A utility that abandoned a half-built nuclear project gets a section 165 abandonment loss

Plain-English summary

A regulated electric utility set out to build new nuclear generating units at one of its plants, co-owned with an unrelated joint owner. The project ran years behind schedule and far over budget, and the lead construction contractor went bankrupt and announced it could not finish. The utility's board voted to abandon the project, terminated the construction contracts, ended employees and permits, gave up its federal licenses, and released its nuclear production tax credit allocations. It then asked the IRS whether it could deduct the resulting loss under section 165, which allows a deduction for a loss sustained during the year and not compensated by insurance or otherwise. The IRS ruled yes: the utility showed both an intent to abandon and affirmative acts of abandonment (the two things section 165 abandonment requires), so it sustained a deductible abandonment loss in the year the project ended. The IRS also confirmed, following Rev. Rul. 87-117, that if the state rate regulator later lets the utility recover some abandoned-plant costs through customer rates, that rate recovery does not count as being "compensated by insurance or otherwise" and so does not defeat the loss. The ruling was limited to whether an abandonment occurred; it did not decide which specific assets were abandoned or the dollar amount of the loss.

Ruling snapshot

• Question: Did the utility sustain a deductible abandonment loss under section 165 when it terminated and abandoned a partially constructed nuclear project?
• Outcome: approved (abandonment loss sustained in the year the project was abandoned)
• Key authorities: IRC § 165(a); Treas. Reg. §§ 1.165-1, 1.165-2; Rev. Rul. 2004-58; Rev. Rul. 87-117; A.J. Industries, Inc. v. United States, 503 F.2d 660 (9th Cir. 1974)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201910001                                              [Third Party Communication:
Release Date: 3/8/2019                                         Date of Communication: Month DD, YYYY]
Index Number: 165.00-00
                                                               Person To Contact:
                                                               -----------------------, ID No. -------------
----------------------------                                   Telephone Number:
-----------------------------                                  ---------------------
-------------------------------------                          Refer Reply To:
                                                               CC:ITA:B03
---------------------------------                              PLR-117939-18
--------------------                                           Date: November 30, 2018




TY: -------

LEGEND:

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

Property = ------------------------------------------------------------------------------------------------------
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Project = --------------------------------------------------------------------------------------------------------
---------------------------------

Parent = ------------------------------------------------------

State = ---------------------

Plant = ----------------------------------------

Joint Owner = ----------------------

Contract A = ---------------------------------------------------------------------------

Group = ---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------

Contract B = --------------------------------------------------

Act = -------------------------------
PLR-117939-18                           2

County = ----------------------

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

Date 2 = -------------------

Date 3 = ---------------------------

Date 4 = ------------------------

Date 5 = ---------------------------

Date 6 = ---------------------

Date 7 = -----------------------

Date 8 = ------------------------

Date 9 = ----------------------------

Year 1 = -------

Year 2 = -------

Year 3 -- -------

Year 4 = -------

Year 5 = -------

Year 6 = -------

Year 7 = -------

Year 8 = -------

Year 9 = -------

Year 10 = -------

Year 11 = -------

Year 12 = -------
PLR-117939-18                                 3

C = --

D = --

E% = ----

F% = ----

G = --

$H = -------------

I = -------

J = -----

K = ----

$L = -------------

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

This is in response to a letter sent on your behalf by your representatives dated -----------
------- (and subsequent correspondence). In the letter, your representatives requested a
ruling that Taxpayer is allowed a loss deduction under section 165 of the Internal
Revenue Code (“Code”) as a result of the abandonment of the Project in the taxable
year ending on Date 1.

                                          FACTS

Taxpayer represents the facts and information related to its request for a ruling as
follows:

Parent is a State public utility holding company and the common parent of an affiliated
group of corporations filing a consolidated return. Parent’s largest subsidiary is
Taxpayer.

