A three-judge panel at the U.S. Court of Appeals for the Federal Circuit on March 11 ruled that Exelon (NYSE: EXC) can’t write off certain nuclear power plant shutdown liabilities against its taxes.
AmerGen Energy Co. LLC, by and through Exelon Generation Co. LLC, had appealed a 2013 decision of the U.S. Court of Federal Claims granting summary judgment that AmerGen may not include future nuclear decommissioning liabilities that it assumed when it purchased three nuclear power plants in the basis of the acquired assets in its 2001 through 2003 tax returns. The Claims Court reasoned that because those nuclear plants would not be decommissioned until years later, AmerGen’s decommissioning liabilities did not satisfy the economic performance requirement of federal code.
“We conclude that the Claims Court correctly decided that § 461(h) is applicable in determining when and whether an accrual method taxpayer, such as AmerGen, incurs future nuclear decommissioning liabilities for purposes of calculating the basis of an acquired nuclear power plant and associated assets,” said the March 11 ruling. “Because AmerGen did not economically perform the decommissioning activities at issue as of 2001 through 2003, the relevant tax years, we affirm.”
In 1999 and 2000, AmerGen purchased three nuclear power plants: Three Mile Island Unit 1 (TMI-1); the Clinton Power Station: and the Oyster Creek Nuclear Generating System. It assumed responsibility for their operations. AmerGen paid a purchase price of $93 million for those plants and related assets. According to AmerGen, it also assumed future decommissioning liabilities associated with each plant.
The court noted: “None of the three nuclear power plants was decommissioned as of the relevant 2001 through 2003 tax years. The operating license for Oyster Creek was originally set to expire in 2009, and has since been extended to 2029. The operating license for TMI-1 was originally set to expire in 2014, and has also been extended to 2034. The operating license for Clinton will not expire until 2026, and may be extended to 2046. Under [federal code], the process of decommissioning may take sixty years after a nuclear power plant permanently ceases operations. Thus, AmerGen might not fully satisfy its decommissioning obligations until 2106.”
The court added: “While planning the purchase of the nuclear power plants, AmerGen was advised by its tax accountants that it was ‘unlikely’ that the IRS would allow AmerGen ‘to include the assumed decommissioning liability in the basis of the assets acquired on the date of the purchase’ because the economic performance requirement of Treas. Reg. § 1.461-1(a)(2)(i) would not ‘be met at the planned purchase date.’ The tax accountants further advised that, under the then-existing basis-allocation rules, the entire amount of cash consideration that AmerGen planned to pay would be allocated to the basis of transferred non-qualified funds, rather than to the basis of the nuclear power plants.
“AmerGen sought private letter rulings on the matter from the IRS. The IRS ruled that, at the time of purchase, AmerGen would ‘not be entitled to treat as a component of its cost basis . . . any amount attributable to the future decommissioning liability’ because AmerGen would not have performed any services relating to decommissioning and thus the liability would not be incurred for tax purposes under § 461(h). The IRS also confirmed that AmerGen must allocate basis of the acquired assets under the then-existing basisallocation rules. In addition, the IRS ruled that AmerGen would obtain a carry-over basis for qualified funds to be transferred to AmerGen, and those funds would remain qualified under § 468A.
“AmerGen accordingly evaluated its planned acquisitions under the assumption that the decommissioning liabilities would not be added to the basis of the acquired assets at the time of purchase. AmerGen required the sellers to make additional contributions to their decommissioning trust funds prior to closing and then to transfer both qualified and nonqualified trust funds to AmerGen. According to AmerGen, it received a total of $974 million in transferred funds from the sellers, including $393 million in qualified funds and $581 million in nonqualified funds. AmerGen did not contribute additional money of its own to those funds after the purchase.”