rp-20-39.pdf

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26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability.
(Also: § 1.168(i)-3)

Rev. Proc. 2020-39

SECTION 1. PURPOSE
This revenue procedure provides guidance under § 168 of the Internal Revenue
Code (Code) to clarify the normalization requirements following the corporate tax rate
reduction provided in section 13001 of Public Law No. 115-97, 131 Stat. 2054 (2017),
commonly referred to as the Tax Cuts and Jobs Act (TCJA). On May 28, 2019, the
Internal Revenue Service published Notice 2019-33, 2019-22 I.R.B. 1255, requesting
comments on issues arising in this area. This revenue procedure provides guidance on
these issues.
SECTION 2. BACKGROUND
.01 In general, normalization is a system of accounting used by regulated public
utilities to reconcile the tax treatment of accelerated depreciation of public utility assets
with their regulatory treatment. The use of normalization is required for a utility to take
advantage of the accelerated cost recovery system under § 168 of the Code for public
utility property. Under normalization, a utility receives the tax benefit of accelerated

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depreciation in the early years of an asset’s regulatory useful life and passes that
benefit through to ratepayers ratably over the regulatory useful life of the asset in the
form of reduced rates.
.02 In order to use a normalization method of accounting, § 168(i)(9)(A)(i) requires a
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 (regulated
tax expense), to use a method of depreciation for property that is the same as, and a
depreciation period for such property that is no shorter than, the method and period
used to compute its depreciation expense for establishing its cost of service for
ratemaking purposes. If the amount allowable as a deduction under § 168 differs from
the amount that would be allowable as a deduction under § 167 of the Code using the
method, period, first and last year convention, and salvage value used to compute
regulated tax expense under § 168(i)(9)(A)(i), then, under § 168(i)(9)(A)(ii), the taxpayer
must make adjustments to a reserve to reflect the deferral of taxes resulting from such
difference. This reserve is referred to as the Accumulated Deferred Income Taxes
(ADIT) reserve.
.03 Taxpayers calculate the amount of the adjustments to the ADIT reserve by
reference to the corporate tax rate applicable in each year that the depreciation
deduction allowable as a deduction under § 168 exceeds the amount calculated under
§ 168(i)(9)(A)(i) for the taxpayer’s regulated tax expense.
.04 Section 1.167(l)-1(h)(2)(i) of the Income Tax 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,

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with respect to any account, the aggregate amount allocable to deferred tax and
included in such reserve under § 167(l) “shall not be reduced except 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 § 1.167(l)-1(h)(1)(i). That
section notes that, additionally, the aggregate amount allocable to deferred taxes may
be properly adjusted to reflect asset retirements or the expiration of the period for
depreciation used for determining the allowance for depreciation under § 167(a).
Consequently, the ADIT increases in each year the accelerated depreciation under
§ 168 exceeds the tax depreciation amount used for calculating the taxpayer’s regulated
tax expense and the ADIT decreases in each year the accelerated depreciation under
§ 168 is less than the tax depreciation amount used for calculating the taxpayer’s
regulated tax expense. These increases and decreases are measured by the
differences in the two depreciation methods multiplied by the tax rate in effect for the
year of the adjustment to the ADIT.
.05 The TCJA, enacted on December 22, 2017, generally reduced the corporate tax
rate under § 11 of the Code from 35 percent to 21 percent for taxable years beginning
after December 31, 2017. Section 13001(a) of the TCJA. Because of the reduction in
rates, for property subject to depreciation in a taxable year beginning on or before
December 31, 2017, and not yet fully depreciated in the first taxable year beginning
after December 31, 2017, a portion of the ADIT reserve will reflect this reduction. For
purposes of this revenue procedure, the portion of the ADIT reserve that reflects the
difference in tax rates due to accelerated depreciation is referred to as the Excess Tax
Reserve (ETR). The ETR represents the amount by which the ADIT reserve exceeds

