Nuclear decommissioning funds could pay severance and preparation costs

Plain-English summary

The IRS ruled that employee severance payments and broad categories of pre-dismantlement costs connected with shutting down two nuclear plants were nuclear decommissioning costs under § 468A. The plants' qualified funds could reimburse the owner or an unrelated co-owner for those costs without prohibited self-dealing. To the extent the deductions generated net operating losses, they qualified as specified liability losses under § 172(f), but the statutory savings rule prevented carrybacks to a taxable year beginning before January 1, 1984.

Ruling snapshot

• Question: Could qualified nuclear decommissioning funds pay the described severance and pre-dismantlement costs, and could related deductions generate specified liability losses?
• Outcome: Approved, subject to expense-level qualification under § 468A and the pre-1984 carryback limitation.
• Key authorities: IRC §§ 162, 172(f), 461(h), 468A, 4951; Treas. Reg. §§ 1.468A-1, 1.468A-2, and 1.468A-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201432012 Third Party Communication: None
Release Date: 8/8/2014 Date of Communication: Not Applicable
Index Number: 468A.01-00
Person To Contact:
----------------------, ID No. ----------------
Telephone Number:
--------------------
Refer Reply To:
CC:PSI:B6
------------------ PLR-147158-13
------------------------------------------------ Date:
----------------------------------------------- March 31, 2014
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LEGEND:
Taxpayer = ---------------------------------------------------------------------------------
Parent = ----------------------------------------------
Plant A = -------------------------------------------------------------------
Plant B = ---------------------------------------------------------------------------------
Location = --------------------------------------
Commission = -----------------------------------------------
State = ------------
Year A = ------
Year B = ------
Date 1 = ------------------------
Date 2 = --------------------------
Date 3 = -----------------
P = ------
D = ------
Fund = ------------------------------------------
Director = ---------------------------------------------------------------------------------

Dear --------------:

    This letter responds to your request, dated November 8, 2013, for rulings

concerning whether certain payments made to employees and certain payments of “pre-
dismantlement costs” constitute “nuclear decommissioning costs” as defined in § 468A
of the Internal Revenue Code and § 1.468A-1(b)(6) of the Income Tax Regulations. In

addition, you ask whether these payments generate a specified liability loss under §
172(f), and if so, what is the earliest taxable year to which such a loss may be carried.

   Taxpayer represents the facts and information relating to its request for rulings as

follows:

    Taxpayer, a corporation, is wholly-owned (through an additional corporation) by

Parent. Taxpayer owns a P percent interest in both Plant A and Plant B and is
responsible for D percent of the cost of decommissioning each Plant. The Plants are at
Location and the amended operating license of Plant A is scheduled to expire on Date 1
and the operating license of Plant B is scheduled to expire on Date 2. On Date 3
Taxpayer notified the Nuclear Regulatory Commission (NRC) that both Plants had
permanently ceased operations. With respect to nuclear decommissioning costs that
are included in the Taxpayer’s cost of service for ratemaking purposes as well as for
other matters, Taxpayer is subject to regulation by Commission. Taxpayer maintains a
separate Fund for each of the Plants. Commission has authorized collections of
amounts for decommissioning from ratepayers and the Service has approved schedules
of ruling amounts for contributions to these Funds.

    In the transition of the Plants from operational status to a safe shutdown and then

to physical dismantlement of the Plants and restoration of the site as required by
Commission and the Nuclear Regulatory Commission, the operational workforce of the
Plants will be reduced overall. The Taxpayer has broadly described the types of tasks
to be performed by employees during the decommissioning process as follows: (1) to
plan and design all of the logistical and technical aspects required to take a nuclear
power plant from an operational-ready status to safe shutdown and non-operational
status to a fully dismantled and restored site; (2) to ensure the safe and orderly
transition of the Plants from an operational-ready status to safe shutdown and non-
operational status; (3) maintain the Plants in a safe condition during the actual
dismantlement of the Plants; and (4) dismantle, remove, and restore the site to its
regulatory and legally required condition. When employees are no longer needed for
operation and or any phase of the decommission process, those employees are
released from service with the Taxpayer. Rules of the Commission allow the collection
of decommissioning amounts for the severance and other assistance payments to
separated employees who become unemployed as a result of decommissioning.

