Industry Director Directive on IRC Section 172(f) Specified Liability Losses - Attachment 3
Decommissioning of Nuclear Power Plant
Section 172(f) provides special rules for the portion of an NOL that is identified as a specified liability loss (SLL) and as such is allowed a ten year carry back as opposed to the two years generally allowed for NOLs. Section 172(f) was amended in 1998 to restrict the types of expenses that qualify as SLLs and therefore now only applies to a narrow set of liabilities.
In general, expenditures incurred for the decommissioning of a nuclear power plant (or any unit thereof) qualify as a specified liability loss (SLL) for purposes of IRC §172(f).
Nuclear decommissioning costs are defined in Regulation §1.468A-1(b)(5).
Unlike other SLLs which must be carried back 10 years, nuclear decommissioning costs may be carried back to the year the plant was placed in service; IRC §172(f)(3).
Be aware that for purposes of determining whether a unit has been decommissioned, each unit located at a multiunit site, constitutes a separate nuclear power plant. Regulation §1.468A-1(b)(4)
There are some potential issues that examiners need to be aware of and include the following:
Issue 1: Payments into an IRC §468A fund do not qualify as SLLs. [172(f)(1)(B)(i) ]
Issue 2: What is the payment source of Decommissioning costs included as part of a SLL? Must expenditures for decommissioning be paid from the IRC §468A fund? (Contact Utilities Tech Advisors for guidance)
Issue 3: Do the claimed costs meet the definition of decommissioning expenditures defined by Regulation §1.468 A-1(b)(5)?
Issue 1 - Decommissioning Fund Payments
Examiners should determine if the taxpayer has elected the provision of Regulation §1.468A-7
If the Taxpayer has elected this provision, request the required Private Letter Ruling (PLR) if it is not attached to the return. Regulation §1.468A-3.
Verify payment compliance with the PLR:
Examiners should also verify the existence of a financial reserve for nuclear decommissioning.
Check for current year increases to the reserve.
If there are current year increases, the examiner should review Schedule M’s adjustments to determine the tax treatment of the fund payment.
Ensure that payments into the fund are not included in computing a Specified Liability Loss.
Issue 2 - What is the payment source of Decommissioning costs included as part of a Specified Liability Loss?
Determine if a fund was set up for the nuclear power plant or unit being decommissioned under IRC §468A.
If a fund was established, the decommissioning costs being paid out of the fund the do not qualify as SLL costs.
If a fund was established and decommissioning costs are not being paid out of the fund; request an explanation from the taxpayer.
There is no published guidance as to whether decommissioning costs must be paid from the IRC §468A fund.
Contact Utilities Tech Advisors for guidance.
Issue 3: Do the claimed costs meet the definition of decommissioning expenditures defined by Regulation §1.468 A-1(b)(5)?
Are the decommissioning costs being incurred at a multiunit nuclear power plant site?
Has the entire site been permanently been shut down or in the process of being shut down?
If not, determine if one of the units has been or is in the process of being permanently shut down and ensure the costs being claimed as SLL costs relate to that specific unit.
Request information documenting that cost being claimed as SLL cost meet the definition of decommissioning costs as described in the regulations.
Law: §172. NET OPERATING LOSS DEDUCTION
172(f)(1)(B)(i) Any amount allowable as a deduction under this chapter (other than 468(a)(1) or 468A(a)) which is in satisfaction of a liability under a Federal or State law requiring —
This provision was added to the Code on October 21, 1998. Note the IRC §468A exclusion is effective for tax years ending after October 21, 1998. Prior guidance such as PLR 9409011 no longer applies.
SEC. 172. NET OPERATING LOSS DEDUCTION.
172(f)(3) SPECIAL RULES FOR NUCLEAR POWERPLANTS. —Except as provided in regulations prescribed by the Secretary, 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.
SEC. 468. SPECIAL RULES FOR MINING AND SOLID WASTE RECLAMATION AND CLOSING COSTS.
(a) ESTABLISHMENT OF RESERVES FOR RECLAMATION AND CLOSING COSTS. —
(1) ALLOWANCE OF DEDUCTION. —If a taxpayer elects the application of this section with respect to any mining or solid waste disposal property, the amount of any deduction for qualified reclamation or closing costs for any taxable year to which such election applies shall be equal to the current reclamation or closing costs allocable to —
(A) in the case of qualified reclamation costs, the portion of the reserve property which was disturbed during such taxable year, and
(B) in the case of qualified closing costs, the production from the reserve property during such taxable year.
SEC. 468A. SPECIAL RULES FOR NUCLEAR DECOMMISSIONING COSTS.
(a) IN GENERAL. —If the taxpayer elects the application of this section, there shall be allowed as a deduction for any taxable year the amount of payments made by the taxpayer to a Nuclear Decommissioning Reserve Fund (hereinafter referred to as the “Fund”) during such taxable year.