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the amount it would have contained had the reduction in rates been in effect for every
year the property was subject to depreciation. That is, the ETR is the amount of
accelerated depreciation-related taxes that have been collected from ratepayers but
have not yet been paid by the utility and become excess due to the reduction in rates.
.06 Section 13001(d) of the TCJA includes accompanying but uncodified
normalization requirements related to the reduction of the corporate tax rate.
Section 13001(d)(1) provides that “[a] normalization method of accounting shall not be
treated as being used with respect to any public utility property for purposes of [§§ 167
or 168] if the taxpayer, in computing its cost of service for ratemaking purposes and
reflecting operating results in its regulated books of account, reduces the excess tax
reserve more rapidly or to a greater extent than such reserve would be reduced under
the average rate assumption method” (ARAM).
.07 Section 13001(d)(2) of the TCJA provides an alternative method for certain
taxpayers. If, as of the first day of the taxable year that includes the date of enactment
of the TCJA, the taxpayer was required by a regulatory agency to compute depreciation
for public utility property on the basis of an average life or composite rate method, and
the taxpayer's books and underlying records did not contain the vintage account data
necessary to apply ARAM, the taxpayer will be treated as using a normalization method
of accounting if, with respect to such jurisdiction, the taxpayer uses the alternative
method for public utility property that is subject to the regulatory authority of that
jur isdiction.
.08 Section 13001(d)(3)(C) of the TCJA defines the “alternative method” (AM) as the
method in which the taxpayer computes the ETR on all public utility property included in

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the plant account on the basis of the weighted average life or composite rate used to
compute depreciation for regulatory purposes, and reduces the ETR ratably over the
remaining regulatory life of the property.
SECTION 3. SCOPE
.01 In general. This revenue procedure applies to public utilities subject to
normalization that have ETR resulting from the corporate tax rate reduction provided in
section 13001 of the TCJA.
.02 Issues beyond the scope of this revenue procedure. This revenue procedure
addresses only the effects of tax rate changes on timing differences related to
accelerated depreciation. Any issues unrelated to the effects of tax rate changes on
accelerated depreciation are beyond the scope of this revenue procedure. For
example, the effects of tax rate changes on timing differences associated with
unprotected plant or non-plant related items, are not addressed in this revenue
procedure. The appropriate amortization or other ratemaking treatment of timing
differences unrelated to accelerated depreciation, such as unprotected plant or non-
plant related items, are to be determined by the regulator in a rate proceeding,
consistent with the regulatory authority over the ratemaking treatment of all other
elements of jurisdictional cost of service.
SECTION 4. APPLICATION

.01 Requirement to use ARAM or the AM.
(1) In General. Generally, under section 13001(d)(1) of the TCJA, taxpayers must
use ARAM to calculate the reversal of their ETR if the taxpayer’s regulatory books (the
financial and tax information used by their regulator in setting rates which may include

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but is not limited to materials submitted to public service commissions as well as any
supporting materials) are based upon the vintage account data necessary to use
ARAM. However, if the taxpayer’s regulatory books are not based upon the vintage
account data that is necessary for the ARAM, use of the ARAM is not required.
(2) Curing Vintage Account Data Deficiencies. A taxpayer whose regulatory books
do not contain sufficient vintage account data to apply the ARAM is not required to use
the ARAM. Determination of whether a taxpayer’s regulatory books contain sufficient
vintage account data necessary to use the ARAM is determined based on all the facts
and circumstances. A taxpayer is not required to cure deficiencies in its regulatory
books by the creation, re-creation, or restoration of books or records, including through
the use of estimates, statistical sampling, or the accessing of data through the use of
computer systems not currently in use for its financial processes. Deficiencies in data
need not be cured, but taxpayers that have taken such actions to cure all deficiencies
by the effective date of this revenue procedure are permitted to use ARAM. Lastly, a
regulated utility that is currently using ARAM to reverse prior ETR is presumed to have
sufficient vintage account data to use ARAM.
(3) Taxpayers Use of AM for Prior Periods. Taxpayers that do not meet the
requirements to use the AM provided in the TCJA and described in this revenue
procedure may not continue to use the AM simply because they have done so in the
past.
(4) Composite Method. Under a composite method, the uniform system of
accounts does not generally require a company to maintain vintage accounts for
depreciation purposes; therefore, companies regulated by Federal Energy Regulatory