Taxpayer is a regulated utility, a calendar year corporation, and uses an overall accrual
method of accounting. Taxpayer generates, transmits, and distributes electricity to
customers in its franchised service territory in State. One of Taxpayer’s baseload
generating stations is Plant. Since Year 1, Plant includes a nuclear electric generation
unit (Unit C), which is co-owned with Joint Owner as tenants in common under a joint
ownership arrangement. Joint Owner is a state-owned utility that is unrelated to
Taxpayer.
PLR-117939-18                                 4


Taxpayer decided to undertake Project in order to meet customers’ future electrical
consumption needs, and thus, in Year 2, Taxpayer on behalf of itself and as agent for
Joint Owner (1) applied to the U.S. Nuclear Regulatory Agency (NRC) for combined
operating licenses (COLs) to construct and operate D new nuclear units, and (2)
entered into Contract A with Group for the engineering, design, procurement, and
construction of D new nuclear electric generation units at Plant (the New Units). When
Contract A was first announced, Taxpayer expected the New Units to be completed and
placed in service in Year 3 and Year 4.

Taxpayer and Joint Owner entered into Contract B in Year 5. Contract B specifically
provided that 1) Taxpayer was Joint Owner’s agent with respect to all aspects of the
acquisition, design, engineering, licensing, and construction of the New Units,
2) Taxpayer owned E% of the New Units while Joint Owner owned the remaining F%,
and, 3) these ownership percentage interests were applicable to respective rights and
obligations for the New Units, including payments under Contract B as well as
entitlement to electricity generated by the New Units once they became operational.
Contract B also provided that Taxpayer and Joint Owner held title to the New Units as
tenants in common with separate, undivided ownership interests, and that both parties
agreed that their relationship with regard to the Project was one of independent,
unrelated entities and that there was no intent to create a partnership or joint venture for
federal income tax purposes. Thus, Taxpayer owned a separate and discrete interest in
the New Units and related Property, none of which were placed in service for purposes
of section 168 of the Code prior to abandonment (and will never be placed in service).
The Project included, but was not limited to, certain buildings, equipment and related
parts, land improvements, and supplies. Taxpayer represents that Taxpayer and Joint
Owner had executed two agreements prior to Contract B which governed their
relationship with respect to the New Units, and that the roles, ownership, and other
terms relevant to this ruling request under the prior two agreements were consistent
with Contract B.

The construction of the Project and Taxpayer’s related recovery of financing costs
through rates was subject to review and approval by the State Public Service
Commission (PSC) as provided for in state law under the Act. Under the Act, the PSC
approved the initial construction milestone schedule and related forecasted capital costs
in Year 6. Approvals by the PSC related to the Project were strictly related to recovery
of costs through rates charged to customers for electricity.

Taxpayer encountered difficulties throughout the duration of the Project, resulting in
Taxpayer requesting and receiving approval from the PSC for updates and revisions to
the capital cost schedule and/or the construction milestone schedule G times during the
life of the Project. Group did not adhere to certain budgets and interim construction
schedules because of many factors, including: (1) unanticipated difficulties encountered
in project engineering and the construction of project components, (2) constrained
PLR-117939-18                                 5

financial resources of the contractors, (3) regulatory, legal, training, and construction
processes associated with securing approvals, permits and licenses and necessary
amendments to them within projected timeframes, (4) the availability of labor and
materials at estimated costs, and (5) the efficiency of project labor. There were also
contractor and supplier performance issues, difficulties in meeting critical regulatory
requirements, contract disputes, and changes in key contractors or subcontractors.

In Year 7, the NRC approved and issued COLs for the New Units. Also in Year 8,
Contract A was amended (Year 8 Amendment) to establish new guaranteed substantial
completion dates, substantially increased penalties for missing those dates, and
provided Taxpayer and Joint Owner the option to fix the total amount to be paid to the
Group for its work on the Project. Subsequently, in Year 9, the PSC approved
Taxpayer’s requested updates resulting from the Year 8 Amendment to the capital cost
schedule and/or the construction milestone schedule, including revised contractual
substantial completion dates, increases in capital and other costs, and approved the
election of the fixed price option. The construction schedule approved by the PSC
provided for contractually guaranteed substantial completion dates in Year 4 and Year
10.

In Year 11, a member of the group notified Taxpayer that the contractually guaranteed
substantial completion dates reflected in the Year 8 Amendment would not be met, and
provided revised estimated completion dates in Year 10. Subsequently in Year 11, the
members of Group and certain of their affiliates filed petitions for protection under
Chapter 11 of the U.S. Bankruptcy Code, citing a liquidity crisis attributable, in part, to
the Project and other nuclear construction projects as a material factor. As part of their
filing, members of Group publicly announced their inability to complete the Project under
the terms of Contract A and their intention to reject Contract A.

