Nuclear decommissioning costs qualify, subject to pre-1984 carryback limit

Plain-English summary

An energy company incurred deductible costs for permanently retired nuclear fuel, systems, and components during plant outages. The IRS ruled that qualifying removal, storage, monitoring, transportation, and disposal costs were nuclear decommissioning costs that could generate specified liability losses under IRC § 172(f). It also ruled that the portion of a negative § 481(a) accounting-method adjustment attributable to those removal costs retained that character. However, a specified liability loss for a plant placed in service before 1984 could not be carried back to a tax year beginning before January 1, 1984.

Ruling snapshot

• Question: Do specified outage costs and the related § 481(a) adjustment qualify as nuclear decommissioning costs for the special NOL carryback rules?
• Outcome: Mixed, the costs and adjustment qualify, but carrybacks cannot reach tax years beginning before 1984
• Key authorities: IRC §§ 172(f), 461(h), 468A, and 481(a); Treas. Reg. §§ 1.468A-1(b)(6) and 1.481-1(d)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201447006 Third Party Communication: None
Release Date: 11/21/2014 Date of Communication: Not Applicable
Index Number: 172.03-00
Person To Contact:

-

Telephone Number:

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Refer Reply To:
CC:ITA:B05
PLR-103980-14
Date:
August 05, 2014

Dear ---------------

This letter responds to your request for a ruling request on behalf of Taxpayer dated
January 23, 2014. Taxpayer represents that the facts are as specified below.

LEGEND

Taxpayer = ----------------------------------------------------------

Date 1 = -------------------------

Year 1 = ------

Year 2 = ------

FACTS

Taxpayer is a publicly traded diversified energy company that conducts its business
through four wholly-owned subsidiaries that are part of its consolidated group. The
group files a consolidated federal income tax return. Through its subsidiaries, Taxpayer
indirectly owns interests in several nuclear generating facilities (facilities) and operates
or oversees the operation of the facilities.

The facilities are subject to regulation by the U.S. Nuclear Regulatory Commission
(NRC). The NRC has the authority to determine whether a nuclear generation facility
may operate and requires testing, evaluation, and modification of all aspects of nuclear
facilities, including decontamination and decommissioning.

Taxpayer maintains independent testing and monitoring, preventative and corrective
maintenance, and equipment and system replacement programs designed to satisfy
NRC requirements. These programs generally coincide with plant outages including

PLR-103980-14 2

planned and unplanned shutdowns during which Taxpayer refuels the nuclear reactors,
tests, monitor, and mitigates radiation levels, removes and replaces systems and
components, and addresses emergency conditions that arise between disconnection
and reconnection of the facilities to the electrical grid.

Taxpayer conducts refueling outages of the facilities periodically during which one-
fourth to one-third of the fuel rods in a fuel assembly are typically replaced. After
removal Taxpayer stores spent nuclear fuel at its own facilities using temporary “wet”
and “dry” storage facilities that are expected to satisfy the storage needs for each facility
through the end of each facility’s operating license term.

Taxpayer routinely removes and replaces systems and components of the facilities
during outages for a variety of reasons, including obsolescence, damage/unreliability,
and contamination. During this process retired systems and components are removed
and permanently disposed of using different methods depending on the level of
contamination.

Taxpayer maintains a staff of radiation technicians to monitor and mitigate radiation
levels at the facilities. During planned outages Taxpayer augments its staff with outside
third-party technicians. These technicians are responsible for the “drain down” process
of reducing radiation levels of the facility, which includes testing, surveying, water filter
maintenance, shielding processes, and plant scrubbing.

For the taxable year ending on Date 1, Taxpayer filed an application for change in
accounting method on behalf of certain of its subsidiaries with respect to certain
expenditures. Prior to obtaining the requested method change, the subsidiaries
followed financial statement standards in determining which expenditures constituted
deductible repairs and which expenditures had to be capitalized. Beginning with
Taxpayer’s Year 1 taxable year, the subsidiaries began deducting all repair
expenditures which keep plant systems and components in ordinarily efficient operating
condition without materially adding to the value of the equipment or appreciably
prolonging its life. A portion of the repair expenditures addressed by the accounting
method change are costs related to the systems and components removal and
replacement activities discussed above. In connection with the accounting method
change, the subsidiaries recognized negative § 481(a) adjustments for Year 1 equal to
the amount of deductions omitted under the prior method of accounting.

