Docket No. AI98-2-000
TO ALL JURISDICTIONAL LICENSEES, PUBLIC UTILITIES
AND NATURAL GAS COMPANIES
SUBJECT: GUIDANCE ON ACCOUNTING FOR DEFERRED INCOME TAXES ON
INTERCOMPANY PROPERTY TRANSFERS
In a recent order, the Commission set forth the proper accounting for deferred income taxes related to intercompany transfers of property. (1) This accounting differs in certain respects from that previously required by the Commission for these types of transactions. The change involves how sellers are to recognize deferred income taxes on deferred intercompany tax gains and losses and how buyers are to recognize deferred income taxes on the change in the tax basis of the transferred property.
In brief, the change in policy allows companies to record
the deferred income tax consequences of intercompany transfers of
property in deferred income tax accounts rather than in
miscellaneous deferred debit/credit accounts or intercompany
The following guidance is being provided to all jurisdictional licensees, public utilities and natural gas companies to assist them in complying with the Commission's accounting requirements for the tax consequences of intercompany property transfers.
For Further Information Contact
1. Seller's Accounting for Intercompany Property Transfer
Question: How should the seller of property in an intercompany transfer account for the income tax consequences attributable to such transfer?
Response: The intercompany transfer of property is a taxable event that (1) results in either a deferred tax gain or loss for the seller and (2) establishes a new tax basis for the property transferred to the buyer. If the property transfer results in a deferred tax gain for income tax purposes, the seller is required to recognize a deferred tax liability for the tax gain in Account 283, Accumulated Deferred Income Taxes - Other. Alternatively, if the property transfer results in a deferred tax loss for income tax purposes, the seller is required to recognize a deferred tax asset for the tax loss in Account 190, Accumulated Deferred Income Taxes. The seller is also required to flowback (i.e., reverse) the deferred income taxes related to the property transferred.
2. Buyer's Accounting for Intercompany Property Transfer
Question: How should the buyer of property in an intercompany
transfer account for the income tax consequences
attributable to such transfer?
Response: Under Section 168(I)(7) of the Internal Revenue Code, the affiliated buyer, in a deferred tax gain situation, assumes the tax basis of the transferor and recognizes a new tax asset for the excess of the transfer price over the transferor's tax basis. In a deferred tax loss situation, the affiliate buyer assumes the tax basis of the transferor to the extent it does not exceed the sales price of the property transferred. Therefore, in a tax loss situation there is no new tax asset to be recognized.
In accounting for the property transfer, the buyer is required to record deferred taxes in the same amount as recorded on the seller's books for the transferred property. The buyer is to record these deferred taxes in the same deferred tax account as that used by the seller. Any step-up in the tax basis of the property is a separate temporary difference and the related deferred tax asset should be recorded in Account 190. Any reduction in the tax basis of the property resulting from the transfer is to be recognized by reducing the amount of deferred income taxes that were recorded on the seller's books for the property.
3. Effective Date of Change
Question: What is the effective date of this change in accounting for intercompany property transfers?
Response: The change in accounting is to be applied to all intercompany property transfers occurring after March 31, 1998, but the Commission would have no objections if it were applied to previous transactions.
4. Cost-of-Service Tariffs/Formula Rate
Question: An entity has a cost-of-service tariff/formula rate under which monthly billings are based on recorded amounts under the FERC's Uniform System of Accounts. Under the tariff/formula rate, only the amounts recorded in certain specified accounts affect the monthly billings, such as those included in the entity's deferred income tax accounts. May an entity adjust its monthly billings to give proper effect to the revised accounting for intercompany property transfers if implementing the change in accounting for FERC accounting and reporting affects changes in the billings under its cost-of-service tariff/formula rate?
Response: Adoption of this change in accounting for intercompany property transfers for FERC accounting and reporting purposes should not affect the measurement of cost included in an entity's billing determinations without prior regulatory approval. If an entity's billing determinations would be affected by adoption of this change, because of the provisions of its tariffs, the entity shall make a filing with the proper rate regulatory authorities before implementing the change for billing purposes.
The Commission delegated authority to the Chief Accountant under 18 C.F.R. 375.303 to issue interpretations of the Uniform System of Accounts for licensees, public utilities and natural gas companies and sign correspondence on behalf of the Commission relating to Annual Report Form Nos. 1, 1-F, 2 and 2-A. The guidance provided herein constitutes final agency action pursuant to this authority. Within 30 days of the date of this letter, interested parties may file a request for rehearing by the Commission under 18 C.F.R. 385.713.
1. See NorAm Gas Transmission Company, 82 FERC 61,330 (1998). Intercompany means any transaction between members of the same affiliated group which file a consolidated income tax return.