Taxpayer and Joint Owner evaluated the various elements of the Project, including
forecasted costs and completion dates, while construction continued. Taxpayer
determined that the cost to complete the Project would substantially exceed earlier
estimates and that the time for completion would substantially extend beyond the
projected dates. Taxpayer recognized that given the public announcements by
members of Group that they could not perform under the terms of Contract A, Group
would likely exercise rights under the bankruptcy laws and reject Contract A, in which
case Taxpayer would lose the benefit of the fixed-price terms and penalties payable to
Taxpayer under the terms of Contract A, and would become responsible for its share of
any cost overruns. These costs increases and other costs identified by Taxpayer were
so large that they would not be fully recoverable from Group or under a payment
guarantee by the parent of one of the members of Group (Parent Guarantee).
Moreover, Taxpayer also considered that the new expected completion dates would not
be within the statutory deadlines to qualify for nuclear production tax credits under
section 45J of the Code (totaling approximately $H).
PLR-117939-18                                6

While Taxpayer was still considering its options regarding the Project, on Date 2, Joint
Owner unilaterally determined that it would suspend all construction related to the
Project. Following Joint Owner’s decision, the Group members’ bankruptcy petition,
and Taxpayer’s internal cost and deadline evaluation, Taxpayer decided to stop
construction, abandon the Project, and pursue rate recovery of costs incurred to date
under the abandonment provisions of the Act or through a general rate case or other
regulatory means. Taxpayer concluded it would not be prudent to continue or to merely
suspend construction.

On Date 2, Taxpayer gave Group the required notice of termination of Contract A, which
notified Group of Taxpayer’s determination to stop construction of the Project, and the
Board of Directors of Taxpayer resolved to abandon the Project. After the notice of
termination period ended, Contract A (including all amendments) with Group was
officially terminated. On Date 3, the Board of Directors of Taxpayer reaffirmed its intent
to irrevocably abandon the Project and ratified the actions of management toward that
end.

A series of correspondence with Joint Owner documented that Contract B with Joint
Owner was mutually terminated effective Date 4, or alternatively that Taxpayer had
terminated the contract on Date 5, under other contract provisions. Also, during Year
11 and consistent with its decision to irrevocably abandon the Property, Taxpayer
offered Joint Owner a forbearance (a formalized waiver directed specifically to Joint
Owner) with respect to the Property to reaffirm its irrevocable waiver of any and all
rights to the Property and to forbear from any claim against Joint Owner arising from the
ownership, operation, sale or use of the Property in any manner whatsoever. The
forbearance was offered exclusively for the benefit of Joint Owner to allow Joint Owner
the option to dispose of the Property without a competing ownership claim by Taxpayer,
as Taxpayer had irrevocably decided to abandon the Property. Taxpayer represents
that this offer of forbearance did not represent a sale, exchange, or other transfer of the
Property and did not include any consideration whatsoever in exchange for the
forbearance with respect to the Property. To date, Joint Owner continues to evaluate its
alternatives, including abandonment, but has not yet announced a decision, and Joint
Owner has not accepted the offer of forbearance. The offer of forbearance was a
voluntary action on the part of Taxpayer, and is not required for state or contract law
purposes.

Taxpayer’s management made public its decision and intent to abandon the Project and
the Property beginning in Year 11, which garnered significant media coverage.
Taxpayer’s management made several appearances before regulators and
governmental bodies at which proceedings the Taxpayer continued to explain that, due
to all the factors cited in its evaluation, such as Group’s bankruptcy, delays, the actions
of Joint Owner, and the inability to find an interested party to step into Joint Owner’s
position, Taxpayer had abandoned the Project. Specifically, on Date 6, Taxpayer filed a
petition with the PSC which included Taxpayer’s plans of abandonment of the Project
PLR-117939-18                               7

for purposes of rate recovery (Abandonment Petition). Through its Abandonment
Petition, Taxpayer sought recovery of costs expended on the construction of the
Project, including certain costs incurred subsequent to Taxpayer’s last revised rates
update, and certain other costs under the abandonment provisions of the Act. The
Abandonment Petition included Taxpayer’s plan of abandonment and certain proposed
actions which would mitigate related customer rate increases.

