On February 23, 2018, the Internal Revenue Service (IRS) released Generic Legal Advice Memorandum (GLAM) 132120-17, clarifying Revenue Procedure 2017-47.1 This GLAM clarifies that the phrase “in a manner that totally reverses the effect of the Inconsistent Practice or Procedure” in Revenue Procedure 2017-47 requires only that a taxpayer change its inconsistent practice or procedure to a consistent practice or procedure going forward, not that the prior financial effects of the inconsistent practice or procedure be reversed.

Background

On September 7, 2017, the IRS issued Revenue Procedure 2017-47, which provides a safe harbor for regulated public utilities for inadvertent or unintentional uses of a practice or procedure that is inconsistent with the Normalization Rules of IRC §§ 50(d)(2) and 168(i)(9). If the safe harbor applies, the IRS will not assert that a regulated utility’s practice or procedure constitutes a violation of the Normalization Rules that triggers a disallowance of accelerated depreciation or a recapture of the investment tax credit (ITC).

The safe harbor in Revenue Procedure 2017-47 provides that a regulated public utility that failed to act consistently with the Normalization Rules will not lose the benefit of the ITC or accelerated depreciation if the following conditions are met:

  • The taxpayer owns public utility property;
  • The failure was inadvertent or accidental;
  • Upon recognizing a failure to act consistently with the Normalization Rules, the taxpayer changes its inconsistent practice or procedure to a practice or procedure consistent with the Normalization Rules, provided that the taxpayer’s regulator adopts or approves of the change;
  • The change to a practice or procedure consistent with the Normalization Rules is made at the “next available opportunity”;
  • The change totally reverses the effect of the inconsistent practice or procedure; and
  • Contemporaneous documentation is maintained that demonstrates the effects of the inconsistent practice or procedure and the change to a proper practice or procedure.

Clarification

Revenue Procedure 2017-47 requires that in order for the safe harbor to apply, the taxpayer must “change its Inconsistent Practice or Procedure to a Consistent Practice or Procedure at the Next Available Opportunity in a manner that totally reverses the effect of the Inconsistent Practice or Procedure.” While the safe harbor did not indicate whether the reversal must be made retroactively, this GLAM solves the confusion. Based on concerns that the wording could be read to require retroactive ratemaking, the IRS issued this GLAM to clarify that the change from the inconsistent practice or procedure to a consistent practice or procedure need only apply prospectively and does not require reversing the financial effects of the inconsistent practice or procedure.