Nuclear decommissioning fund may pay three broad cost categories

Plain-English summary

A utility had permanently shut down a nuclear plant and was using a qualified nuclear decommissioning fund. It expected license-termination costs, greenfield demolition and site-restoration costs, and spent-fuel management costs, including expansion and eventual removal of an on-site storage installation. The IRS ruled that all three categories fit the regulatory definition of nuclear decommissioning costs and could be paid from the fund to the extent each expense was otherwise deductible. The ruling did not decide whether any particular expense was currently deductible or sufficiently connected to decommissioning. It specifically warned that spent-fuel storage costs subject to possible recovery from the Department of Energy might not be otherwise deductible and therefore might not qualify for payment from the fund.

Ruling snapshot

• Question: Could the qualified fund pay license-termination, greenfield, and spent-fuel management costs incurred in decommissioning the plant?
• Outcome: Approved, but only to the extent each cost is otherwise deductible
• Key authorities: IRC § 468A; Treas. Reg. § 1.468A-1(b)(6)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201510030 Third Party Communication: None
Release Date: 3/6/2015 Date of Communication: Not Applicable
Index Number: 468A.01-00
Person To Contact:
------------------------------- ----------------------, ID No. ----------------
--------------------------- Telephone Number:
---------------------------------- --------------------
--------------------------- Refer Reply To:
-------------------------------- CC:PSI:B6
PLR-125134-14
Date:
December 3, 2014

LEGEND:

Taxpayer = ---------------------------------------------
--------------------------------
Parent = -----------------------------------
--------------------------------
Plant = ---------------------------------
Director = ---------------------------------------------------------------------------------
Location = ------------------------
X = -----
Commission = -----------------------------------------------------
State = -------------
Date A = ------------------
Date B = ----------------
Method = -------------
Fund = -------------------------------------------------------

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

   This letter responds to your request, dated June 27, 2014, for a ruling, under

section 468A of the Code, regarding whether certain costs incurred in connection with
the ongoing decommissioning of Plant constitute “nuclear decommissioning costs” as
defined in § 1.468A-1(b)(6) of the Income Tax Regulations.

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

   Taxpayer, a wholly-owned indirect subsidiary of Parent incorporated under the

laws of State, is included in a consolidated return filed by Parent. Taxpayer has an
ownership interest of X percent in the Plant. Taxpayer is regulated by Commission as a

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public utility and Commission granted Taxpayer a market-based rate tariff for its
wholesale power sales.

    The Plant is situated at Location. Plant commenced commercial operation on

Date A. On Date B, Taxpayer shut down Plant. Taxpayer maintains Fund, a nuclear
decommissioning fund qualified under § 468A. Since Date B, Taxpayer’s primary
activities have been related to the decommissioning of Plant.

    Taxpayer is using Method to decommission Plant. All nuclear fuel assemblies

have been removed from the reactor and those assemblies are being stored in a spent
fuel pool for cooling. Subsequently, the spent fuel will be inserted into storage casks
and the casks will be transferred to an on-sight Independent Spent Fuel Storage
Installation (ISFSI). An ISFSI consists of a concrete storage pad that holds the storage
casks. Taxpayer’s current ISFSI will require expansion to accommodate the addition of
the spent fuel from Plant. Under the Nuclear Waste Policy Act of 1982, 42 U.S.C. §
10101, et seq, the Department of Energy (DOE) is required to take and dispose of spent
nuclear fuel in a permanent geologic repository. No repository has been established
and the government has not yet begun accepting spent fuel. Utilities have recovered
ISFSI-related costs from the DOE in legal actions. Taxpayer expects to seek recovery
of its ISFSI-related costs from the DOE.

  The Taxpayer anticipates incurring three broad categories of expenses in the

process of decommissioning Plant. These are summarized as follows:

  1. License Termination Costs
  a. Transitional costs incurred in preparing for decommissioning
  including, but not limited to, planning, design, security, staffing, retention, and
  communication with affected communities.
  b. Ongoing operation and maintenance costs including, but not limited to,
  salaries, security, taxes, insurance, regulatory fees, corporate support, legal,
  accounting, information technology, and other administrative costs.
  c. Physical dismantlement costs including, but not limited to, dismantlement and
  removal of plant systems, site decontamination and disposal of hazardous and
  industrial waste.
  d. Severance Costs including, all severance costs for employees once their tasks
  in connection with the decommissioning of Plant are completed.

  2. Greenfield Costs
  a. Demolition of clean structures
  b. Site restoration
  c. Severance costs including all severance costs for employees once their tasks
  in connection with the greenfield phase are completed.