In connection with the Abandonment Petition, Taxpayer’s senior management provided
a briefing to the PSC regarding the Project and the decision to abandon construction,
and Taxpayer’s management met with various stakeholders and members of State’s
legislature, including legislative leaders, to discuss the abandonment of the Project and
to hear their concerns. In response to those concerns, and to allow for adequate time
for governmental officials to conduct their reviews, Taxpayer voluntarily withdrew the
abandonment petition from the PSC on Date 7. For several months in Year 11,
interested parties, including State’s legislature, Attorney General, and Governor, held
and participated in private and public meetings to voice concerns with respect to
allowing Taxpayer to collect revised rates from the public. Although Taxpayer filed
another abandonment petition supporting its position on Date 7, customer rate recovery
with respect to the Project remains unsettled at this point. Taxpayer has not filed any
petitions with PSC to pursue completion of the Project or any alternatives inconsistent
with abandonment.

Taxpayer’s management removed the costs of the abandoned Project from construction
work in progress (CWIP) and reported such costs (net of required estimated impaired
amounts) as regulatory assets pursuant to generally accepted accounting principles
(GAAP). As a regulated utility, Taxpayer must obtain approval from the Federal Energy
Regulatory Commission (FERC) to transfer amounts held in the CWIP to the
“unrecovered plant and regulatory study costs” account. That request cannot be made
until a recoverable amount is known, which can only happen after the recoverable
amount is determined by the PSC in an abandonment proceeding or otherwise.
Pending FERC approval, Taxpayer reclassified the balance from CWIP to a regulatory
asset per GAAP accounting. This reclassification first occurred with Taxpayer’s filing of
its Date 9 financial statements with the U.S. Securities and Exchange Commission on
Form 10-Q. Thus, Taxpayer cites this reclassification and other accounting and
reporting entries, and related disclosures as evidence that management intends for the
Project never to be resurrected or otherwise converted for future use or value to
Taxpayer.

In Year 11, Taxpayer undertook various affirmative acts to demonstrate its irrevocable
intent to abandon the Project and the Property. These affirmative acts included, but
were not limited to: (1) complete and permanent cessation of construction of the New
Units; 2) Board of Directors’ resolutions to irrevocably abandon the Property and the
Project; 3) Taxpayer’s request to the NRC to permanently withdraw and terminate the
COLs (rather than a request to have the partially completed New Units placed in
PLR-117939-18                                8

“deferred status”); and, 4) termination of Taxpayer’s employees dedicated to the
engineering, procurement, and construction of the Property and the Project, including
the New Units.

In Year 11, construction ceased and demobilization of construction crews, vendors, and
contractors began. Taxpayer terminated the employment of over I individuals including
over J who were employed by Taxpayer, Group and other subcontractors. Taxpayer
employed less than K people dedicated to the Project at the end of Year 11 and their
work is limited to winding down the Project and ensuring site safety and security. These
wind-down activities performed by Taxpayer include monitoring contractors and vendors
for retrieval and removal of equipment from the site, and supervising contractors
retained solely to perform certain land stabilization and reclamation activities as
required by permits to return the site to a satisfactory state. Such wind-down activities
would not be consistent with a construction site. And since Year 11, Taxpayer has only
undertaken activities related to environmental, security, and personnel safety
considerations for the site as required by the NRC under the terms of the COLs, or
otherwise by law.

Insurance policies were cancelled in Year 11 relating to builder’s risk property insurance
for installed work and property stored onsite and excess property insurance for the
amount in excess of the builder’s risk property insurance liability limits. Certain
insurance policies remained in effect after Year 11 related to worker’s compensation,
general liability and excess liability insurance for anyone performing any work on at
Project site. These insurance policies are necessary as wind-down procedures
continued during Year 11. Taxpayer has no reasonable prospect of recovery from
insurance for the termination of the Project and abandonment of the Property and
Project.

In Year 11, Taxpayer notified 1) the U.S. Department of Energy of its withdrawal of its
loan guarantee application (allowed Taxpayer to borrow money with a federal guarantee
to help fund construction); 2) County of State of Taxpayer’s termination of its Fee in Lieu
of Tax Agreement with County (the Agreement provided that if or when the Project was
to be completed, Taxpayer would pay a lower property tax rate on the Property and the
New Units than it would otherwise have paid); 3) the Internal Revenue Service of the
release of the Taxpayer’s prior allocations of its nuclear production tax credits under
section 45J of the Code given that the New Units would not be operational before the
end of Year 10 due to the abandonment of the Project; 4) the State Department of
Revenue of the abandonment and returned exemption certificates (under which certain
vendors, contractors and subcontractors were not required to collect sales taxes); 5)
Joint Owner of its intention to terminate two off-site warehouse leases which were used
by Taxpayer, Joint Owner and certain subcontractors to store some equipment and
parts related to the Project; and, 6) its bond trustee of the removal of Project costs from
bondable additions related to its first mortgage bonded debt.
PLR-117939-18                                9

