NUCLEAR DECOMMISSIONING COST IS A 'SPECIFIED LIABILITY LOSS' FOR COMPUTING NOL.

UIL Number(s) 0172.07-00

                                             Date: November 24, 1993

This is in reply to your July 21, 1993, letter in which you requested on behalf of X four rulings under section 172 of the Internal Revenue Code. These four rulings all concern how section 172 operates with regard to a nuclear decommissioning specified liability loss. You have submitted the following facts with regard to your requested rulings.

X was incorporated under state law for the purpose of owning and operating a nuclear power plant. It is an accrual basis calendar year taxpayer. X is owned by ten regional utility companies (the "owners") which are its sole shareholders.

In * * *, the Atomic Energy Commission (predecessor to the Nuclear Regulatory Commission) issued a license authorizing operation of the nuclear power station until * * *. This nuclear power plant ("power plant") commenced commercial operation on * * *. X's business consists solely of the power plant. X is the sole owner of this power plant.

As the owner/operator of a power plant, X is required by federal law to decommission the power plant upon the termination of the operating life of the power plant. See Atomic Energy Act of 1954, as amended (42 U.S.C. sections 2011 et seq.), including sections 102, 103 and 189 (42 U.S.C. sections 2132, 2133 and 2239). See also 10 CFR Parts 30, 40, 50, 51, 70 and 72, relating to General Requirements for Decommissioning Nuclear Facilities, as published in 53 Fed. Reg. 24,018 (1988). Under these rules, as applied by the Atomic Energy Commission and its successor, the Nuclear Regulatory Commission, X's liability to decommission its power plant was established once it commenced operations in

In order to provide for this liability, X has been contributing funds to both a "qualified" (under section 468A of the Code) and a "nonqualified" nuclear decommissioning trust.

Based on the above facts, X requests four rulings. First, X requests that its expenses in decommissioning the power plant that are deductible under chapter 1 of the Code will be a "specified liability loss" as defined in section 172(f)(1)(B) of the Code to the extent those expenses are taken into account in computing the net operating loss for the year.

Second, X requests that its expenses in decommissioning the power plant that are deductible under chapter 1 of the Code are "amounts incurred in the decommissioning of a nuclear power plant" under section 172(f)(3) of the Code to the extent they are amounts described in section 1.468A-1(b)(5) of the regulations.

Third, X requests that under Code section 172(f)(1), the amount of X's specified liability loss for a taxable year is equal to the lesser of (a) its net operating loss for the taxable year or (b) the sum of the amounts described in sections 172(f)(1)(A) and (B); regardless of whether X has made withdrawals during such year from one or more of its nuclear decommissioning trusts.

Lastly, X requests that for each taxable year in which it has a specified liability loss attributable to decommissioning its power plant, X may choose to utilize either the 10-year carryback period under Code section 172(b)(1)(C) or the extended carryback period under Code section 172(f)(3) with regard to that taxable year's specified liability loss. The following is the law X uses in support of its requested rulings.

Section 172(a) of the Code allows as a deduction for the taxable year an amount equal to the aggregate of (1) the net operating loss carryovers to such year, plus (2) the net operating loss carrybacks to such year. For purposes of subtitle A, the term "net operating loss deduction" means the deduction allowed by section 172(a).

Section 172(b)(1)(A) of the Code provides that generally a net operating loss for any taxable year shall be a net operating loss carryback to each of the 3 taxable years preceding the taxable year of such loss, and shall be a net operating loss carryover to each of the 15 taxable years following the taxable year of the loss.

Section 172(b)(1)(C) of the Code provides that in the case of a taxpayer with a specified liability loss (as defined in section 172(f)) for a taxable year, the specified liability loss shall be a net operating loss carryback to each of the ten taxable years preceding the taxable year of such loss.

Section 172(b)(2) of the Code provides that the entire amount of the net operating loss for any taxable year (the "loss year") shall be carried to the earliest of the taxable years to which (by reason of section 172(b)(1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried.

Section 172(f)(1) of the Code provides that the term "specified liability loss" means the sum of the amounts described in sections 172(f)(1)(A) and 172(f)(1)(B) to the extent those expenses are taken into account in computing the net operating loss for the year.

