Guidance on Nuclear Production Tax Credit Is Critical, Group Says

September 22, 2021

Hon. Mark Mazur
Deputy Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Ave NW
Washington, DC 20220

Mr. William M. Paul
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Ave NW
Washington, DC 20224

Hon. Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Ave NW
Washington, DC 20024

Re: Request for Guidance Regarding Section 45J Nuclear Production Tax Credit

Dear Messrs. Mazur, Rettig, and Paul:

The Nuclear Energy Institute (NEI) works to establish unified policy on behalf of its members on matters affecting the nuclear energy industry. NEI's members include entities licensed to construct and operate commercial nuclear power plants in the United States, nuclear plant designers, major architect and engineering firms, fuel cycle facilities, nuclear materials licensees, and other organizations involved in the nuclear energy industry.

The nuclear production tax credit under IRC section 45J is of great interest to our members. The Bipartisan Budget Act of 2018 (2018 BBA), P.L. 115-119, amended section 45J in a manner that requires Treasury and IRS to issue guidance to implement those changes. Despite the passage of three and a half years since those changes were enacted, such guidance has not yet been issued. While we recognize the challenges of issuing an unprecedented amount of guidance for the Tax Cuts and Jobs Act, particularly in the midst of a pandemic, the issuance of the section 45J guidance is critical to the continued efforts of our members to develop carbon-free nuclear generation facilities. On behalf of our members, we respectfully request that such guidance be promptly issued. We discuss below the specific guidance that we are seeking on behalf of our members.

I. Background

President Biden campaigned on a clean energy standard that would transition the electricity system to 100 percent carbon-free electricity by 2035, and many states have adopted similar goals and mandates. The President also committed to invest in clean energy technologies, including advanced nuclear energy, that will create millions of well-paying jobs. The work of NEI's members aligns with the Administration's efforts to significantly reduce carbon emissions while creating high-quality jobs and, as the largest source of carbon-free energy in the U.S., nuclear power is critical to meeting these goals. Along with other carbon-free sources such as wind and solar, protecting and increasing our use of nuclear energy is an important way to dramatically reduce greenhouse gas emissions and help make meaningful progress to address climate change.

To that end, the industry is continuing to develop advanced carbon-free nuclear generation facilities, which require the commitment of substantial capital over a significant timeframe prior to completion. That development includes the current construction of Plant Vogtle Units 3 and 4, which when completed will add 2,224 megawatts of carbon-free net dependable capacity — enough power to serve one million homes and business. That development also includes the commercialization of small modular reactors (SMRs). SMRs are simplified versions of the nuclear power plants operating today in the U.S. that can be deployed in multiples at a site to fit different generation needs. For example, the U.S. Nuclear Regulatory Commission (NRC) is in the process of finalizing the NuScale Power, LLC design certification for a 50-megawatt electric SMR that can be configured with up to twelve modules yielding a total capacity of 600 megawatts electric.¹ Utah Associated Municipal Power Systems plans to adopt the NuScale SMR design for its Carbon-Free Power Project that is expected to be operational by the end of the decade and will be located at the Idaho National Laboratory.² As another example, the NRC is engaged in pre-application review of the GE-Hitachi Nuclear Energy (GEH) BWRX-300 design, a ~300-megawatt electric water-cooled, natural circulation SMR with passive safety systems.³

In addition, other advanced reactor designs are being developed. Progress to commercialize these advanced reactor technologies took a step forward in 2020 when the U.S. Department of Energy (DOE) selected TerraPower LLC and X-energy to receive support for Advanced Reactor Demonstration Program projects to build two first-of-a-kind advanced nuclear reactors that can be operational within seven years.⁴ These two projects are examples of commercializing advanced reactors, but by no means are they the only cases. There are dozens of additional companies developing designs to address new market segments for nuclear energy. For example, Oklo Power LLC's Aurora powerhouse is undergoing NRC review of its combined license to construct and operate a ~1.5-megawatt electric compact micro-reactor at the Idaho National Laboratory.⁵

All these industry participants and related service providers welcomed Congress' support in the 2018 BBA for clean energy nuclear generation facilities and would greatly benefit from the increased certainty that guidance would provide as project investments continue to be made. We urge Treasury and the IRS to promptly provide implementing guidance with respect to the 2018 BBA changes to section 45J and offer our suggestions for inclusion in that guidance.

II. Section 45J Overview

Section 45J permits a taxpayer to claim a credit for electricity that the taxpayer (1) produces at an advanced nuclear power facility during the eight-year period beginning when the facility is placed in service and (2) sells to an unrelated person. Section 45J was enacted by section 1306 of the Energy Policy Act of 2005, Pub. L. No. 109-58.