Consistent with the Taxpayer’s intent to abandon in Year 11, many permits related to
the Project were terminated during Year 11, including the industrial storm water permit
for batch plants, National Pollutant Discharge Elimination System permits for the
Project, a storm water permit for construction activities and land disturbances, and a
railroad crossing permit for a temporary road over a rail line. Taxpayer represents that
various permits currently remain in effect at the site of the Project but that all actions
which Taxpayer could reasonably take toward the closure or termination of these
permits have been taken through Date 1, and that there is no future economic benefit to
Taxpayer that would result from these permits prior to their closure or termination.
Taxpayer represents that no permits related to the Project that existed in Year 12 will be
sold or otherwise exchanged for consideration by Taxpayer.
.
                    ADDITIONAL TAXPAYER REPRESENTATIONS

   1) The Property and the New Units were not placed in service for purposes of
      section 168 of the Code prior to abandonment in Year 11, and thus will never be
      placed in service by Taxpayer.

   2) Taxpayer has identified certain property related to the Project that will be held for
      sale to unrelated parties. None of the property held for sale is included in the
      abandoned Property subject to this ruling request.

   3) Taxpayer has identified certain property related to the Project that will be
      transferred for use in the operation of Unit C. None of the transferred property is
      included in the abandoned Property subject to this ruling request.

   4) As an unrelated party to Taxpayer, Joint Owner made a unilateral decision to
      abruptly suspend construction of the Project as of Date 2, and, to the best
      knowledge of the Taxpayer, is still considering all options for its discrete
      ownership interest, including potential abandonment.

   5) Due to Taxpayer’s irrevocable decision to abandon in Year 11 and the economic
      considerations involved, Taxpayer will not contemplate resurrecting or otherwise
      continuing the Project as the usefulness of the Property and the New Units in the
      Taxpayer’s business ceased in Year 11.

   6) While the rate recovery of costs associated with the abandonment of the
      Property and the Project remains unsettled, the rate recovery process will not
      require Taxpayer to contemplate resurrecting or otherwise continuing the Project
      in any way that would be contrary to the decision to abandon.

   7) Taxpayer does not expect any proposed legislation to require it to resurrect or
      otherwise continue the Project in any way that would be contrary to its decision to
      abandon the Project.
PLR-117939-18                                10


   8) Taxpayer represents that it has no contractual obligations that could require it to
      resurrect or otherwise continue the Project in any way that would be contrary to
      its decision to abandon the Project.

   9) Taxpayer negotiated a settlement regarding the Parental Guarantee, and
      Taxpayer sold its right to receive all future settlement payments and the related
      bankruptcy claims in Year 11 to an unrelated party. No remaining recovery from
      any member of Group, the parent of Group members, or other contractors or
      vendors remained pending as of the end of Year 11.

   10) Taxpayer has no reasonable prospect of recovery from insurance or otherwise
      for the termination and abandonment of the Project and the Property.

   11) Other than regulatory matters including, but not limited to, NRC withdrawal of the
      COLs, resolving joint ownership issues with Joint Owner, removal of contractor-
      owned construction equipment from the site, and the safety, security, and
      environmental considerations for the site, Taxpayer represents that it has, to the
      best of its knowledge and belief, performed all relevant acts within its control to
      irrevocably abandon the Property and the Project in Year 11.

   12) Taxpayer represents that the abandonment provisions of the Act relate solely to
      rate recovery and do not include any approvals for a utility to abandon property.
      The abandonment provisions of the Act generally provide that in the event of
      abandonment, costs incurred may be included by a utility in rate base for
      recovery purposes, subject to review and approval of the decision to abandon
      being prudent and costs incurred being prudent.

   13) Taxpayer sustained a loss of approximately $L related to the Project in the
      taxable year ended on Date 1.