Section 172(f)(1)(B) of the Code provides, in part, that a specified liability loss shall include any amount (not described in section 172(f)(1)(A)) allowable as a deduction under this chapter with respect to a liability which arises under a Federal or State law if the act giving rise to such liability occurs at least 3 years before the beginning of the taxable year.

Section 172(f)(2) of the Code provides that the amount of the specified liability loss for any taxable year shall not exceed the amount of the net operating loss for such taxable year.

Section 172(f)(3) of the Code provides that, except as provided in regulations, the portion of the 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.

Section 172(f)(5) of the Code provides that for purposes of applying section 172(b)(2), a specified liability loss for any taxable year shall be treated as a separate net operating loss for such taxable year to be taken into account after the remaining portion of the net operating loss for such taxable year.

Section 172(f)(6) of the Code provides that any taxpayer entitled to a 10-year carryback under section 172(b)(1)(C) from any loss year may elect to have the carryback period with respect to such loss year determined without regard to section 172(b)(1)(C). Such election shall be made in such manner as may be prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer's return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for that taxable year.

Section 468A of the Code provides that amounts contributed by a utility to a "Nuclear Decommissioning Reserve Fund" ("qualified trust") to pay for future decommissioning costs are currently deductible.

Section 1.468A-1(b)(5) of the Income Tax Regulations defines decommissioning costs to include "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 powerplant that has permanently ceased the production of electric energy."

Under section 468A(e)(2), qualified trusts are treated as corporations and, thus, pay tax on the investment income earned on the amounts contributed by the utility. When a qualified trust distributes money to the utility, section 468A(c) requires that such amounts be included in the gross income of the utility. However, the utility is permitted a deduction for the decommissioning expenses as they are incurred.

Based on the above facts and law, we hold favorably on each of the four requests to the extent explained below.

First, X's expenses in decommissioning the power plant that are deductible under chapter 1 of the Code will be a "specified liability loss" as defined in section 172(f)(1)(B) of the Code to the extent those expenses are taken into account in computing the net operating loss for the year. Section 172(f)(1)(B) provides, in part, that a specified liability loss shall include any amount allowable as a deduction for the taxable year under chapter 1 of the Code with respect to a liability which arises under a Federal law if the act giving rise to such liability occurs at least 3 years before the beginning of the taxable year. Because X has the liability under the Atomic Energy Act (a Federal law) to decommission the power plant, and the act causing that liability occurred more than three years before the taxable year in which the decommissioning expenses are incurred, X may include its decommissioning expenses that are deductible under chapter 1 of the Code as a specified liability loss to the extent these expenses are taken into account in computing the net operating loss for the year.

Second, X's expenses in decommissioning the power plant that are deductible under chapter 1 of the Code are "amounts incurred in the decommissioning of a nuclear power plant" under section 172(f)(3) of the Code to the extent they are amounts described in section 1.468A- 1(b)(5) of the regulations. Section 172(f)(3) of the Code provides a special carryback period for the specified liability loss attributable to "amounts incurred in the decommissioning of a nuclear power plant". Although the above phrase has not been defined, a similar phrase ("nuclear decommissioning costs") has been defined under section 1.468A-1(b)(5) of the regulations for purposes of section 468A. This regulation defines nuclear decommissioning costs to include "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 powerplant that has permanently ceased the production of electric energy."

The phrase "amounts incurred in the decommissioning of a nuclear plant" should be interpreted to have the same meaning as the term "nuclear decommissioning costs" under section 468A because both sections 172(f)(3) and 468A were added to the Code in 1984, and both sections were intended to provide relief to the nuclear powerplant industry. See generally H. Rep. No. 861, 98th Cong., 2d Sess. 877 (1984). Accordingly, X's expenses in decommissioning the power plant that are deductible under chapter 1 of the Code are "amounts incurred in the decommissioning of a nuclear power plant" under section 172(f)(3) of the Code to the extent they are amounts described in section 1.468A-1(b)(5) of the regulations.

Third, the amount of X's specified liability loss under Code section 172(f)(1) for a taxable year is equal to the lesser of (a) its net operating loss for the taxable year pursuant to section 172(f)(2) or (b) the sum of the amounts described in sections 172(f)(1)(A) and (B); regardless of whether X has made withdrawals during such year from one or more of its nuclear decommissioning trusts.

