AMERICAN GAS ASSOCIATION

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AMERICAN GAS ASSOCIATION INTERSTATE NATURAL GAS
ASSOCIATION

• Update on Selected Cases, Rulings and Proposed
  Regulations
• Craig King
• November 8, 2005

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Update on Selected Court Cases, Rulings and
RegulationsDomestic Manufacturing Deduction

• Proposed Regulations Under Section 199 Issued on
  October 19, 2005
• Include many of the rules of Notice 2005-14.
• Retain contract manufacturing rules.
• Correct technical issue section 199 deduction
  does not create or increase NOL carryback or
  carryover.
• Clarify that gains or losses from hedging
  inventory and supplies are included in DPGR.
• Narrow definition of construction.

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Update on Selected Court Cases, Rulings and
RegulationsDeferred Compensation

• Proposed Regulations Under Section 409A Issued on
  September 29, 2005
• Identify which plans and arrangements are covered
  by section 409A.
• Outline operational requirements for deferral
  elections and permissible timing for deferred
  compensation payments.
• Extend for one year the deadline for documentary
  compliance with the new rules to December 31,
  2006.
• Proposed effective date January 1, 2007.

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Update on Selected Court Cases, Rulings and
RegulationsRepairs versus Capitalization

• FPL Group v. Commissioner, TC Memo 2005-210,
  September 8, 2005
• Prior decision had held that taxpayers method of
  accounting for repairs was its regulatory method
  rather than the method under Regulations section
  1.162-4.
• Taxpayer argued here that if that was the case,
  then the IRS had changed its method to the
  section 1.162-4 method when it made adjustments
  to its regulatory treatment.
• Held IRS did not change the taxpayers method of
  accounting and did not abuse its discretion in
  refusing its request to change to the section
  1.162-4 method.

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Update on Selected Court Cases, Rulings and
RegulationsTransition ITC

• FPL Group v. Commissioner, TC Memo 2005-208,
  August 31, 2005
• Held Taxpayer did not purchase and/or install
  equipment pursuant to binding, written supply
  contracts under the TRA of 1986 ITC transition
  rules.
• FPL's claims that the following constituted
  binding, written supply contracts were rejected
• (1) its regulatory tariff
• (2) an interchange contract and
• (3) the documents exchanged with respect to the
  development of regional impact projects.

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Update on Selected Court Cases, Rulings and
RegulationsEnergy Policy Act (EPACT) Litigation

• PSI Energy Inc. v. United States, Fed. Cl., No.
  04-5079, June 10, 2005
• Taxpayer had purchased enriched uranium from the
  government, but had not used any of it to
  generate electricity. In 1984, it sold the
  entire stock of fuel to other utilities. Due to
  market standardization, the selling price was
  stated as if the resold fuel contained fewer
  separative work units (SWUs) than had been
  purchased from the government.
• Held When all enriched fuel was resold by
  taxpayer, by statute it was not liable for EPACT
  tax. It was irrelevant that fuel was resold for
  less than its cost in SWUs.

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Update on Selected Court Cases, Rulings and
RegulationsInterest Offsets

• Pacific Gas Electric Co. v. United States, Fed.
  Cir., No. 03-5173, August 10, 2005
• Held IRS not entitled to offset interest
  erroneously paid by it to taxpayer against
  amounts due and owing taxpayer on a subsequent
  refund relating to the same tax year, when the
  government could not have maintained a suit for
  the erroneously paid interest due to expiration
  of the statute of limitations.
• Rationale IRS' ability to offset was subject to
  the same statute of limitations that applies to
  suits by the government to recover erroneous
  refunds of taxes or erroneous payments of
  interest on refunds.

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Update on Selected Court Cases, Rulings and
RegulationsSection 263A Simplified Methods

• Revenue Ruling 2005-53, August 2, 2005
• Ruled Self-constructed assets are produced on a
  routine and repetitive basis for purposes of the
  simplified service cost method and the simplified
  production method if the assets are either
• Mass-produced or
• Have a high degree of turnover.
• Applies to years prior to 2005.
• Generated substantial controversy.
• IRS meeting with industry and their
  representatives.

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Update on Selected Court Cases, Rulings and
RegulationsSection 263A Simplified Methods

• Proposed, Temporary and Final Regulations
  Sections 1.263A-1T, -2T
• Self-constructed property is considered produced
  on a routine and repetitive basis for purposes
  of the simplified service cost method and the
  simplified production method only if
• Numerous substantially identical units of
  tangible personal property are produced within a
  taxable year using standardized designs and
  assembly line techniques and
• The applicable recovery period of the assets is
  not longer than 3 years.

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Update on Selected Court Cases, Rulings and
RegulationsSection 263A - Environmental
Remediation

• Revenue Ruling 2005-42, IRB 2005-28, July 11,
  2005
• Ruled Environmental remediation costs to clean
  up land a taxpayer contaminated by the operation
  of the taxpayer's manufacturing activities are
  incurred by reason of the taxpayer's production
  activities and are properly allocable under
  263A to inventory produced during the taxable
  year the costs are incurred.
• As with repair costs, environmental remediation
  costs are properly allocable to inventory without
  regard to whether those costs are incurred
  before, during, or after production.
• Ruling addresses five different Situations.