Based on the facts and representations above, Taxpayer requests a ruling that
Taxpayer sustained a deductible abandonment loss under section 165 of the Code
related to the termination and abandonment of the Property and the Project during the
taxable year ended on Date 1. The scope of this ruling request is limited to the issue of
whether an abandonment of the Property and the Project was sustained in the taxable
year ended on Date 1, and Taxpayer is not requesting a ruling addressing which
specific assets were abandoned or the amount properly allocable to the loss sustained.

                                 LAW AND ANALYSIS

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.
PLR-117939-18                                11

Section 1.165-1(b) of the Income Tax Regulations provides that to be allowable as a
deduction under section 165(a), a loss must be evidenced by closed and completed
transactions, fixed by identifiable events, and, except as otherwise provided, actually
sustained during the taxable year. Only a bona fide loss is allowable. Substance and
not mere form shall govern in determining a deductible loss.

Section 1.165-1(d)(1) of the regulations provides that a loss shall be allowed only for the
taxable year in which the loss is sustained. For this purpose, a loss shall be treated as
sustained during the taxable year in which the loss occurs as evidenced by closed and
completed transactions and as fixed by identifiable events occurring in such taxable
year.

Section 1.165-2(a) of the regulations allows a deduction under section 165(a) for a loss
incurred in a business or in a transaction entered into for profit and arising from the
sudden termination of the usefulness in such business or transaction of any
nondepreciable property, when such business or transaction is discontinued or when
such property is permanently discarded from use therein. The taxable year in which a
loss is sustained is not necessarily the taxable year in which the overt act of
abandonment, or the loss of title to the property occurs.

Section 1.165-1(d)(2)(i) of the regulations provides that if a casualty or other event
occurs which may result in a loss and, in the year of such casualty or event, there exists
a claim for reimbursement with respect to which there is a reasonable prospect of
recovery, no portion of the loss with respect to which reimbursement may be received is
sustained, for purposes of section 165, until it can be ascertained with reasonable
certainty whether or not such reimbursement will be received. Whether or not such
reimbursement will be received may be ascertained with reasonable certainty, for
example, by a settlement of the claim, by an adjudication of the claim, or by an
abandonment of the claim. When a taxpayer claims that the taxable year in which a
loss is sustained is fixed by his abandonment of the claim for reimbursement, he must
be able to produce objective evidence of his having abandoned the claim, such as the
execution of a release.

Rev. Rul. 2004-58, 2004-1 C.B. 1043, states that to establish the abandonment of an
asset for purposes of section 165, a taxpayer must show both and intention to abandon
the asset and an affirmative act of abandonment. A.J. Industries, Inc. v. United States,
503 F.2d 660 (9th Cir. 1974). A deduction is not allowable if a taxpayer intends to hold
and preserve property for possible future use or to realize potential future value from the
property. The “identifiable event” required by section 1.165-1(b) and (d)(1) must be
observable to outsiders and constitute some step which irrevocably cuts ties to the
asset. A taxpayer need not relinquish legal title to property in all cases to establish
abandonment, provided there is an intent to abandon and an affirmative act of
abandonment.
PLR-117939-18                                12

The abandonment of real property interests where ownership has not been transferred
has been addressed in a variety of circumstances. An abandonment was found where
the taxpayer filled and sealed a water well excavation in Rev. Rul. 56-599, 1956-2 C.B.
122; dismantled an asphalt plant, moved it to another location and did not reassemble it,
Seminole Rock & Sand Co. v. Commissioner, 19 T.C. 259 (1952), acq., 1953-1 C.B. 6;
stopped working on a mine, reduced the work force and budget to maintain it, sold the
mine equipment for salvage, decided to abandon the mine by vote of board of directors,
and wrote the mine off the company books, A.J. Industries, Inc. v. United States, 503
F.2d 660 (9th Cir. 1974); and locked and boarded hotel, placed barricades around it, cut
off utilities, terminated insurance, discontinued maintenance, and made no efforts to sell
or lease it, Hanover v. Commissioner, T.C. Memo. 1979-332.

Rev. Rul. 87-117, 1987-2 C.B. 61, holds that for purposes of section 165(a), the fact
that a public utility company that has abandoned a partially constructed nuclear power
plant obtains a rate increase that is based in part on the costs of the abandoned plant
does not cause it to have been “compensated for by insurance or otherwise as that
phrase is used in section 165(a).”