   In addition to the severance payments described above, Taxpayer will incur “pre-

dismantlement costs.” These costs are described by the Taxpayer broadly as follows:
(1) preparation for physical decommissioning of the units; (2) consolidation and
restoration of the facilities of the Plants and the site upon which they are located; (3)
security for the Plants and the surrounding site; (4) communication with affected
communities regarding the permanent retirement of the Plants and plans for
decommissioning of the Plants; and (5) staffing costs incurred as a result of the

permanent retirement and prior to the commencement of physical dismantlement of
major components of the Plants.

   For reasons of administrative necessity, many of the costs described above will

be paid initially, either by an unrelated company that owns the remainder of Plant A and
Plant B not owned by Taxpayer, or by Taxpayer. These costs will then be reimbursed
to the unrelated company or to Taxpayer by the Fund.

  Taxpayer requests the following rulings:

  (1)    Severance payments as described in the Taxpayer’s request constitute
            “nuclear decommissioning costs” within the meaning of § 468A and
            § 1.468A-1(b)(6), and therefore can be paid out of the Funds for the
            related Plant.
  (2)    Pre-dismantlement decommissioning costs as described above constitute
            “nuclear decommissioning costs” within the meaning of § 468A and
            § 1.468A-1(b)(6), and therefore can be paid out of the Funds for the
            related
  (3)    Reimbursement by the Funds to the unrelated company or to the
            Taxpayer of severance payments and pre-dismantlement
            decommissioning costs represent a permissible use of the Funds
            under § 468A(c)(4) and §§ 1.468A-5(a)(3)(i) and 1.468A-5(b)(2)(i), and
            is not a prohibited self-dealing transaction under § 1.468A-5(b)(1).
  (4)    May deductions for the Severance Payments described in Issue 1 and the
            Pre-Dismantlement Decommissioning Costs described in Issue 2
            generate a specified liability loss under § 172(f), and if so, what is the
            earliest taxable year to which such a loss may be carried?

LAW AND ANALYSIS

  Issues 1, 2, and 3

   Section 468A(a) was added to the Code in 1984 by Deficit Reduction Act of

1984, Pub. L. No. 98-369. Section 468A(a) allows owners/operators of nuclear power
plants to currently deduct the future costs of decommissioning a nuclear power plant by
making contributions to a Fund prior to when economic performance occurs.

   Section 468A(c)(1) and § 1.468A-2(d)(1) generally require the owner/operator to

include in gross income amounts that are distributed from a Fund. In addition to any
deduction under section 468A(a) for contributions to a Fund, section 468A(c)(2)
recognizes that an owner/operator may deduct otherwise deductible nuclear
decommissioning costs, (such as under § 162), for which economic performance (within
the meaning of section 461(h)) occurs during a taxable year.

     Section 468A(e)(4) limits the use of the amounts in a Fund to satisfying any

liability of any person contributing to the Fund for the decommissioning of a nuclear
power plant, the payment of administrative and other incidental expenses of the Fund,
and making investments.

    Section 1.468A-1(b)(6) states, in part, that “nuclear decommissioning costs”

means “all otherwise deductible expenses to be incurred in connection with the
entombment, decontamination, dismantlement, removal and disposal of the structures,
systems and components of a nuclear power plant, whether that nuclear power plant
will continue to produce energy or has permanently ceased to produce electric energy.
Such term includes all otherwise deductible expenses to be incurred in connection with
the preparation for decommissioning, such as engineering and other planning
expenses, and all otherwise deductible expenses to be incurred with respect to the plant
after the actual decommissioning occurs, such as physical security and radiation
monitoring expenses.”

  Section 162 generally allows a deduction for the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or business.

   Section 468A(e)(5) provides that, under regulations prescribed by the Secretary,

for purposes of § 4951 the Fund shall be treated in the same manner as a trust
described in § 501(c)(21). This section is implemented by §1.468A-5(b). Section
1.468A-5(b)(1) states that the excise taxes imposed by § 4951 apply to each act of self-
dealing between the Fund and a disqualified person.