ISSUES

1. Whether deductions allowable under Chapter 1 of the Code1 for the following
   costs incurred by Taxpayer in connection with maintenance outages are

1 References to the Code refer to the Internal Revenue Code of 1986.

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deductions in satisfaction of a liability under a federal or state law requiring the
decommissioning of a nuclear power plant (or any unit thereof) within the
meaning of § 172(f) that may give rise to a specified liability loss (hereinafter
referred to as nuclear decommissioning costs):

a. Costs to remove, store, and monitor spent fuel assemblies that are
permanently retired from service; and

b. Costs to remove, store, transport, dispose, and monitor facility systems and
components that are permanently retired from service.

2. Whether the portion of a § 481(a) adjustment for a change in method of
   accounting, which is from capitalizing to expensing the costs of removing
   systems and components from service that are to be replaced by other systems
   and components, qualifies as a nuclear decommissioning cost.

LAW AND ANALYSIS

Section 172(a) allows a deduction for the taxable year equal to the aggregate of (1) the
net operating loss (NOL) carryovers to such year, plus (2) the NOL carrybacks to such
year. With certain modifications, § 172(c) defines a NOL 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 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 10-year carryback period for the portion of any NOL that qualifies as a specified
liability loss. Moreover, § 172(f)(3) provides a special carryback period for a specified
liability loss attributable to amounts incurred in the decommissioning of a nuclear power
plant (or any unit thereof).

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.

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

PLR-103980-14 4

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, Taxpayer’s expenses in decommissioning the facilities that are deductible
under Chapter 1 of the Code are "amounts incurred in the decommissioning of a nuclear
power plant" under § 172(f)(3) to the extent they are amounts described in § 1.468A-
1(b)(6) of the Income Tax Regulations.

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
Nuclear Decommissioning Reserve Fund (Fund) prior to when economic performance
occurs.

Section 468A(c)(1) generally requires the owner/operator to include in gross income
amounts that are distributed from a Fund. In addition to any deduction under § 468A(a)
for contributions to a Fund, § 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 § 461(h)) occurs during a taxable year.

Section 1.468A-1(b)(6) states 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 electric 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. Such term also includes costs incurred in connection with the construction,
operation, and ultimate decommissioning of a facility used solely to store, pending
acceptance by the government for permanent storage or disposal, spent nuclear fuel
generated by the nuclear power plant or plants located on the same site as the storage
facility. 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 (Pub.L. 97–425). An expense is otherwise deductible for purposes of this
paragraph (b)(6) if it would be deductible under chapter 1 of the Internal Revenue Code
without regard to section 280B.” The term “nuclear decommissioning costs” does not
include replacement costs (including installation and repair costs and the costs of
replacement systems and components) incurred by a taxpayer to extend the useful life
of the facilities. In addition, costs incurred by a taxpayer with respect to ongoing
monitoring, testing, and mitigation of radiation levels at nuclear facilities do not qualify
as decommissioning costs as defined under § 1.468A-1(b)(6) for purposes of § 468A.

PLR-103980-14 5

Issue 1a: Refueling

Taxpayer represents that deductible costs incurred with respect to spent nuclear fuel
include: (1) spent fuel removal costs, (2) handling and monitoring costs, (3) on-site
storage costs, (4) operating and maintenance costs for on-site storage, (5) security
costs for on-site storage, and (6) the cost of dry storage canisters filled with spent fuel.
Costs to remove, store, and monitor spent fuel assemblies include the cost of
augmenting Taxpayer’s normal staff of technicians during the refueling process.

Section 1.468A-1(b)(6) states that the term “decommissioning costs” includes costs
incurred in connection with the construction, operation, and ultimate decommissioning
of a facility used solely to store, pending acceptance by the government for permanent
storage or disposal, spent nuclear fuel generated by the nuclear power plant or plants
located on the same site as the storage facility. Accordingly, the deductible costs
incurred by Taxpayer with respect to spent nuclear fuel will qualify as “decommissioning
costs” as defined under § 1.468A-1(b)(6) for purposes of § 468A.

Issue 1b: Systems and Components Removal

Taxpayer represents that deductible costs with respect to removed systems and
components include: (1) system and component removal costs, (2) on-site storage
costs, (3) monitoring and handling costs, (4) operating and maintenance costs for on-
site storage, (5) security costs for on-site storage, and (6) transportation and disposal
costs for off-site storage.