Regulation §1.468A-1. Nuclear decommissioning costs; general rules
(b) Definitions. —The following terms are defined for purposes of section 468A and the regulations thereunder:
. . .
(4) The term “nuclear power plant” means any nuclear power reactor that is used predominantly in the trade or business of the furnishing or sale of electric energy, if the rates for the furnishing or sale, as the case may be, either have been established or approved by a public utility commission or are under the jurisdiction of the Rural Electrification Administration. Each unit (i.e., nuclear reactor) located on a multi-unit site is a separate nuclear power plant. The term “nuclear power plant” also includes the portion of the common facilities of a multi-unit site allocable to a unit on that site.
Regulation §1.468A-1. Nuclear decommissioning costs; general rules (cont’d)
(5) The term “nuclear decommissioning costs” or “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 that has permanently ceased the production of 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 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)(5) if it would be deductible under chapter 1 of the Internal Revenue Code without regard to section 280B.
Regulation §1.468A-3. Ruling amount
(a) In general (1) Except as otherwise provided in paragraph (j) of this section, an electing taxpayer is allowed a deduction under section 468A(a) for the taxable year in which the taxpayer makes a cash payment (or is deemed to make a cash payment) to a nuclear decommissioning fund only if the taxpayer has received a schedule of ruling amounts for the nuclear decommissioning fund that includes a ruling amount for such taxable year. Except as provided in paragraph (a)(4) or (5) of this section, a schedule of ruling amounts for a nuclear decommissioning fund (“schedule of ruling amounts”) is a ruling (within the meaning of paragraph (a)(2) of §601.201) specifying the annual payments (“ruling amounts”) that, over the taxable years remaining in the “funding period” as of the date the schedule first applies, will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding period equal to (and in no event greater than) the “amount of decommissioning costs allocable to the fund.” The projected balance of a nuclear decommissioning fund as of the last day of the funding period shall be calculated by taking into account the fair market value of the assets of the fund as of the first day of the first taxable year to which the schedule of ruling amounts applies and the estimated rate of return to be earned by the assets of the fund after payment of the estimated administrative costs and incidental expenses to be incurred by the fund (as defined in paragraph (a)(3)(ii) of §1.468A-5), including all Federal, State and local income taxes to be incurred by the fund (the “after-tax rate of return”). See paragraph (c) of this section for a definition of funding period and paragraph (d) of this section for guidance with respect to the amount of decommissioning costs allocable to a fund.
Regulation §1.468A-7. Manner of and time for making election
(a) In general. —An eligible taxpayer is allowed a deduction for the taxable year in which the taxpayer makes a cash payment (or is deemed to make a cash payment) to a nuclear decommissioning fund only if the taxpayer elects the application of section 468A. A separate election is required for each nuclear decommissioning fund and for each taxable year with respect to which payments are to be deducted under section 468A. In the case of an affiliated group of corporations that join in the filing of a consolidated return for a taxable year, the common parent must make a separate election on behalf of each member whose payments to a nuclear decommissioning fund during such taxable year are to be deducted under section 468A. The election under section 468A for any taxable year is irrevocable and must be made by attaching a statement (“Election Statement”) and a copy of the schedule of ruling amounts provided pursuant to the rules of §1.468A-3 to the taxpayer's Federal income tax return (or, in the case of an affiliated group of corporations that join in the filing of a consolidated return, the consolidated return) for such taxable year. Except as otherwise provided in paragraph (b)(3) of §1.468A-8, the return to which the Election Statement and a copy of the schedule of ruling amounts is attached must be filed on or before the time prescribed by law (including extensions) for filing the return for the taxable year with respect to which payments are to be deducted under section 468A.
(b) Required information. —The Election Statement must include the following information:
(1) The legend “Election Under Section 468A” typed or legibly printed at the top of the first page.
(2) The electing taxpayer's name, address and taxpayer identification number (or, in the case of an affiliated group of corporations that join in the filing of a consolidated return, the name, address and taxpayer identification number of each electing taxpayer).
(3) The taxable year for which the election is made.
(4) For each nuclear decommissioning fund for which an election is made —
(i) The name and location of the nuclear power plant to which the fund relates;
(ii) The name and employer identification number of the nuclear decommissioning fund;
(iii) The total amount of actual cash payments made to the nuclear decommissioning fund during the taxable year that were not treated as deemed cash payments under paragraph (c)(1) of §1.468A-2 for a prior taxable year;
(iv) The total amount of cash payments deemed made to the nuclear decommissioning fund under paragraph (c)(1) of §1.468A-2 for the taxable year; and
(v) The cost of service amount for the taxable year (see paragraph (b)(2) of §1.468A-2).