FERC Accepts IRS Normalization Rulings on Intercompany Tax Allocation Payments

The Federal Energy Regulatory Commission (FERC) addressed a normalization tax issue of first impression in January 2024, namely, whether payments received by a regulated transmission company from profitable affiliates pursuant to an intercompany tax allocation agreement can reduce the utility's net operating loss (NOL) carryforward attributable to accumulated deferred income taxes under the normalization rules. 

Notwithstanding the transmission company's arguments that any such reduction would violate the normalization rules and result in the loss of its right to claim accelerated depreciation, in 2024, FERC ruled that the reduction was consistent with its prior ratemaking decisions and was not impermissible.

Shortly thereafter, as previously reported by Holland & Knight in May 2024, the IRS issued three private letter rulings (PLRs) to state-regulated affiliates of the transmission company, holding that the reduction of the NOL carryforward by reason of the intercompany tax allocation payments would violate the normalization rules, putting FERC on a potential interagency collision course with the IRS.

Following the issuance of the PLRs, the transmission company filed a motion for rehearing to reopen the record and allow FERC to consider the position of the IRS as set forth in the rulings.

FERC's Decision

FERC granted the transmission company's motion for rehearing and, on June 30, 2025, issued a decision agreeing to abide by the position adopted by the IRS in PLRs issued to affiliates of the transmission company in connection with state rate proceedings.¹

FERC was unpersuaded by arguments in support of maintaining its prior position, which were 1) the facts in the PLRs were materially different, 2) that technically PLRs are binding only on the specific taxpayer to whom they are issued and 3) that the IRS had reached the wrong conclusion such that the transmission company should seek its own ruling requesting a contrary result. Accordingly, it reversed course.

In its decision, FERC noted that the PLRs did not address the propriety of differing ratemaking methodologies potentially applicable to utilities filing consolidated returns – namely, the so-called "stand-alone method" and "separate return method." Rather, as explained in the earlier Holland & Knight alert, the PLRs addressed the specific issue whether the reduction of the deferred tax asset for the net operating loss (NOL) carryforward would violate the deferred tax reserve computational rules of Treas. Reg. Section 1.167(l)-1(h)(2) and the so-called "consistency rules" of I.R.C. Section 168(i)(9)(B). FERC acknowledged that the IRS was the proper agency to interpret the governing normalization rules and thus deferred to the IRS position that the NOL carryforward deferred tax asset cannot be reduced by intercompany tax allocation payments consistent with the tax normalization rules.

FERC properly observed, however, that the normalization rules applied only to the so-called "protected" portion of the NOL carryforward – namely, the portion created from claiming accelerated depreciation for federal income tax purposes – and not to other book-tax timing differences.

Thus, to the extent the tax allocation payments related to unprotected items, the deferred tax asset could be reduced consistent with the normalization rules. Typically, the respective protected and unprotected portions of the NOL carryforward would be computed using the "with and without method."

For more information or questions, please contact the authors.

Notes

¹ 191 FERC par. 61,239 (June 30, 2025). The private letter rulings are PLR 105952-22, PLR 10770-22 and PLR 105951-22 (all dated March 8, 2024).

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