IRS written determination 201532024

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201532024
Release Date: 8/7/2015
Index Number: 167.22-01
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
----------------------, ID No. ----------------
Telephone Number:
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Refer Reply To:
CC:PSI:B06
PLR-141647-14
Date:
April 27, 2015
LEGEND:
Taxpayer=------------------------
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State A=------------
State B=-----------------
GasCo=------------------------------------------------
StorCo=----------------------------------------------
Transferee=----------------------
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CommissionA=----------------------------------------------------
Commission B=-----------------------------------------------------
Date X=--------------------------
Director=--------------------------------------------------------------------------------
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Dear -------------:
This letter responds to the request, dated October 31, 2014, on behalf of
Taxpayer for a ruling on the proper treatment, under the normalization provisions of the
Internal Revenue Code, of Taxpayer’s Accumulated Deferred Income Tax (ADIT) as a
consequence of the transfer of certain property, the depreciation of which originally
gave rise to the ADIT.
The representations set out in the request follow.
Taxpayer is a limited liability company incorporated under the laws of State A.
Taxpayer has elected to be treated for federal tax purposes as a corporation. Through
the ownership of the membership interests in several disregarded entities, Taxpayer

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owns GasCo and StorCo. GasCo is a natural gas distribution company operating in
State B. GasCo’s distribution business is subject to regulation by Commission A with
respect to rates and conditions of service. StorCo provides natural gas storage and
transmission services to customers. StorCo leases certain storage assets from GasCo
and provides natural gas storage services to customers with those assets. The storage
and transmission businesses are subject to the regulatory jurisdiction of Commission B
with regard to its rates and conditions of service. The rates for the distribution, storage,
and transmission services are established on a rate of return basis.
Transferee is a corporation incorporated under the laws of State B. It is the
common parent of several companies, each of which is a limited liability company that is
disregarded for federal tax purposes. Transferee, through these companies, conducts
operations in many segments of the natural gas industry, including distribution, in State
B. Transferee’s operations are subject to the regulatory jurisdiction of Commission A
with respect to rates and conditions of service. We note that Transferee operates in
other states in addition to State B and is subject to the regulatory jurisdiction of other
public utility commissions but neither are discussed here inasmuch as the property
transferred in the transaction discussed below is under the regulatory jurisdiction of
Commission A.
On Date X, Taxpayer and Transferee executed agreements providing for
Taxpayer to transfer certain storage and transmission assets (and cash) to Transferee
in exchange for certain distribution assets. This exchange is represented to qualify as a
“like kind exchange,” the treatment of which is provided in section 1031 of the Internal
Revenue Code. Taxpayer’s storage and transmission assets are its relinquished
property and the distribution assets received from Transferee are the replacement
property. Under § 1031, both Taxpayer and Transferee recognized insignificant gain or
loss on the exchange and both carried over the basis in their respective relinquished
property to their replacement property. For regulatory purposes, Taxpayer will record
the replacement property at the same regulatory book value as the relinquished
property. Prior to the exchange, Taxpayer had recorded an ADIT balance to reflect the
deferral of federal income taxes attributable to its claiming accelerated depreciation with
respect to the relinquished property as required by the normalization provisions of the
Internal Revenue Code. At issue here is the treatment of the ADIT balance recorded by
Taxpayer with respect to the relinquished property.
Taxpayer requests that we rule as follows:
1. In the context of a § 1031 exchange, it would be inconsistent with the
requirements of § 168(i)(9) and § 1.167(l)-1 for Taxpayer to recognize for
ratemaking purposes a depreciation-related ADIT balance attributable to its
replacement property in excess of the depreciation-related ADIT balance
attributable to its relinquished property.