     In part, § 1.468A-5(b)(2) defines “self-dealing” for purposes of § 468A and the

regulations thereunder as any act described in section 4951(d) except: (i) A payment by
a nuclear decommissioning fund for the purpose of satisfying, in whole or in part, the
liability of the electing taxpayer for decommissioning costs of the nuclear power plant to
which the nuclear decommissioning fund relates.

   Section 1.468A-5(b)(3) provides that the term “disqualified person” includes each

person described in § 4951(e)(4) and § 53.4951-1(d). Section 4951(e)(4) of the Code
provides the term “disqualified person,” with respect to a trust, includes a contributor to
the trust and a trustee of the trust.

    Section 1.468A-5(c)(1)(i) provides that if at any time during the taxable year a

qualified nuclear decommissioning fund does not satisfy a requirement of section
1.468A-5(a), the Service may, in its discretion, disqualify all or a portion of the fund as of
the date that the fund does not satisfy such requirements.

    Section 1.468A-5(c)(3) provides that, if all or any portion of a qualified nuclear

decommissioning fund is disqualified under section 1.468A-5(c)(1), the portion of the
qualified nuclear decommissioning fund that is disqualified is treated as distributed to

the electing taxpayer on the date of the disqualification. Such a distribution shall be
treated for purposes of section 1001 as a disposition of property held by the qualified
nuclear decommissioning fund. In addition, the electing taxpayer must include in gross
income for the taxable year that includes the date of disqualification an amount equal to
the product of the fair market value of the assets of the fund determined as of the date
of disqualification (reduced by certain amounts including any tax that is (1) imposed on
the income of the fund, (2) is attributable to income taken into account before the date
of the disqualification or as a result of the disqualification, and (3) has not been paid as
of the date of the disqualification) and the fraction of the qualified nuclear
decommissioning fund that was disqualified under section 1.468A-5(c)(1).

   We have examined the representations and information submitted by the

Taxpayer in relation to the requirements set forth in § 468A and the regulations
thereunder. Based solely upon these representations of the facts, we conclude that
severance payments and pre-dismantlement decommissioning costs are nuclear
decommissioning costs within the meaning of § 468A and § 1.468A-1(b)(6). The
expenses, as broadly described by Taxpayer, are incurred in connection with the
entombment, decontamination, dismantlement, removal, and disposal of the structures,
systems, and components of a nuclear power plant. We note that we are not ruling on
any particular expense but on broad categories of expense and emphasize that each
specific expense must satisfy the tests in § 468A and the regulations thereunder.

    Regarding the reimbursement by the Funds of severance payments and

predismantlement decommissioning costs, these amounts fall into two groups: (1) those
paid initially by the unrelated company and then invoiced to Taxpayer and paid by the
Funds and (2) those paid initially by the unrelated company, invoiced and paid by
Taxpayer and then reimbursed by the Funds to Taxpayer. In both cases, we conclude
that such payments are a permissible use of the Funds and that the reimbursements
are within the exception to the self-dealing rules contained in § 1.468A-5(b)(2)(i). That
section defines “self-dealing” for purposes of § 468A and the regulations thereunder as
any act described in section 4951(d) except “(i) A payment by a nuclear
decommissioning fund for the purpose of satisfying, in whole or in part, the liability of the
electing taxpayer for decommissioning costs of the nuclear power plant to which the
nuclear decommissioning fund relates.” Here the reimbursement of severance
payments and pre-dismantlement decommissioning costs made by the Funds are made
for the purpose of satisfying the liability of Taxpayer for decommissioning costs of the
nuclear power plant to which the Fund relates and are therefore not “self-dealing.”
Thus, the reimbursement by the Funds to the unrelated company or to Taxpayer of
severance payments and pre-dismantlement decommissioning costs represent a
permissible use of the Funds. This reimbursement constitutes an amount distributed
from a Fund as described in § 468A(c)(1) and § 1.468A-2(d)(1). We note that this ruling
applies only to reimbursement of the amounts paid for the severance payments and the
pre-dismantlement decommissioning costs by the Taxpayer, and not any additional

amounts such as “service fees” or any other amounts not solely to reimburse Taxpayer
for decommissioning costs actually paid.

