Payments into a state fund to pay for wildfire damage can be amortized for US tax purposes over 15 years, the IRS said.

The agency made the statement in a private letter ruling issued to a utility that it made public in mid-September. The ruling is Private Letter Ruling 202037001.

The ruling describes a program that sounds like one adopted by California to place a cap on the amount that California electric utilities can be required to pay for damage from wildfires.

The state set up a fund in 2019 that is funded from two sources. The three investor-owned utilities agreed to make initial contributions of $7.5 billion. Grid users are contributing another $900,000 a year for 15 years through a special charge on utility bills.

The fund is used to pay damage claims from wildfires on or after July 12, 2019 that the state finds were caused by a utility. The utility has the first loss. The fund is not tapped until after a utility retention amount is paid.

The utilities must contribute another $300 million a year for the next 10 years. The private letter ruling said the actual contributions will depend on need.

California has an “inverse condemnation” law holding utilities strictly accountable for damage caused by their power lines and other equipment. The safety certificate entitles the utility to a presumption that it behaved prudently. If it is later found to have behaved imprudently, then the utility must reimburse the fund up to a cap. Otherwise, no reimbursement is required. (For more details about operation of the California wildfire fund, see “California moves forward” in the October 2019 NewsWire.)

A company setting aside money to pay future claims is usually not allowed to deduct the amount until the claim is paid.

In this case, a utility argued that its initial contribution was essentially purchase price for a type of intangible property right called a “section 197 intangible.” Such intangibles include “any license, permit, or other right granted” by a government agency.

The cost of section 197 intangibles is deducted on a straight-line basis over 15 years.

The IRS agreed. The deductions started immediately.

The IRS said the additional annual payments are effectively additional contingent purchase price for the intangible and can be deducted on a straight-line basis over the remainder of the 15-year period.