Legal restrictions upon the physical disposition of property such as a nuclear plant will
not in themselves preclude a finding of abandonment if all other facts and
circumstances demonstrate an intention to irrevocably abandon property 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
Taxpayer cannot simply walk away from, board up, or dismantle. Similarly, the
construction and future operation of a nuclear power plant is heavily regulated, requiring
federal and state licensing and, supervision and approval of costs and construction
milestones.

In the present case, Taxpayer has indicated that it intended to abandon the Project in
Year 11, by ceasing any further construction and potential future operation of the New
Units. Further, Taxpayer demonstrated its intent to abandon in Year 11, and has taken
numerous affirmative steps to abandon the New Units and, in part, by 1) terminating
Contract A with Group A, and Contract B with Joint Owner and all construction of the
Property and the New Units; 2) withdrawing its application to the NRC for COLs to
construct and operate the New Units; 3) terminating its loan guarantee application to the
Department of Energy; 4) terminating various permits and its Fee in Lieu of Tax
agreement; 5) notifying the Internal Revenue Service of the release of its prior
allocations of nuclear production tax credits under section 45J of the Code; 6) notifying
its bond trustee of the removal of Project costs from bondable additions related to its
first mortgage bonded debt; 7) passing corporate resolutions to effectuate the
abandonment of the Property and the Project; 8) terminating all insurance policies
except those necessary to cover wind-down procedures, 9) publicly announcing its
decision concerning the abandonment of the plant and explaining it in several
PLR-117939-18                                13

appearances before regulators and governmental bodies; 10) following GAAP
procedures in a manner consistent with abandonment for financial reporting purposes;
and 11) severing almost all operational employees who were working on the
construction of the Project either directly or through Group A, or other subcontractors.

Taxpayer has also demonstrated the presence of identifiable events in Year 11, such as
the construction contractor (Group) bankruptcy, and the presence of closed and
completed transactions in Year 11, such as the terminations of Contract A and Contract
B.

Further, whether rate increases received by a public utility pursuant to an abandonment
of assets constitute compensation by insurance or otherwise has previously been
considered by the Internal Revenue Service in Rev. Rul. 87-117. According to the facts
in Rev. Rul. 87-117:

      Taxpayer, a public utility company engaged in the business of generating and
      distributing electricity, abandoned a partially competed nuclear electric
      generating plant. The state commission with ratemaking authority over taxpayer,
      in determining to grant taxpayer a subsequent rate increase, permitted taxpayer
      to amortize the cost of the abandoned plant over a specified period and to
      include such costs in the taxpayer’s cost of service for ratemaking purposes.

Rev. Rul. 87-117 further provides:

      Although a utility commission may give consideration to the fact that a utility
      suffered a loss in determining whether a rate increase is warranted, the rate is
      not structured to reimburse the utility for its loss. Rather the rate increase is
      structured to enable the utility to perform its functions of serving its customers at
      a fair charge, while at the same time maintaining its financial integrity and its
      ability to attract capital at reasonable terms by paying its investors a reasonable
      rate of return on their investment. Moreover, the increased revenue is taxable
      income to Taxpayer without regard to Taxpayer's basis in the nuclear power
      plant. This is unlike insurance, where the payment is treated as a sale or
      exchange and serves to reduce basis before any gain or income is recognized.

In this case, unlike the facts of Rev. Rul. 87-117, the State A PSC has not reached any
final decisions on any of Taxpayer’s Abandonment Petitions filed to date. However,
Taxpayer represents that the abandonment provisions of the Act relate solely to rate
recovery and do not include any approvals related to a utilities ability to abandon
property. Thus, PSC’s future decisions should relate solely to rate recovery and any
rate increases granted to Taxpayer should be similar in nature to those considered in
Rev. Rul. 87-117, which were not considered to be compensation by insurance or
otherwise.
PLR-117939-18                                  14

                                       CONCLUSION

Based on the above, it is held that Taxpayer sustained an abandonment loss within the
meaning of section 165(a) of the Code related to the abandonment of the Property and
the Project in the taxable year ending on Date 1. Taxpayer demonstrated the requisite
intent to abandon the Property and the Project, and effectuated that intent through
numerous affirmative acts of abandonment.

This holding is limited to the issue of whether an abandonment of the Property and the
Project occurred and does not consider which specific assets are abandoned or the
amount properly allocated to the loss that was sustained.

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

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 Taxpayer’s 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.

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.


                                       Sincerely,



                                       Brinton Warren
                                       Chief, Branch 3
                                       (Income Tax & Accounting)