   Issue 4

   Section 172(a) allows a deduction for the taxable year equal to the aggregate of

(1) the net operating loss carryovers to such year, plus (2) the net operating loss
carrybacks to such year. With certain modifications, § 172(c) defines a net operating
loss as the excess of the deductions allowed by Chapter 1 of the Code over the gross
income.

   Section 172(b)(1)(A) generally provides that a net operating loss (NOL) for any

taxable year is carried back to each of the 2 taxable years preceding the taxable year of
the loss and carried forward to each of the 20 taxable years following the year of the
loss. However, § 172(b)(1)(C) provides a special carryback period for the portion of any
NOL that qualifies as a specified liability loss.

    Section 172(f)(1)(B)(i) defines a specified liability loss, in part, as any amount

allowable as a deduction under Chapter 1 of the Code (other than §§ 468(a)(1) or
468A(a)) which is in satisfaction of a liability under a federal or state law requiring the
decommissioning of a nuclear power plant (or any unit thereof) that is taken into
account in computing the NOL for the taxable year. Section 172(f)(1)(B)(ii) provides
that a deduction for a liability may only generate a specified liability loss if (I) the act (or
failure to act) giving rise to such liability occurs at least 3 years before the beginning of
the taxable year, and (II) the taxpayer used an accrual method of accounting throughout
the period or periods during which such act (or failure to act) occurred.

   Section 172(f)(3) provides that, except as provided in regulations, that portion of

a specified liability loss which is attributable to amounts incurred in the
decommissioning of a nuclear power plant (or any unit thereof) may, for purposes of
subsection (b)(1)(C), be carried back to each of the taxable years during the period (A)
beginning with the taxable year in which such plant (or unit thereof) was placed in
service, and (B) ending with the taxable year preceding the loss year.

     Section 1.446-1(c)(1)(ii)(A) provides that under an accrual method of accounting,

a liability is incurred and generally taken into account for federal income tax purposes in
the year in which all the events have occurred that establish the fact of the liability, the
amount of the liability can be determined with reasonable accuracy, and economic
performance has occurred with respect to the liability.

   Section 461(h) makes clear that generally the all events test is not treated as

having been met any earlier than the taxable year in which economic performance has
occurred with respect to a liability. See also section 1.461-4(a)(1) of the regulations.

   Section 461(h)(2)(B) provides that in the case of a liability that requires the

taxpayer to provide services, economic performance occurs as the taxpayer provides
the services. Section 1.461-4(d)(4) of the regulations provides that economic
performance occurs with respect to such service liabilities as the taxpayer incurs costs
in connection with the satisfaction of the liability.

   The phrase “amounts incurred in the decommissioning of a nuclear power plant”

should be interpreted to have the same meaning as the term “nuclear decommissioning
costs” under § 468A because the relevant language contained in both §§ 172(f)(3) and
468A was added to the Code by the same section of the Tax Reform Act of 1984 (the
1984 Act), and both sections were intended to provide relief to the nuclear power plant
industry. See generally H. Rep. No. 861, 98th Cong., 2d Sess. 877 (1984). Accordingly,
a taxpayer’s expenses in decommissioning the power plants that are deductible under
Chapter 1 of the Code are “amounts incurred in the decommissioning of a nuclear
power plant” under section 172(f)(3) to the extent they are amounts described in section
1.468A-1(b)(6) of the regulations.

    Moreover, the act or failure to act giving rise to such liabilities has occurred at

least 3 years prior to the beginning of the taxable year when such liabilities will be
deductible. In the case of pre-dismantlement decommissioning costs, the act giving rise
to the liability occurred when licenses to operate the Plants were granted and the Plants
were placed in service. In the case of the liability for severance payments, the act
giving rise to such liability was when State enacted a statute which could be interpreted
to allow such costs and the Commission approved such costs as decommissioning
expenses. Finally, the Taxpayer uses the accrual method of accounting. Consequently,
to the extent deductions for nuclear decommissioning costs generate an NOL, that
portion of the NOL will qualify as a specified liability loss as defined in § 172(f).