One part of the above holding is embodied in section 172(f)(2) of the Code, which provides that the amount of the specified liability loss for any taxable year shall not exceed the amount of the net operating loss for such taxable year. In addition, the predecessor sections to section 172(f) of the Code (sections 172(j) and 172(k)) were combined as section 172(f) for taxable years after 1990). Those predecessor sections and the regulations under the former section 172(j) provided a rule similar to the one suggested by the taxpayer. At the time the above sections were combined, Congress did not suggest or indicate that this rule should not be continued. H. Rep. No. 964, 101st Cong., 2d Sess. 1142 (1990).

Thus, the amount of X's specified liability loss for a taxable year is equal to the lesser of (a) its net operating loss for the taxable year or (b) the sum of the amounts described in sections 172(f)(1)(A) and (B). However, we express no opinion on how X should allocate between a nuclear decommissioning specified liability loss and other types of specified liability losses described in section 172(f) if the need should ever arise.

The above rule will also apply regardless of whether X has made withdrawals during such year from one or more of its nuclear decommissioning trusts because the amounts withdrawn from the trusts can be deducted under section 461 of the Code when they are used to decommission the power plant. As we stated above, X's expenses in decommissioning the power plant that are deductible under chapter 1 of the Code are "amounts incurred in the decommissioning of a nuclear power plant" under section 172(f)(3) of the Code to the extent they are amounts described in section 1.468A-1(b)(5) of the regulations. Since section 172(f)(3) only requires us to examine whether the expenses in decommissioning are deductible for the taxable year, and not whether they are attributable to funds withdrawn from a nuclear decommissioning trust, X may determine its nuclear decommissioning specified liability loss by using the above holding regardless of whether X has made withdrawals during such year from one or more of its nuclear decommissioning trusts.

However, we do point out that in the case of a qualified trust under section 468A of the Code X must include in its gross income under section 468A(c) any funds withdrawn from the trust.

Lastly, X may choose each taxable year whether to utilize either the 10-year carryback period under Code section 172(b)(1)(C) or the extended carryback period under Code section 172(f)(3) with regard to that taxable year's specified liability loss. This is based on the language of section 172(f)(6), which provides that any taxpayer entitled to a 10-year carryback under section 172(b)(1)(C) from any loss year may elect to have the carryback period with respect to such loss year determined without regard to section 172(b)(1)(C). We agree with the taxpayer's interpretation of this statutory language. However, we do point out that section 172(f)(6) also provides that such election, once made for any taxable year, shall be irrevocable for that taxable year.

CONCLUSIONS

(1) X's expenses in decommissioning the power plant that are deductible under chapter 1 of the Code will be a "specified liability loss" as defined in section 172(f)(1)(B) of the Code to the extent those expenses are taken into account in computing the net operating loss for the year.

(2) X's expenses in decommissioning the power plant that are deductible under chapter 1 of the Code are "amounts incurred in the decommissioning of a nuclear power plant" under section 172(f)(3) of the Code to the extent they are amounts described in section 1.468A- 1(b)(5) of the regulations.

(3) The amount of X's specified liability loss for a taxable year is equal to the lesser of (a) its net operating loss for the taxable year or (b) the sum of the amounts described in sections 172(f)(1)(A) and (B); regardless of whether X has made withdrawals during such year from one or more of its nuclear decommissioning trusts. However, we express no opinion on how X should allocate between a nuclear decommissioning specified liability loss and other types of specified liability losses described in section 172(f) if the need should ever arise.

(4) X may choose each taxable year to utilize either the 10-year carryback period under Code section 172(b)(1)(C) or the extended carryback period under Code section 172(f)(3) with regard to that taxable year's specified liability loss.

This letter ruling is based on facts and representations provided by the taxpayer. No opinion is expressed as to the tax treatment of the transaction considered herein under the provisions of any other sections of the Code and regulations which may be applicable thereto, or the tax treatment of any conditions existing at the time of, or effects resulting from, the transaction except as specifically covered by the above rulings.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. Temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted. Thus, this ruling will be modified or revoked by adoption of temporary or final regulations, to the extent the regulations are inconsistent with any conclusions in the ruling. See section 11.04 of Rev. Proc. 93-1, 1993-1 I.R.B. 7, 39. However, when the criteria contained in section 11.04 of Rev. Proc. 93-1 are satisfied, a ruling is not revoked or modified retroactively except in rare or unusual circumstances.

                                   Sincerely yours,