Under section 45J(d), an advanced nuclear power facility is a nuclear facility that meets all of the following requirements: (1) the facility consists of a nuclear power reactor that uses nuclear energy to produce electricity; (2) the facility is owned by the taxpayer; (3) the reactor design for the facility is approved by the Nuclear Regulatory Commission after December 31, 1993 (and such design or a substantially similar design of comparable capacity was not approved on or before that date); and (4) the facility is placed in service before January 1, 2021 (this fourth requirement does not apply, however, to a facility for which an allocation of national megawatt capacity limitation is made under subsection 45J(b)(5), as described below).

Under section 45J(b)(1), a taxpayer may claim a credit for qualifying electricity produced at an advanced nuclear power facility only if part of the national megawatt capacity limitation has been allocated to the facility. Under section 45J(b)(2), the aggregate amount of national megawatt capacity limitation that may be allocated is 6,000 megawatts. Section 45J(b)(4) provides that the Treasury Department was to promulgate regulations within six months of the enactment of Section 45J to establish (in consultation with DOE) a certification and allocation process for the Section 45J national megawatt limitation.

In lieu of promulgating regulations, on November 12, 2013, the IRS and Treasury Department published Notice 2013-68, 2013-46 I.R.B. 501, which specified the method that would be used to allocate the national megawatt capacity limitation on the credit available under section 45J and prescribed the application process by which taxpayers could request an allocation of the national megawatt capacity limitation. That Notice required (at section 4.02(1)) that construction of an otherwise eligible facility begin prior to January 1, 2014 in order to receive an allocation of the national megawatt capacity limitation and stated:

construction begins when a person who has applied for or been granted a construction permit or combined license from the Nuclear Regulatory Commission for an advanced nuclear facility initiates the pouring of safety-related concrete for the reactor building.

Following the issuance of Notice 2013-68, we understand that the IRS fully allocated the national megawatt capacity limitation.

Notice 2013-68 (at section 6) provides that the amount of the national megawatt capacity limitation allocated to a facility under Notice 2013-68 will be withdrawn if the facility is not placed in service before January 1, 2021, or if the DOE informs the IRS that the DOE certification for the facility has been withdrawn. We understand that none of the facilities for which an allocation was provided under Notice 2013-68 were placed in service before January 1, 2021, and, accordingly, all such allocations have been withdrawn.

III. 2018 BBA Changes to Section 45J

The 2018 BBA added two new subsections to section 45J — section 45J(b)(5) and section 45J(e). Each is discussed in turn below.

A. Subsection 45J(b)(5)

Section 45J(b)(5) requires the Secretary to reallocate any unutilized national megawatt capacity limitation “as rapidly as practicable after December 31, 2020.” Unutilized national megawatt capacity limitation means the excess (if any) of 6,000 megawatts over the aggregate amount of such limitation that was allocated to a facility under the procedures provided in Notice 2013-68 that is placed in service before January 1, 2021.⁶

As noted above, no facilities for which the national megawatt capacity limitation of 6,000 megawatts had been previously allocated were placed in service before January 1, 2021 and, therefore, the unutilized national megawatt capacity limitation is 6,000 megawatts. Such amount therefore must be allocated to facilities placed in service after December 31, 2020 in the order in which such facilities are placed in service.⁷ The statutory changes to section 45J do not, however, include procedures for such allocation. Clarity of such allocation procedures will help facilitate the investments necessary to ensure certification and reallocation of the unutilized national megawatt capacity limitation “as rapidly as practicable.”

B. Subsection 45J(e)

Section 45J(e) permits a qualified public entity to make an election for any taxable year with respect to all or any portion of the credits available to it under section 45J to transfer such credits to one or more eligible project partners.

Qualified public entities include (a) a federal, state, or local government entity, or any political subdivision, agency, or instrumentality thereof; (b) a mutual or cooperative electric company described in section 501(c)(12) or section 1381(a)(2); or (c) a not-for-profit electric utility which had or has received a loan or loan guarantee under the Rural Electrification Act of 1936.⁸

Eligible project partners include any person who (a) is responsible for, or participates in, the design or construction of the advanced nuclear power facility to which the section 45J credit relates; (b) participates in the provision of the nuclear steam supply system to such facility; (c) participates in the provision of nuclear fuel to such facility; (d) is a financial institution providing financing for the construction or operation of such facility; or (e) has an ownership interest in such facility.⁹

With respect to any section 45J credits transferred by a qualified public entity to an eligible project partner, the credit must be taken into account in the first taxable year of the eligible project partner ending with or after the qualified public entity's taxable year with respect to which the credit was determined.¹⁰

Further clarity with respect to this change will permit developers of nuclear energy generation facilities to effectively utilize the benefits provided by Congress in section 45J(e).

