On December 17, 2021, the IRS released Private Letter Ruling 202150003 where it concluded that a Taxpayer would not violate the normalization rules if it ratably amortized its Protected EDIT (defined below) pursuant to an updated depreciation study. Normalization is, of course, required under section 168(i)(9) in order for public utilities to use accelerated depreciation.
Under the facts of the ruling, Parent provides natural gas and liquids transportation services. Subsidiary Corporation owns and operates a portfolio of natural gas-related energy assets that provide transmission, storage, gathering, distribution, and processing services. Taxpayer is a disregarded subsidiary of Corporation that is a public utility for purposes of the Tax Cuts and Jobs Act (TCJA).
The public utility commission sets the Taxpayer’s rates, including the applicable rates of depreciation. For book purposes, Taxpayer uses a single composite depreciation rate, which was previously approved by the public utility commission. For tax purposes, Taxpayer uses accelerated depreciation under section 168 of the Code, and applies a normalization method of accounting pursuant to section 168(i)(9). In response to the TCJA’s corporate tax rate reductions, Taxpayer used the so-called “alternative method” based on its composite depreciation rates to compute its amortization of the excess accumulated deferred income taxes attributable to accelerated depreciation (Protected EDIT).
Taxpayer sought a ruling to confirm that changing its composite depreciation rate (and asset life) based upon an updated depreciation study would not result in a normalization violation. The alternative method requires the taxpayer to compute the excess deferred tax reserve on all public utility property on the basis of the weighted average life or composite rate used to compute depreciation for regulatory purposes, and reduces the excess tax reserve ratably over the remaining regulatory life of the property.
The IRS concluded that Taxpayer could continue to use the alternative method under TCJA Section 1001(d)(3)(C) to amortize the adjusted Protected EDIT. Further, because the depreciation study only considered the regulatory composite life and salvage rates of Taxpayer’s existing jurisdictional property, both of which are factors properly considered under Treas. Reg. § 1.167(l)-1(a)(1), the use of the revised composite depreciation rate to determine the adjusted regulatory life and Protected EDIT amortization did not result in a normalization violation.
Eversheds Sutherland Observation: Presumably, had the public utility commission and the Taxpayer considered other factors in computing the revised remaining regulatory life, such as cost of removal, or, had the updated depreciation study produced a longer life (and smaller annual amortization) than the prior rate, the resulting changes would result in a normalization violation.[1]
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[1] In PLR 202141001 and PLR 202124003, the IRS concluded that the taxpayers’ cost of removal-related net deferred tax amount was not “protected” by the Normalization Rules. For more information, see our previous alert.
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