     The remaining issue concerns the taxable years to which such a loss may be

carried. As a general rule, § 172(b)(1)(C) allows the unabsorbed portion of a specified
liability loss to be carried back to each of the 10 taxable years preceding the taxable
year of the loss, with the 10th preceding taxable year being the first year to which the
loss is carried. However, as noted above, § 172(f)(3) generally permits the portion of a
specified liability loss attributable to nuclear decommissioning expenses to be carried
back to each of the taxable years during the period (A) beginning with the taxable year
in which such plant (or unit thereof) was placed in service, and (B) ending with the
taxable year preceding the loss year.

  This special rule for NOLs generated by nuclear decommissioning costs and the

economic performance requirements of section 461(h) for accrual method taxpayers
were both originally enacted in the same section of the 1984 Act. In adding § 172(k) to
the Code, the 1984 Act provided for an extended carryback period for such losses.
However, former § 172(k)(4) did not allow carrybacks to taxable years beginning before

January 1, 1984, unless the loss could be carried back to those years without the
benefit of special rules for deferred statutory or tort liability losses.

   In section 11811 of the Omnibus Budget Reconciliation Act of 1990 (the 1990

Act), Congress reorganized the provisions in section 172. Congress placed the 10-year
carryback for product liability losses and what had previously been called deferred
statutory or tort liability losses under the same subsection of § 172, namely § 172(f),
labeling such losses specified liability losses. After striking certain sections of § 172, in
section 11811(b)(2)(A) of the 1990 Act Congress enacted a new § 172(f). Included in
section 11811(b)(2)(B) of the 1990 Act is the following savings provision which
continued the carryback limitation originally contained in the 1984 Act:

   The portion of any loss which is attributable to a deferred statutory or tort liability

loss (as defined in § 172(k) of the Internal Revenue Code of 1986 as in effect on the
day before the date of the enactment of this Act) may not be carried back to any taxable
year beginning before January 1, 1984, by reason of the amendment made by
subparagraph (A).

   In section 3004 of the Tax and Trade Relief Extension Act of 1998 (the 1998

Act), Congress restricted the types of liabilities the deduction of which could generate a
specified liability loss to five enumerated liabilities (in addition to product liability losses),
including federal or state law liabilities to decommission a nuclear power plant (or any
unit thereof). Prior to the 1998 Act, a specified liability loss could be based on any
deduction arising out of a federal or state law provided the additional requirements of
the statute were satisfied.

   In contrast to the prior acts, in the 1998 Act Congress did not enact a savings

provision prohibiting the carryback of specified liability losses to any taxable year
beginning before January 1, 1984. Plant A was placed in service in Year A, but Plant B
was placed in service in Year B. This raises the question of whether the portion of any
specified liability loss attributable to expenses to decommission Plant A may be carried
back to Year A, a taxable year beginning before January 1, 1984.

     In the 1998 Act Congress only amended the definition of a specified liability loss.

Congress did not amend the Code sections that addressed the taxable years to which
such losses could be carried back. Congress did not amend section 172(f)(3) which
contains the special carryback rule for specified liability losses attributable to deductions
for nuclear decommissioning costs. Consequently, the savings provision contained in
the 1990 Act continues to apply to section 172(f)(3) after the purely definitional changes
that Congress made in the 1998 Act. Therefore, the first taxable year that any specified
liability loss attributable to decommissioning Plant A may be carried back to is Year B.
The first taxable year that the portion of any specified liability loss attributable to
decommissioning Plant B may be carried back to is also Year B.

    Except as specifically determined above, no opinion is expressed or implied

concerning the Federal income tax consequences of the transaction described above.
We note that, even though the granting of the license by the NRC is the act giving rise
to the liability, the liability is not incurred until economic performance occurs – when the
actual decommissioning takes place. The taxpayer may apply § 172(f) after such time.

   This ruling is directed only to the Taxpayer who requested it. Section 6110(k)(3)

of the Code provides it may not be used or cited as precedent. In accordance with the
power of attorney on file with this office, a copy of this letter is being sent to your
authorized representatives. We are also sending a copy of this letter ruling to the
Director.

                                   Sincerely,



                                   Peter C. Friedman
                                   Senior Technician Reviewer, Branch 6
                                   (Passthroughs & Special Industries)

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