization schedule to match the new average remaining life. The Taxpayer requested that the IRS consider the reduction of the remaining regulatory life of the PUP to be a normalization method of accounting. Law and analysis Under IRC Section 168(f)(2), the depreciation deduction determined under IRC Section 168 does not apply to any PUP if the taxpayer does not use a normalization method of accounting. To use a normalization method of accounting, the taxpayer must, under IRC Section 168(i)(9)(A)(i), use the same depreciation method in determining its tax expense for ratemaking and operations purposes. The method used may not be shorter in period than the method and period used to compute the taxpayer's depreciation expenses. Under TCJA Section 13001(d)(1), a taxpayer that computes its cost of service in ratemaking by reducing the excess tax reserve (ETR) more rapidly than under the average rate assumption method (ARAM) is not using the normalization method. Revenue Procedure 88-12 allows a taxpayer that does not have sufficient vintage account data to apply the ARAM to use the Reverse South Georgia Method. Under Section 13001(d)(2) of the TCJA, certain taxpayers may use an alternative method if a regulatory agency required them to compute PUP depreciation based on an average life or composite rate method, and their books and underlying records did not contain the vintage account data necessary to apply the average rate assumption method (because the asset additions are tracked separately). In that case, "the taxpayer will be treated as using a normalization method of accounting if, with respect to such jurisdiction, the taxpayer uses the alternative method for public utility property that is subject to the regulatory authority of that jurisdiction." The IRS concluded that Taxpayer may use the alternative method for PUP because its records do not have the vintage account data necessary to apply ARAM and that the Reverse South Georgia Method is allowed under IRC Section 13001(d)(2) of the TCJA. As a result, Taxpayer's reduction in the remaining regulatory life of its PUP complies with the normalization rules. Implications Taxpayers need to stay diligent with respect to the changes in depreciation rates that often occur around utility rate cases. Making sure the amortization of excess deferred taxes stays in sync with the book depreciation is key to avoiding any unintended tax normalization missteps.
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