IV. Requested Guidance

As a preliminary matter, we urge Treasury and the IRS to promptly issue guidance to implement the 2018 BBA changes. Such guidance would provide greater certainty regarding the availability of the incentives enabling the industry to plan for the development, construction, financing, and operation of carbon-free nuclear energy facilities.

A. Section 45J(b)(5)

Section 45J(b)(4) requires the Secretary to provide a certification process under which the Secretary, after consultation with the Secretary of Energy, shall approve and allocate the national megawatt capacity limitation.

The IRS may allocate the national megawatt capacity limitation only to advanced nuclear facilities (within the meaning of section 45J(d)(2)). In Notice 2013-68, the IRS stated an advanced nuclear facility is a qualifying facility only if DOE provides a certification to the IRS that the facility qualifies as an advanced nuclear facility.

1. Tentative Allocations

For the IRS to provide an allocation of unutilized national megawatt capacity limitation “as rapidly as practicable,” we urge that the guidance include procedures for facility owners to apply for and receive a tentative allocation of unutilized national megawatt capacity limitation equal to its expected nameplate capacity well before a project is placed in service. We would expect certain information to be required to be provided to enable the IRS to provide that tentative allocation, including documentation sufficient to allow DOE to certify that the nuclear energy facility is an advanced nuclear energy facility. In addition, we would expect there to be other required information, including information similar to that identified in Notice 2013-68 at section 5.04, to confirm that, once placed in service, the facility should be entitled to a final allocation of unutilized national megawatt capacity limitation equal to its nameplate capacity, subject to (1) submission of an application for a final allocation of unutilized national megawatt capacity limitation, including any necessary information or documentation that was not, or could not be, provided in the request for a tentative allocation and (2) the availability of remaining amounts of unutilized national megawatt capacity limitation.

A tentative allocation process would substantially expedite the timeline for issuing final allocations of the unutilized national megawatt capacity limitation. Further, the issuance of a tentative allocation and the rapid issuance of a final allocation will be critical to the development, construction, and financing of advanced nuclear energy facilities by providing greater certainty regarding the availability of section 45J tax credits for a facility during the development of the facility through a tentative allocation, and by providing confirmation of an allocation of the unused national megawatt capacity limitation rapidly following the facility being placed in service.

To minimize the burden to the IRS and DOE of reviewing applications for tentative allocations of unutilized national megawatt capacity limitation for facilities unlikely to become operational, we recommend that an application for a tentative allocation may only be submitted after progress in developing and deploying a facility is sufficiently demonstrated. For this purpose, we urge Treasury and the IRS to treat the earlier of either of the following as a sufficient demonstration for such an application:

2. Final Allocations

As noted above, final allocations of the unutilized national megawatt capacity limitation must be allocated to facilities placed in service after December 31, 2020, in the order in which such facilities are placed in service.¹¹ Our recommendations with regard to that final allocation are to ensure that there is clarity as to when a facility is placed in service for this purpose, to ensure that such allocation is made promptly, and to periodically provide the industry with the current information on the remaining amount of the unutilized national megawatt capacity limitation.

It is critical that there be certainty regarding when a facility is placed in service for purposes of a final allocation in light of (i) the statutory requirement that the unutilized national megawatt capacity limitation be allocated in the order in which facilities are placed in service and (ii) the likelihood that absent a clear placed-in-service standard, there may be substantial disputes regarding the date that facilities are placed in service and whether any allocation remains available for other facilities.

For certain purposes, the IRS uses a five-factor test for evaluating when a project is placed in service; however, those factors are not exclusive, but rather used as guideposts to determine whether, looking at the totality of the facts and circumstances, a facility has been placed in service.¹² That facts-and-circumstances analysis should not be used for section 45J(b)(5)(A) purposes as it would require substantial government and industry resources to resolve disputes about the order in which facilities are placed in service and, accordingly, in which allocations are provided (particularly as the 6000-megawatt allocation limit is reached).¹³ Industry participants would be in the untenable position of having to determine whether their facility was placed in service before another facility without the ability to evaluate the information necessary to undertake a complete analysis of the other facility (some of which information may be taxpayer protected information under section 6103). Accordingly, we urge the IRS to adopt an objective standard for when a facility is placed in service solely for purposes of section 45J(b)(5)(A). In that regard, we respectfully request that the placed-in-service date for this limited purpose is the earlier of the two specifically identifiable dates:

At the time of the issuance of an operating license under 10 CFR Part 50 or a finding under 10 CFR §52.103(g), certain factors traditionally used in evaluating whether a facility is placed in service (as described above) are expected to be satisfied, including (i) approval of required licenses and permits, (ii) passage of control of the facility, and (iii) completion of tests necessary to load fuel. In light of the above, we believe that it would be appropriate for the limited purposes of providing a final allocation under section 45J(b)(5)(A) to use these dates certain as the placed-in-service date.

