PLR 200012082: Nuclear fuel storage costs qualify for decommissioning fund use

Plain-English summary

An electric utility planned to build a spent fuel storage installation while decommissioning a retired nuclear plant. The IRS ruled that the installation's construction, operation, and decommissioning costs could be paid from the plant's nuclear decommissioning fund. It also ruled that those costs were deductible under section 165 in the year paid or incurred if they were irrevocably committed to the plant's decommissioning. The deduction depended on the plant qualifying for an abandonment loss and on there being no reimbursement claim with a reasonable prospect of recovery. The ruling addresses this plant and installation, which the utility said would not store fuel from its other facilities.

Ruling snapshot

• Question: Could the storage installation's costs be paid from the fund and deducted as abandonment losses?
• Outcome: Approved, subject to the stated abandonment and reimbursement conditions.
• Key authorities: IRC §§ 165 and 468A; Treas. Reg. §§ 1.165-1(d)(1), 1.167(a)-8(a)(4), and 1.468A-1(b)(5).

Full text (IRS public release)

200012082

Internal Revenue Service Department of the Treasury
Index Number: 165.13-00 Washington, DC 20224
468A.00-00

Person to Contact:
Telephone Number:

Refer Reply To:
CC:DOM:P&SI:6 PLR-115109-99

Date: DEC 22 1999

Re: Private Letter Ruling Request on Treatment of Costs Associated With Independent Spent Fuel Storage Installation

Taxpayer =

Parent 1 =

Parent 2 =

Plant =

Location =
Commission A =
Commission B =
District =
Fund =
x =
Date 1 =
Date 2 =
Date 3 =
a =
b =
c =

Dear :

This letter responds to the request of Taxpayer, dated September 10, 1999, for a determination as to whether the costs associated with the construction, operation, and decommissioning of an independent spent fuel storage installation ("ISFSI") can be financed from amounts held in Fund pursuant to § 1.468A-1(b)(5) of the Regulations, and whether such costs are deductible in the taxable year paid or incurred pursuant to
§ 165 of the Internal Revenue Code.

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Taxpayer represents that the facts and information relating to its request are as follows:

Taxpayer is 100 percent owned by Parent 1; Parent 1 is 100 percent owned by Parent 2 and files a consolidated income tax return with both Taxpayer and Parent 2. Taxpayer has a direct ownership interest of x percent in Plant, as a tenant-in-common with other electric utility companies, which is situated at Location. Taxpayer is under the audit jurisdiction of the District Director of District.

Plant's began commercial operation on Date 1 and was permanently retired from electric service on Date 2. Taxpayer is subject to the jurisdiction of both Commission A and Commission B. The Plant is currently in SAFSTOR, a methodology described by the Nuclear Regulatory Commission ("NRC") in which a nuclear facility is placed and maintained in a condition that allows the nuclear facility to be safely stored and subsequently decontaminated and dismantled to levels that permit release of the land for unrestricted use.

Decommissioning of the Plant will be carried out in three phases. In the first phase, the Plant will be dismantled. This will include the removal and disposal of all contaminated and non-contaminated equipment, components, and buildings. An ISFSI would be constructed and the Plant’s spent fuel will be moved from its current location in the spent fuel pool to the ISFSI to allow the Plant’s spent fuel pool to be decommissioned. In the second phase, the ISFSI facility will be monitored until the Plant's spent fuel is removed. In the third phase, the ISFSI facility will be dismantled, the NRC license will be terminated, and the final site restoration work will be completed. The spent fuel is scheduled to be transferred off site beginning in Date 3.

The ISFSI will consist of a a square foot reinforced concrete pad on which approximately b casks will be placed. Each cask will hold c spent fuel assemblies depending on the selected design. Taxpayer represents that the ISFSI will not be used to store spent fuel from any of Taxpayer's other nuclear generating facilities. Furthermore, Taxpayer represents that Plant is not being, and cannot be, used to produce additional income, and construction of the ISFSI will not facilitate conversion to another use. The ISFSI will be located in close proximity to the Plant’s sphere enclosure building and within a fenced area called the “Protected Area”.

Section 1.468A-1(b)(5) of the regulations defines the term “nuclear decommissioning costs” or “decommissioning costs” to mean all otherwise deductible expenses incurred in connection with the entombment, decontamination, dismantlement, removal and disposal of the structures, systems and components of a nuclear power plant that has permanently ceased the production of electric energy. Such term does not include otherwise deductible expenses to be incurred in connection with the disposal of spent nuclear fuel under the Nuclear Waste Policy Act of 1982. Thus, nuclear decommissioning costs are broadly defined to include expenses incurred before, during and after the actual decommissioning process of the nuclear power plant that has ceased operations.

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Section 468A(c)(2) provides that in addition to any deduction under section 468A, there shall be allowable as a deduction for any taxable year the amount of the nuclear decommissioning costs with respect to which economic performance (within the meaning of section 461(h)(2)) occurs during such taxable year. Thus, costs meeting the definition of nuclear decommissioning costs under section 468A of the Code are not automatically deductible. These costs are deductible when economic performance occurs under section 461(h)(2) if the costs are deductible under section 162 (or are otherwise deductible under another provision of the Code).

Section 165(a) of the Code provides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Section 1.165-1(d)(1) of the regulations provides that a loss under § 165 shall be allowed in the taxable year in which the loss occurs, as evidenced by closed and completed transactions and as fixed by identifiable events occurring in that year.

Section 1.165-2(c) of the regulations provides that for the allowance under
§ 165(a) of losses arising from the permanent withdrawal of depreciable property from use in the trade or business or in the production of income, see § 1.167(a)-8.

Section 1.167(a)-8(a)(4) of the regulations provides that in order to qualify for the recognition of loss from physical abandonment, the intent of the taxpayer must be irrevocably to discard the asset so that it will neither be used again by him nor retrieved by him for sale, exchange or other disposition.

Legal restrictions upon the physical disposition of property such as a nuclear plant will not themselves preclude a finding of abandonment if all other facts and circumstances demonstrate an intention to irrevocably retire property from use and the requisite overt acts related to abandonment have occurred. The acts necessary to evidence the intent to abandon property need only be appropriate to the particular circumstances. A nuclear power plant is a heavily regulated asset, and one which a taxpayer cannot simply walk away from or dismantle.

In the present case, the costs associated with the construction and operation of the subject ISFSI are incurred in connection with the dismantlement and decontamination of Plant that has permanently ceased the production of power. Therefore, assuming the Plant itself qualifies for an abandonment loss under § 165 of the Code (as previously ruled upon) and that there exists no claim for reimbursement of the costs associated with the ISFSI with respect to which there is a reasonable prospect of recovery, we conclude that the costs associated with the construction, operation, and decommissioning of the subject ISFSI are deductible in the tax year paid or incurred pursuant to § 165 of the Code.

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Therefore, costs associated with the construction, operation, and decommissioning of an ISFSI for Plant constitute deductible losses pursuant to § 165 if in connection with the abandonment of Plant, they are irrevocably committed to the process of decommissioning. In addition, costs associated with the construction, operation, and decommissioning of an ISFSI for Plant may be paid from the Fund because they constitute decommissioning costs pursuant to § 1.468A-1(b)(5) of the regulations.

This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that this ruling may not be used or cited as precedent.

Pursuant to the power of attorney on file with this office, a copy of this letter is

being sent to the authorized legal representatives.
Sincerely yours,
/s/ Peter C. Friedman

PETER C. FRIEDMAN

Assistant to the Branch Chief, Branch 6
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)

Enclosure:

6110 copy