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Update on Selected Court Cases, Rulings and
RegulationsCIAC Safe Harbor

• Revenue Procedure 2005-35, IRB 2005-28 July 11,
  2005
• Safe harbor accounting method for reimbursable
  up-front payments from electricity generators to
  utilities to finance upgrades to utilities
  transmission system. Requirements for current
  interconnection agreements
• Cash reimbursement not less than up-front
  payment
• Interest calculated under FERC rules
• Full reimbursement plus FERC interest within 20
  years of commercial operation.
• Where safe harbor met, upfront payment not
  includible in income when received and not
  deductible when repaid.

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Update on Selected Court Cases, Rulings and
RegulationsTransition Costs

• Revenue Procedure 2005-62, IRB 2005-37, September
  12, 2005
• Utility will not recognize gross income when it
  receives a financing order that creates an
  intangible property right in the amount of the
  specified cost that can be recovered through
  securitization, or if other conditions are met.
• Expands scope of prior Revenue Procedure
• To all public utility companies.
• Costs that are recoverable through a
  securitization mechanism are not limited to
  transition costs.

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Update on Selected Court Cases, Rulings and
RegulationsTransition Costs

• Revenue Procedure 2005-61, IRB 2005-37, September
  12, 2005
• IRS will not issue advance rulings or
  determination letters on whether, under
  authorization by appropriate State agency to
  recover certain costs pursuant to State specified
  cost-recovery legislation, any investor-owned
  utility company realizes income upon
• (1) creation of an intangible property right,
• (2) the transfer of that intangible property
  right, or
• (3) the securitization of the intangible property
  right.

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Update on Selected Court Cases, Rulings and
RegulationsCIACs

• PLR 200528022, April 6, 2005
• Ruled Payments by city to utility to place lines
  underground were contributions to capital not
  taxable CIACs.
• Rationale Payments were not CIACs under public
  benefit exception. City had an ordinance allowing
  residents to vote for undergrounding of utility
  lines. Purpose of ordinance was to improve public
  safety, preserve scenic views and enhance overall
  appearance of community.

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Update on Selected Court Cases, Rulings and
RegulationsCIACs

• PLR 200542001, July 6, 2005
• Ruled Payments by developer to utility for
  undergrounding perimeter lines and connecting to
  existing underground line were taxable CIACs.
• Rationale Developer had to underground lines in
  order to get the necessary permits for
  construction of a new building. Consequently the
  payments were for developers benefit.

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Update on Selected Court Cases, Rulings and
RegulationsCIACs

• PLR 200541036, July 5, 2005
• Ruled Payment by developer to utility to
  relocate utility poles and lines and to reconnect
  relocated poles and lines were CIACs.
• Rationale Under site approval plan, developer
  could not develop site without relocating and
  reconnecting poles and lines. Consequently,
  payments related to provision of services by
  utility for the benefit of the developer.

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Update on Selected Court Cases, Rulings and
RegulationsSection 29 Credit

• PLR 200537034, June 7, 2005
• Ruled Facility was placed in service prior to
  July 1, 1998 for purposes of section 29 credit.
• Rationale Prior to July 1, 1998, taxpayer had
• Necessary licenses permits
• Control of facility
• Completed critical tests on facility and
• Commenced daily or regular operation (in spite of
  occasional operational problems and lack of
  demand).

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Update on Selected Court Cases, Rulings and
RegulationsSection 29 Credit

• PLRs 200541024, 200541025, and 200541026, June
  28, 2005
• Reconfirmed earlier section 29 rulings,
  including
• Relocation, or replacement of parts, does not
  change placed in service date, provided fair
  market value of original property is more than 20
  percent of total fair market value at the time of
  relocation or replacement.
• Modifications do not change placed in service
  date, provided they do not significantly (1)
  increase production capacity or (2) extend life
  of facility.

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Update on Selected Court Cases, Rulings and
RegulationsConsolidated Tax Adjustments

• Oregon Legislation - Senate Bill 408
• Requires utilities to provide Commission
  information regarding
• Amount of taxes actually paid by utility, and
• Amount of taxes authorized by Commission to be
  collected in rates during specified time periods.
• Where difference is at least 100,000, Commission
  is authorized to implement rate schedule under
  automatic adjustment clause for the difference.
• Prompted by Enron subsidiary Portland General
  Electrics over-collection of taxes.
• Other states are considering similar legislation.

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Update on Selected Court Cases, Rulings and
RegulationsMiscellaneous

• Projects Targeted by Treasury for Completion this
  Fall
• Deduction/capitalization of expenses for tangible
  assets under sections 162 and 263 (Proposed
  Regulations)
• Treatment of costs for maintaining generating
  assets (Industry Issue Resolution Project)
• Accounting Method changes for rotable spare parts
  (Revenue Procedure)
• Property eligible for bonus depreciation under
  extended placed in service date rule (Proposed
  Regulations)

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Update on Selected Court Cases, Rulings and
Regulations

• QA