We also recommend that the guidance provide an expedited process for an owner of a nuclear energy facility with a tentative allocation to obtain a final allocation of the unutilized national megawatt capacity limitation. In that regard, following receipt of a tentative allocation of unutilized national megawatt capacity, only information not available when a tentative allocation was provided should be necessary to receive a final allocation. Such information would include, for example, documentation evidencing the date on which the facility was placed in service (as described above, evidence of the issuance of an operating license or a section 52.103(g) finding) and the final nameplate capacity of the facility, as well as any updates to information provided in connection with the application for a tentative allocation.

Finally, we urge the IRS to publish semi-annually (i.e., in six-month intervals) the amounts of tentative and final allocations of the unutilized national megawatt capacity limitations that have been made by the IRS to keep the industry informed on the status of the actual and expected remaining amount of unutilized national megawatt capacity limitation as the industry continues to develop this carbon-free electric generation technology.

B. Section 45J(e)

For qualified public entities to be able to transfer section 45J credits to eligible project partners as is permitted under section 45J(e), clarity regarding the definitions of “qualified public entity” and “eligible project partner” is critical. The market for transfers of section 45J credits will require confidence that a transferor is in fact a qualified public entity that has an allocation of unutilized national megawatt capacity limitation. Similarly, it is critical that a potential transferee is confident that it is in fact an eligible project partner. To achieve the benefits of the new subsections, qualified public entities and eligible project partners may seek to enter into agreements at the earliest possible point to provide qualified public entities with certainty regarding their ability to transfer section 45J credits, and eligible project partners with the ability to properly plan for the utilization of transferred section 45J credits. To address the above considerations, we respectfully request that the IRS issue guidance providing:

• A qualified public entity may hold its interest in an advanced nuclear power facility through a wholly-owned limited liability company that would be treated as a disregarded entity under Treasury Regulation § 301.7701-3(b)(1)(ii) but for the application of Treasury Regulation § 301.7701-2(b)(6).

• Clarification regarding the application of the rules to qualified public entities that do not file tax returns. We recommend that the guidance confirm that any references in section 45J to “taxpayer” include non-filing qualified public entities and that the calendar year be treated as the taxable year.

• An eligible project partner includes any person that is among the categories of eligible project partners provided in section 45J(e) at any time beginning on the date that is five years before construction of the project begins (within the meaning of Notice 2013-68 at Section 4.02(1)). By inclusion in the statutory language of persons such as those involved in the design or construction financing of a nuclear energy project, the term eligible project partners must include persons involved with the project well before the project is placed in service or the section 45J credits are earned.

• Eligible project partners include (a) any underwriter or placement agent with respect to any financing used for the construction or operation of a facility; (b) any bank, insurance company, asset management company, or other financial institution that provides financing (including refinancing) used for the construction or operation of a facility, including, without limitation, by purchasing bonds, notes, or other evidences of indebtedness issued to finance such needs, by entering into a sale-leaseback transaction to provide financing (including refinancing), or by making loans or providing lines of credit or participating in syndications of loans or lines of credit for such purposes; or (c) any contractors and subcontractors thereof who provided services or equipment for the design or construction of the facility.

• Specific confirmation that there is no minimum level of activity, participation, or financing required to be treated as an eligible project partner and to be entitled to be a transferee of a particular amount of section 45J credits.

Further, with regard to the utilization of section 45J credits, section 39 permits a taxpayer to carryback the credit one taxable year and carryforward the credit 20 taxable years from the taxable year in which the credit is earned. Nothing in the statutory changes made to section 45J by the Act suggests that the ability to carryback and carryforward section 45J credits should be curtailed under section 45J(e). We request that the guidance confirm that a transferee of section 45J credits may carry the credit back one year and forward up to 20 years from the year in which such credits were earned by the transferring qualified public entity.

* * * *

In conclusion, NEI urges Treasury and the IRS to promptly issue guidance under section 45J, as outlined above, to implement the 2018 BBA changes to provide much needed direction to the industry to support the development of clean energy nuclear generating facilities.

If you have any questions concerning this letter, please contact me or Jonathan Rund (202-739-8144 or jmr@nei.org).

Sincerely,

Ellen C. Ginsberg
Nuclear Energy Institute
Washington, DC

CC: Hon. Tom West, Deputy Assistant Secretary (Business Taxation), Department of the Treasury
Krishna P. Vallabhaneni, Tax Legislative Counsel, Department of the Treasury
Brett York, Deputy Tax Legislative Counsel, Department of the Treasury
Kimberly Wojcik, Attorney Advisor, Department of the Treasury
Patrick Kirwan, Branch Chief, Internal Revenue Service
Jennifer Records, Senior Technician Reviewer, Internal Revenue Service
Christopher Kelley, Special Counsel, Internal Revenue Service