Section 1.468A-1(b)(6) states 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 electric energy or has permanently ceased to produce electric energy.”
Accordingly, with respect to costs described in items (1) through (6), the deductible
costs incurred by Taxpayer with respect to spent nuclear fuel qualify as
“decommissioning costs” as defined under § 1.468A-1(b)(6) for purposes of § 468A.

To qualify as nuclear decommissioning costs under § 172(f), the liability for such costs
must also satisfy the requirements of § 172(f)(1)(B)(ii). That is, the act or failure to act
giving rise to such liabilities must have occurred at least 3 years prior to the beginning of
the taxable year when such liabilities are deductible. Also, Taxpayer must have used
an accrual method of accounting throughout the period or periods during which such act
(or failure to act) occurred. Taxpayer uses an accrual method of accounting for federal
income tax purposes. With respect to the costs referred to in 1a and 1b, the act giving
rise to the liabilities for such costs occurred when licenses to operate the plants were
granted and the plants were placed in service.

PLR-103980-14 6

Taxpayer has represented that costs at issue in this ruling are for nuclear power plants
placed in Service during or before Year 2. Consequently, liabilities for such costs also
satisfy the 3-year act or failure to act requirement of § 172(f)(1)(B)(ii). To the extent the
costs referred to in 1a and 1b are deductible under Chapter 1 of the Code, such costs
qualify as nuclear decommissioning costs within the meaning of § 172(f). The portion of
any NOL generated by such costs will qualify as a specified liability loss within the
meaning of § 172(f)(1).

Issue 2: Section 481(a) Adjustment

A portion of the negative § 481(a) adjustments discussed above is attributable to
system and component removal costs that were capitalized under the subsidiaries’ old
method of accounting but would have been expensed under the subsidiaries’ new
method of accounting. If that portion of the § 481(a) adjustments is characterized as
system and component removal costs, the adjustments will qualify as nuclear
decommissioning costs for § 172(f) purposes.

Section 481(a) requires those adjustments necessary to prevent amounts from being
duplicated or omitted to be taken into account when a taxpayer's taxable income is
computed under a method of accounting different from the method used to compute
taxable income for the preceding taxable year. When there is a change in method of
accounting to which § 481(a) is applied, income for the taxable year preceding the year
of change must be determined under the method of accounting that was then employed,
and income for the year of change and the following taxable years must be determined
under the new method of accounting as if the new method had always been used. See
section 2.04 of Rev. Proc. 2002-18, 2002-1 C.B. 678 and section 2.05 of Rev. Proc.
2011-14, 2011-1 C.B. 330.

Section 1.481-1(d) provides that “any adjustments required under section 481(a) that
are taken into account during a taxable year must be properly taken into account for
purposes of computing gross income, adjusted gross income, or taxable income in
determining the amount of any item of gain, loss, deduction, or credit that depends on
gross income, adjusted gross income, or taxable income.”

An adjustment under § 481(a) can include amounts attributable to tax years that are
closed by the statute of limitations. Suzy’s Zoo v. Commissioner, 114 T.C. 1, 13 (2000),
aff’d, 273 F.3d 875, 884 (9th Cir. 2001); Superior Coach of Florida, Inc. v.
Commissioner, 80 T.C. 895, 912 (1983), Weiss v. Commissioner, 395 F.2d 500 (10th
Cir. 1968), Spang Industries, Inc. v. United States, 6 Cl. Ct. 38, 46 (1984), rev’d on
other grounds 791 F.2d 906 (Fed. Cir. 1986).

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Sections 481(c) and 1.481-4 provide that the adjustment required by § 481(a) may be
taken into accounting in determining taxable income in the manner, and subject to the
conditions, agreed to by the Service and a taxpayer. Section 1.446-1(e)(3)(i) authorizes
the Service to prescribe administrative procedures setting forth the limitations, terms,
and conditions deemed necessary to permit a taxpayer to obtain consent to change a
method of accounting in accordance with § 446(e). Generally, the adjustment period for
voluntary method of accounting changes is one taxable year (year of change) for a net
negative § 481(a) adjustment and four taxable years (year of change and next three
taxable years) for a net positive § 481(a) adjustment. See section 5.04 of Rev. Proc.
2011-14, and section 5.03 of Rev. Proc. 97-27.