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Commission (FERC) utilizing this method generally do not have the data necessary to
utilize ARAM. Taxpayers may utilize AM whenever a composite method approved by
FERC or another applicable regulatory agency is applied for depreciation purposes, and
a taxpayer may rely on its cost of service rate filing to FERC as sufficient documentation
that a composite method of depreciation has been used.
(5) Jurisdiction of Multiple Regulatory Bodies. In the interest of economy and
efficiency, taxpayers under the jurisdiction of multiple regulatory bodies may use a
single method, ARAM or the AM, provided that the regulatory bodies agree. For
example, a utility that is under the regulatory jurisdiction of FERC, which uses a
composite method of calculating depreciation, and a state regulatory body that does not
use a composite method (and therefore would generally use the AM for FERC purposes
but has the data necessary to use ARAM for state purposes) may, if approved by the
state regulator, use the AM for state purposes as well.
(6) Transition Rules. Many utilities have already been required to adjust rates due
to the TCJA. Utilities may correct any method of reversing ETR that is not in accord
with this revenue procedure at the next available opportunity. The methods adopted
prior to the publication of this revenue procedure that are not in accord with this revenue
procedure are not considered to be a violation of the normalization rules if so corrected.
This corrective action will require the utility to consult with its regulator and obtain its
regulator’s consent. Utilities are not in conflict with section 13001(d) of the TCJA if the
utilities follow such a path to correct potential normalization violations prospectively.
These rules extend to companies that may not have started the amortization of ETRs or
may be re-deferring the amortization as they evaluate their records.

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.02 Net operating loss carryforward (NOLC). Compliance with normalization requires
a determination of the source of an NOLC so that rate base is not overstated in
jurisdictions in which net deferred tax liabilities reduce rate base. While
§ 1.167(l)-1(h)(1)(iii) is the relevant general authority, there is not one single
methodology provided for determination of the portion of an NOLC that is attributable to
depreciation. Section 1.167(l)-1(h)(1)(iii) instead informs taxpayers that the amount and
time of the deferral of tax attributable to depreciation when there is an NOLC should be
taken into account in such “appropriate time and manner as is satisfactory to the district
director.” Regulating commissions have expertise in this area, and any reasonable
method for determining the portion of the NOLC attributable to depreciation should
generally be respected provided such method does not clearly violate normalization
requirements.
.03 Application of 2008 regulations (§ 1.168(i)-3). The rules in § 1.168(i)-3 of the
Income Tax Regulations, adopted by T.D. 9387 (73 F.R. 14934, 14937) on March 20,
2008, apply only to section 203(e) of the Tax Reform Act of 1986. Generally, the IRS
will apply § 1.168(i)-3 of the regulations as if that limitation date language is not present.
Thus, the sharing of ETRs with customers continues to be permitted in most
circumstances after a retirement or disposition and upon the sale of public utility
property to another regulated utility as set forth in § 1.168(i)-3.
SECTION 5. EFFECT OF THIS REVENUE PROCEDURE ON EXISTING
NORMALIZATION RULES

The TCJA ETR normalization requirements are part of the overall pre-existing
deferred tax normalization rules, and this reveune procedure is intended to be
consistent with those rules. This revenue procedure does not create an exception to

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how the overall pre-existing deferred tax normalization rules would apply, except as
noted.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective August 14, 2020.
SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Martha M. Garcia of the Office of
Associate Chief Counsel (Passthroughs and Special Industries). For further information
regarding this revenue procedure contact Martha M. Garcia on 202-317-6853 (not a toll
free call).