Safe harbor for public utilities, “normalization rules” - KPMG United States
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Safe harbor for public utilities, “normalization rules” violations

Safe harbor for public utilities, “normalization rules”

The IRS today released an advance version of Rev. Proc. 2017-47 to provide a safe harbor for public utilities that inadvertently or unintentionally use a practice or a procedure that is not consistent with the Code’s “normalization rules.”


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Rev. Proc. 2017-47 [PDF 37 KB] states that if the safe harbor applies, the IRS will not assert that a taxpayer’s inadvertent or unintentional use of a practice or procedure that is inconsistent with sections 50(d)(2) and 168(i)(9) constitutes a violation of the “normalization rules.” 

Still, the IRS cautioned that this guidance does not limit or change the process by which a taxpayer may request a letter ruling or a referral for a technical advice memorandum that the taxpayer’s proposed practice or procedure is consistent or inconsistent with the “normalization rules.”

Normalization rules

“Normalization” refers to a system of accounting used by public utilities to reconcile tax treatment of the investment tax credit (under the special rules of section 50) or accelerated depreciation of assets (under section 168) with their regulatory treatment. Under the “normalization rules,” a public utility receives a tax benefit of the investment tax credit or accelerated depreciation in the early years of an asset’s regulatory useful life, and then passes that benefit on to its customers (ratepayers) ratably over the regulatory useful life of the asset, in the form of reduced rates.

Sanctions imposed under the “normalization rules” were intended to discourage the flow-through of tax benefits to customers, so the utilities could benefit from the investment tax credit or depreciation provisions while preventing the loss of revenue to the federal government if the benefits were allowed to be passed on to customers.

Rev. Proc. 2017-47

The revenue procedure provides a safe harbor to those public utilities:

  • That own public utility property
  • That have inadvertently or unintentionally failed to follow a practice or procedure that is consistent with the “normalization rules” in one or more years
  • That on recognizing the failure to comply, change the inconsistent practice or procedure to one that is consistent at the “next available opportunity” and in a manner that “totally reverses” the effect of the inconsistent practice or procedure (as long as the regulator approves the change)
  • That retain contemporaneous documentation 

Rev. Proc. 2017-47 provides that for any taxpayer satisfying these criteria, the IRS will not assert that the inconsistent practice or procedure violates the “normalization rules” and will not deny the taxpayer the benefits of the investment tax credit and/or accelerated depreciation. To invoke the safe harbor, the taxpayer must include a statement with its return that satisfies certain items listed in the revenue procedure.

Effective date

Rev. Proc. 2017-47 is effective for tax years ending on or after December 31, 2016. Also, the IRS stated that it will not challenge any “inconsistent practice or procedure” in any earlier tax year, provided the taxpayer satisfies the requirements of Rev. Proc. 2017-47.

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