Segregated funds

SEGREGATED FUNDS

January 01, 2009 | By Keith Martin in Washington, DC

Segregated funds may not have to be reported as income.

A utility sold a nuclear power plant and also transferred the nuclear decommissioning fund to the new owner. It promised its regulators that it would return an amount equal to its book gain on the sale to its customers. No details had been worked out by the time of sale, so the buyer paid the portion of the purchase price that the utility promised to pass through eventually to customers into a segregated account. The account earned interest.

Some time later, the two state regulatory commissions with jurisdiction over the utility issued orders directing the utility to use the segregated funds to provide credits over the next 18 to 36 months on bills to customers in the two states. The Federal Energy Regulatory Commission also ordered a one-time refund of some of the funds to other customers in the form of a check or billing credit.

The Internal Revenue Service ruled privately that the utility did not have to report the purchase price deposited in the account, or the interest earned on the account, as income. It made the ruling public in December. The IRS said the utility had no income in the sense of an “accession to wealth,” and it had no control over the funds. The segregated account remained subject to oversight by the public utility commissions until the funds in the account were fully credited to customers. The ruling is PLR 200852002.

The ruling is interesting because the IRS is usually reluctant to rule that amounts are not income at all. It has fewer qualms about ruling that an amount that would normally be income does not have to be reported in a particular case because of an “exclusion” in the tax code. The ruling also suggests planning possibilities.

The IRS said it did not matter that the funds were eventually turned over to the utility when the utility provided billing credits to its customers.

 

Keith Martin