The purpose of the § 481(a) adjustment is to prevent amounts from being duplicated or
omitted in computing taxable income as a result of a change in method of accounting.
In this particular instance, the change in method of accounting results in the omission of
an amount of deductions, and thus a negative adjustment (reduction of taxable income)
is mandated by § 481 to rectify such omission. Section 481 does not expressly address
whether a § 481(a) adjustment retains or reflects the characteristics of the gross income
or deductions that underlie the adjustment. However, if the § 481(a) adjustment does
not retain or reflect the characteristics of its underlying item, other distortions caused by
the change in method of accounting could occur in some circumstances. In this
particular case, for example, some portion of the negative § 481(a) adjustment relates
to removal costs that qualify as nuclear decommissioning costs under § 172(f). If that
portion of the § 481(a) adjustment is not treated as qualifying for treatment as nuclear
decommissioning costs, the amount of nuclear decommissioning costs incurred by
Taxpayer over its lifetime will be permanently understated.

In the context of certain foreign corporations, the Service has stated that the § 481(a)
adjustment does retain the character of the underlying item, for purposes of subpart F.
Rev. Proc. 2011-14 provides that a negative § 481(a) adjustment necessary to prevent
the omission of amounts of an expense item is allocated to the class of gross income
that has the same source, separate limitation classification, character, and treatment for
purposes of subpart F as the foreign corporation's income that would have been offset
by the expense in the prior year or years. Furthermore, a negative § 481(a) adjustment
necessary to prevent the duplication of amounts of an income item offsets gross income
that has the same source, separate limitation classification, character, and treatment for
purposes of subpart F as the foreign corporation's income had in the prior year or years.
See section 5.07 of Rev. Proc. 2011-14.

Additionally, in MMC Corp. v. Commissioner, T.C. Memo 2007-354, the Tax Court held
that a positive § 481 adjustment is treated as built-in gain under § 1374. In MMC Corp.,
the taxpayer elected to convert from a C corporation to an S corporation after year two
of the four year § 481 spread period. The Tax Court observed that “when we examine
whether the section 481 adjustment is built-in gain [for purposes of § 1374], we consider

PLR-103980-14 8

the related item, not the section 481 adjustment itself.” The court further noted that the
taxpayer “mistakenly focused on the section 481 adjustment itself, rather than the
related item that the section 481 adjustment is correcting.”

Finally, allowing the portion of the § 481(a) adjustment allocable to repair expenditures
qualifying as nuclear decommissioning costs to retain the character of nuclear
decommissioning costs makes intuitive sense. The ultimate reason that this portion of
the § 481(a) adjustment exists is that Taxpayer incurred certain expenses that qualified
as deductions and as nuclear decommissioning costs. The only reason that these
expenses were not taken into account as deductions and treated as nuclear
decommissioning costs is due to the change in method of accounting. Although the
express language of § 481 only addresses distortions in the amount of lifetime taxable
income (here, an omission of deductions), it seems appropriate in this circumstance to
interpret this section to prevent closely related distortions caused by accounting method
changes (the understatement of deductions qualifying as nuclear decommissioning
costs).

Consequently, the portion of the negative § 481(a) adjustments attributable to system
and component removal costs that were capitalized under the subsidiaries’ old method
of accounting but would have been expensed under the subsidiaries’ new method of
accounting qualifies as nuclear decommissioning costs for § 172(f) purposes.

Carryback Period

The remaining issue concerns the carryback period for a specified liability loss
attributable to nuclear decommissioning expenses. 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, § 172(f)(3)
provides that, except as provided in regulations, the 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.

This special rule for NOLs generated by nuclear decommissioning costs and the
economic performance requirements of § 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.

PLR-103980-14 9

In § 11811 of the Omnibus Budget Reconciliation Act of 1990 (the 1990 Act), Congress
reorganized the provisions in § 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 § 11811(b)(2)(A) of
the 1990 Act, Congress enacted a new § 172(f). Included in § 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 section 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 § 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. This raises the question of whether the portion of any specified
liability loss attributable to expenses to decommission nuclear power plants placed in
service prior to January 1, 1984, may be carried back to the taxable year the plant was
placed in service.

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 § 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 § 172(f)(3) after the purely definitional changes that
Congress made in the 1998 Act.

Therefore, under the facts of this case, a specified liability loss attributable to nuclear
decommissioning costs for a nuclear power plant placed in service in a taxable year
beginning before January 1, 1984, may not be carried back to taxable years beginning
before January 1, 1984.

PLR-103980-14 10

CAVEATS

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that 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.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

Sincerely,

Seoyeon Sharon Park
Assistant to the Branch Chief, Branch 5
(Income Tax & Accounting)