IRS Rules Utility's NOL Carryforward Cannot Be Reduced By Tax Allocation Payments

Highlights

• The IRS recently issued a private letter ruling (PLR) that a utility's net operating loss carryforward (NOLC) cannot be reduced by tax allocation payments under the normalization rules.
• The utility, a member of an affiliated group of corporations filing a consolidated return, had incurred net operating losses attributable to the use of accelerated depreciation for federal income tax purposes.
• The IRS reasoned that the tax allocation payments did not represent an interest-free loan from the federal government, which it described as the sine qua non of depreciation normalization.

The IRS recently issued private letter ruling (PLR) 107770-22 that involved a normalization issue of first impression, namely, whether payments received by a utility pursuant to an intercompany tax allocation agreement (TAA) can reduce the utility's net operating loss carryforward (NOLC) attributable to accumulated deferred income taxes (ADIT) consistent with the