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  3. Spent Fuel Management Costs
  a. Planning for spent fuel management
  b. ISFSI expansion costs including design and construction costs
  c. Purchase of dry storage systems for fuel assemblies
  d. Spent fuel transfer costs
  e. Ongoing operation and maintenance costs including, but not limited to,
  surveillance, maintenance, security, regulatory fees and permits, salaries, taxes,
  insurance, corporate support, legal, accounting, information technology, and
  other administrative costs.
  f. Deconstruction and removal of the ISFSI
  g. Severance costs including all severance costs for employees once their tasks
  in connection with the spent fuel management are completed

 Taxpayer would like to pay the costs summarized above from the Fund.

Taxpayer requests the following rulings:

  1. To the extent otherwise deductible, all License Termination Costs described

above constitute “nuclear decommissioning costs” within meaning of § 468A and
§ 1.468A-1(b)(6) and therefore can be paid out of the Fund.

   2. 1. To the extent otherwise deductible, all Greenfield Costs described above

constitute “nuclear decommissioning costs” within meaning of § 468A and § 1.468A-
1(b)(6) and therefore can be paid out of the Fund.

   3. To the extent otherwise deductible, all Spent Fuel Management Costs

described above constitute “nuclear decommissioning costs” within meaning of § 468A
and § 1.468A-1(b)(6) and therefore can be paid out of the Fund.

   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 taxpayers with a qualifying interest in
a nuclear power plant to currently deduct the future costs of decommissioning the
nuclear power plant by making contributions to a Fund prior to when economic
performance occurs.

   Section 468A(c)(1) generally requires the taxpayer 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 such taxpayer 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

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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 § 280B.”

    The definition of “nuclear decommissioning costs” contained in § 1.468A-1(b)(6)

is quite broad. As noted above, it includes 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” as
well as “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.” Further, the definition 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.” Thus, with respect to the License Termination Costs, Greenfield
Costs, and Spent Fuel Management Costs summarized above, these costs are related
to the decommissioning of Plant and are within the definition of nuclear
decommissioning costs. We do not rule that any particular cost is “otherwise
deductible” under chapter 1 of the Code; Taxpayer has assumed that fact within its
requested rulings. Taxpayer represents that these costs are otherwise deductible under
sections of the Code including § 162 and § 165. We rule only that these general
categories of costs are nuclear decommissioning costs and that therefore these costs
may be paid out of Fund.

    We note that, while the regulations are broadly worded and have been

interpreted broadly by the Service, those regulations do require that, to be included
within the ambit of nuclear decommissioning costs, all costs must be “otherwise
deductible.” Section 468A does not provide an independent basis for the deduction of
any amounts except for those amounts contributed to a qualified fund as provided in §

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468A(a). Those 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 must also
be “otherwise deductible.” In the absence of a national repository for spent nuclear fuel,
operators of nuclear plants must safely store such fuel as part of their obligations under
their license. However, the costs of constructing the necessary facilities may not be
“otherwise deductible” if there is a reasonable chance of recovery of these amounts and
therefore these costs may not be deductible. The regulations do not include such costs
within the definition of “nuclear decommissioning costs” and these costs may not be
paid out of a qualified fund.

   We rule as follows:

  1. To the extent otherwise deductible, all License Termination Costs described

above constitute “nuclear decommissioning costs” within meaning of § 468A and
§ 1.468A-1(b)(6) and therefore may be paid out of the Fund.

   2. To the extent otherwise deductible, all Greenfield Costs described above

constitute “nuclear decommissioning costs” within meaning of § 468A and § 1.468A-
1(b)(6) and therefore can be paid out of the Fund.

   3. To the extent otherwise deductible, all Spent Fuel Management Costs

described above constitute “nuclear decommissioning costs” within meaning of § 468A
and § 1.468A-1(b)(6) and therefore can be paid out of the Fund.

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

concerning the Federal income tax consequences of the transaction described above.
Each specific cost must be shown to be related to the decommissioning of Plant and
that relationship is subject to verification on audit. We rule only that, as categories, the
License Termination, Greenfield, and Spent Fuel Management costs as described
above are sufficiently related to the decommissioning of Plant to be considered nuclear
decommissioning costs and paid out of Fund. Further, we do not rule regarding the
current deductibility of any costs identified as Spent Fuel Management Costs that may
be subject to recovery by the Taxpayer.

   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
designated representatives. We are also sending a copy of this letter ruling to the
Director. Pursuant to § 1.468A-7(a), a copy of this letter must be attached (with the

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required Election Statement) to the Taxpayer’s federal income tax return for each tax
year in which the Taxpayer claims a deduction for payments made to the Fund.

                                 Sincerely,



                                 Peter C. Friedman
                                 Senior Technician Reviewer, Branch 6
                                 Office of the Associate Chief Counsel
                                 (Passthroughs & Special Industries)

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