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2. If the answer to Ruling 1 is affirmative,Taxpayer’s prospective treatment of the
federal ADIT balance attributable to the replacement property as though it had
been actually generated by those assets will be consistent with § 168(i)(9) and
§ 1.167(l)-1.
Law and Analysis
Section 168(f)(2) of the Code provides that the depreciation deduction
determined under section 168 shall not apply to any public utility property (within the
meaning of section 168(i)(10)) if the taxpayer does not use a normalization method of
accounting.
In order to use a normalization method of accounting, section 168(i)(9)(A)(i) of
the Code requires the taxpayer, in computing its tax expense for establishing its cost of
service for ratemaking purposes and reflecting operating results in its regulated books
of account, to use a method of depreciation with respect to public utility property that is
the same as, and a depreciation period for such propertythat is not shorter than, the
method and period used to compute its depreciation expense for such purposes. Under
section 168(i)(9)(A)(ii), if the amount allowable as a deduction under section 168 differs
from the amount that-would be allowable as a deduction under section 167 using the
method, period, first and last year convention, and salvage value used to compute
regulated tax expense under section 168(i)(9)(A)(i), the taxpayer must make
adjustments to a reserve to reflect the deferral of taxes resulting from such difference.
Section 168(i)(9)(B)(i) of the Code provides that one way the requirements of
section 168(i)(9)(A) will not be satisfied is if the taxpayer, for ratemaking purposes, uses
a procedure or adjustment which is inconsistent with such requirements. Under section
168(i)(9)(B)(ii), such inconsistent procedures and adjustments include the use of an
estimate or projection of the taxpayer’s tax expense, depreciation expense, or reserve
for deferred taxes under section 168(i)(9)(A)(ii), unless such estimate or projection is
also used, for ratemaking purposes, with respect to all three of these items and with
respect to the rate base.
Former section 167(l) of the Code generally provided that public utilities were
entitled to use accelerated methods for depreciation if they used a “normalization
method of accounting.” A normalization method of accounting was defined in former
section 167(l)(3)(G) in a manner consistent with that found in section 168(i)(9)(A).
Section 1.167(1)-1(a)(1) of the Income Tax Regulations provides that the normalization
requirements for public utility property pertain only to the deferral of federal income tax
liability resulting from the use of an accelerated method of depreciation for computing
the allowance for depreciation under section 167 and the use of straight-line
depreciation for computing tax expense and depreciation expense for purposes of
establishing cost of services and for reflecting operating results in regulated books of
account. These regulations do not pertain to other book-tax timing differences with

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4
respect to state income taxes, F.I.C.A. taxes, construction costs, or any other taxes and
items.
Section 1.167(l)-1(h)(1)(i) of the regulations provides that the reserve established
for public utility property should reflect the total amount of the deferral of federal income
tax liability resulting from the taxpayer’s use of different depreciation methods for tax
and ratemaking purposes.
Section 1.167(l)-1(h)(1)(iii) of the regulations provides that the amount of federal
income tax liability deferred as a result of the use of different depreciation methods for
tax and ratemaking purposes is the excess (computed without regard to credits) of the
amount the tax liability would have been had the depreciation method for ratemaking
purposes been used over the amount of the actual tax liability. This amount shall be
taken into account for the taxable year in which the different methods of depreciation
are used.
Section 1.167(l)-1(h)(2)(i) of the regulations provides that the taxpayer must
credit this amount of deferred taxes to a reserve for deferred taxes, a depreciation
reserve, or other reserve account. This regulation further provides that the aggregate
amount allocable to deferred taxes may be reduced to reflect the amount for any
taxable year by which federal income taxes are greater by reason of the prior use of
different methods of depreciation under section 1.167(1)-1(h)(1)(i) or to reflect asset
retirements or the expiration of the period for depreciationused for determining the
allowance for depreciation under section 167(a).
In the present case, Taxpayer has transferred the relinquished property and
received the replacement assets in exchange. The relinquished property has been
disposed of by Taxpayer and removed from Taxpayer’s regulatory books of account.
The ADIT at issue was created by the deferral of federal taxes attributable to Taxpayer’s
claiming accelerated depreciation with respect to the relinquished property as required
by § 1.167(l)-1(h)(2). The disposal of the relinquished property from Taxpayer’s
regulatory books of account are the functional equivalent of a retirement of the property
(see generally §§ 1.167(a)-8(a) and 1.168(i)-8(b)(2)) and § 1.167(l)-1(h)(2) provides that
the accumulated ADIT balance is adjusted to reflect such dispositions. Accordingly,
Taxpayer’s ADIT balance must be adjusted to reflect the disposition of the relinquished
property. The required adjustment is the removal of the ADIT balance with respect to
the relinquished property from Taxpayer’s regulated books of account.
Accordingly, we find that in the context of a § 1031 exchange, it would be
inconsistent with the requirements of § 168(i)(9) and § 1.167(l)-1 for Taxpayer to
recognize for ratemaking purposes a depreciation-related ADIT balance attributable to
its replacement property in excess of the depreciation-related ADIT balance attributable
to its relinquished property. Because the relinquished property has been disposed of,
the amount of the depreciation-related ADIT balance originally created with respect to

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5
the relinquished property is adjusted to reflect that disposition and such balance is not
considered attributable to the replacement property.
In addition, we find that since such balance must be reduced to reflect the
disposition of the relinquished property, Taxpayer’s prospective treatment of the federal
ADIT balance attributable to the replacement property as though it had been actually
generated by those assets will not be consistent with § 168(i)(9) and § 1.167(l)-1.
Except as specifically determined above, no opinion is expressed or implied
concerning the Federal income tax consequences of the matters described above
Specifically, we express no opinion regarding any consequences of the exchange
described above, including whether such exchange satisfies the provisions of § 1031.
This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
of the Code provides it may not be used or cited as precedent. In accordance with the
power of attorney on file with this office, a copy of this letter is being sent to your
authorized representative. We are also sending a copy of this letter ruling to the
Director.
Sincerely,
Peter C. Friedman
Senior Technican Reviewer, Branch 6
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
cc: