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No surprises under the tree as IRS concludes no normalization violation when using revised composite depreciation rate to cushion Protected EDIT | Eversheds Sutherland (United States) LLP


On December 17, 2021, the IRS issued a private decision letter 202150003 in which it concluded that a taxpayer would not violate the normalization rules if he proportionally depreciated his protected EDIT (defined below) in accordance with a updated depreciation study. Standardization is, of course, required under Section 168 (i) (9) for utilities to use accelerated depreciation.

Based on the facts of the decision, Parent provides natural gas and liquids transportation services. The subsidiary owns and operates a portfolio of natural gas-related energy assets that provide transportation, storage, collection, distribution and processing services. The taxpayer is an ignored subsidiary of the company which is a public utility for the purposes of the Tax Cuts and Jobs Act (TCJA).

The public utility commission fixes the rates of the Taxpayer, including the applicable depreciation rates. For accounting purposes, the taxpayer uses a single composite depreciation rate, which has been pre-approved by the utilities commission. For tax purposes, the Taxpayer uses accelerated depreciation under article 168 of the Code and applies an accounting normalization method in accordance with article 168 (i) (9). In response to the TCJA’s corporate tax rate cuts, the taxpayer used the so-called “alternative method” based on its composite depreciation rates to calculate its depreciation of the accumulated deferred tax surplus attributable to accelerated depreciation (MED protected).

The taxpayer requested a ruling confirming that changing its composite depreciation rate (and asset life) based on an updated depreciation study would not result in a violation of the standardization. The alternative method requires the taxpayer to calculate the excess of the deferred tax reserve over all public utility property based on the weighted average life or the composite rate used to calculate depreciation for regulatory purposes. , and reduces the excess tax reserve in proportion to the remaining regulatory life of the property.

The IRS concluded that the taxpayer could continue to use the alternative method under section 1001 (d) (3) (C) of the TCJA to amortize the adjusted protected EDIT. Further, because the depreciation study only considered the regulatory composite life and the recovery rates of the taxpayer’s existing jurisdictional assets, both of which are factors properly taken into account in the context of the taxpayer. Treas. Reg. § 1.167 (l) -1 (a) (1), the use of the revised composite depreciation rate to determine the adjusted regulatory life and EDIT protected depreciation did not result in a violation of standardization.

Observation of Eversheds SutherlandPresumably, had the utility board and taxpayer taken into account other factors in calculating the revised remaining regulatory life, such as the cost of removal, or, whether the depreciation study The update had produced a longer lifespan (and lower annual depreciation) than the previous rate, the resulting changes would result in a violation of standardization.[1]

[1] In PLR 202141001 and PLR 202124003, the IRS concluded that the net deferred tax amount related to the cost of the taxpayer move was not “protected” by the normalization rules. For more information, see our previous alert.

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