Utility Group Seeks Changes to Nuclear Decommissioning Fund Regs

March 29, 2017

Courier's Desk
Internal Revenue Service
CC:PA:LPD:PR (REG-112800-16)
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Proposed Regulations Under Section 468A (REG-112800-16)

Dear Sir or Madam:

On behalf of the Utility Decommissioning Tax Group (the "UDTG"), we respectfully submit comments with respect to proposed regulations (the "Proposed Regulations") issued on December 28, 2016, and published in the Federal Register on December 29, 2016,¹ under section 468A of the Internal Revenue Code of 1986, as amended (the "Code")² regarding qualified nuclear decommissioning reserve funds ("qualified funds"). The UDTG consists of nuclear electric companies, trust companies and investment management firms involved in the administration and management of qualified funds. The UDTG was formed in the late 1980's and has offered industry insight to the Department of Treasury ("Treasury"), the Internal Revenue Service (the "IRS"), the Nuclear Regulatory Commission and Congressional committees on a variety of issues associated with qualified funds. In conjunction with the issuance of the Proposed Regulations, we offer the following comments and request a public hearing with respect to the Proposed Regulations.

In summary, we commend the IRS and Treasury for the added clarity and changes made to the "otherwise deductible" requirement, the self-dealing rules, and the definition of "substantial completion" contained in the Proposed Regulations. However, we believe that certain refinements are still necessary.

First, we believe that further clarification to the definition of "nuclear decommissioning costs" in Prop. Treas. Reg. § 1.468A-1(b)(6) is needed to properly reflect the intent of the IRS and Treasury to eliminate the "otherwise deductible" requirement with respect to independent spent fuel storage installation ("ISFSI") costs and all storage costs. However, the UDTG continues to believe that reference to "otherwise deductible" in the regulations is unnecessary with respect to all decommissioning costs because deductibility is not required by the legislative intent or the plain language of the Code. Second, we note that the language set forth in the Proposed Regulations relating to depreciable and amortizable assets is merely a clarification of the current regulations rather than a broadening of the definition of nuclear decommissioning costs. Third, we believe the applicability and effective date of the Proposed Regulations should be amended to permit taxpayers to rely on them for taxable years that are open as of the date the Proposed Regulations were published in the Federal Register. These clarifications, and other additional changes to the Proposed Regulations, are discussed below.

Clarifications Regarding the Definition of Nuclear Decommissioning Costs

1. Clarifications Regarding ISFSI-Related Costs

The Preamble to the Proposed Regulations states that the Proposed Regulations are intended to clarify the definition of "nuclear decommissioning costs" under Treas. Reg. § 1.468A-1(b)(6) to specifically provide for ISFSI-related costs. This definition is used to determine what costs may be paid for or reimbursed from a qualified fund. In recent years, questions have arisen regarding whether the qualified fund could be used to pay for the construction and maintenance of ISFSIs. Much of the uncertainty has centered on the deductibility of costs under section 165 of the Code that are potentially recoverable through litigation with the Department of Energy.

The Proposed Regulations separate the definition of nuclear decommissioning costs into two groups: (1) otherwise deductible costs associated with the general decommissioning of the plant, and (2) costs incurred in connection with the construction, operation, and decommissioning of an ISFSI. While the Proposed Regulations retain the "otherwise deductible" language in describing the first category of costs, the second category of nuclear decommissioning costs associated with ISFSIs does not contain these words. We note that there was no change to the language allowing for ISFSI costs other than the separation of the definition into a separate section.³ Without further clarification, it may be difficult to tell if the change that was made was to intentionally remove any requirement for ISFSI and other storage costs to be "otherwise deductible." In other words, the current regulations arguably already specifically provided for ISFSI related costs and there was no change to that language.

The Preamble to the Proposed Regulations states:

We believe that the language in the Preamble to the Proposed Regulations should be clarified to explicitly state that the intent of the IRS and Treasury with the Proposed Regulations is to eliminate the issues surrounding the "otherwise deductible" requirement in the current regulations. This can be done by amending the last sentence in the quoted Preamble language as follows in the future Preamble to the final regulations: "The proposed final regulations clarify the definition of nuclear decommissioning costs to specifically provide for include ISFSI-related costs regardless of whether such costs are or will be deductible."

To make it clear that the change in the Proposed Regulations is to treat ISFSI-related costs as nuclear decommissioning costs, we recommend making certain changes to Prop. Treas. Reg. § 1.468A-1(b)(6)(ii). We also note that in Prop. Treas. Reg. § 1.468A-1(b)(6)(ii), the "otherwise deductible" language remains in the last sentence, which could suggest that the "otherwise deductible" requirement still exists for ISFSI-related costs. To eliminate this potential confusion and to reflect the intent of the IRS and Treasury, we recommend making the following changes to Prop. Treas. Reg. § 1.468A-1(b)(6)(h) (changes underlined):

2. Clarifications Regarding All Other Decommissioning Costs

In addition to the clarifications regarding ISFSI-related costs in Prop. Treas. Reg. § 1.468A-1(b)(6)(ii), we recommend eliminating references to "otherwise deductible" with respect to all other decommissioning costs in Prop. Treas. Reg. § 1.468A-1(b)(6)(i). We discussed the rationale for this change extensively in our prior comments dated September 25, 2015. We have attached a copy of those comments to this letter as Exhibit B.

Under section 468A, a taxpayer includes the amount of any actual or deemed distribution from a qualified fund in gross income in the year of the distribution.⁵ The Preamble to the Proposed Regulations correctly states that when this occurs, pursuant to Treas. Reg. § 1.468A-2(e), taxpayers may then claim an offsetting deduction for amounts spent on decommissioning costs as determined under section 461(h) and other sections.⁶ Thus, whether a cost associated with the actual decommissioning of a nuclear power plant is deductible is determined by other provisions of the Code, not section 468A.⁷ As a result, requiring a nuclear decommissioning cost to be "otherwise deductible" as a prerequisite for payment from a qualified fund is unnecessary.⁸ As stated in our prior comments, the Code and the legislative history of section 468A do not limit the use of the assets of a qualified fund to only deductible costs but, instead, limit the use of the assets of a qualified fund only for purposes of satisfying, in whole or in part, any nuclear decommissioning liability of any person contributing to the qualified fund.⁹ Furthermore, we note that as currently drafted, the last sentence in Prop. Treas. Reg. § 1.468A-6(b)(i) regarding expenses that are depreciable or amortizable suggests that only an expense that is depreciable or amortizable is "otherwise deductible" for purposes for the proposed regulation. As noted above, the requirement to be otherwise deductible is not necessary, and we have proposed language to amend the regulation to reflect that costs that are recoverable through depreciation and amortization are also nuclear decommissioning costs for purposes of Prop. Treas. Reg. § 1.468A-1(b)(6)(i). Accordingly, we propose to change Prop. Treas. Reg. § 1.468A-1(b)(6)(i) as follows:

However, in conjunction with the elimination of the "otherwise deductible" language from the Proposed Regulations with respect to all decommissioning costs, we recognize that taxpayers may take the position that certain impermissible costs could be viewed as a decommissioning cost. Therefore, to make it clear that deleting the references to "otherwise deductible" will not permit impermissible costs for which the Code explicitly precludes a deduction (such as bribes, kickbacks and other illegal payments under section 162(c) and penalties and fines under section 162(f)) from being treated as nuclear decommissioning costs, we recommend adding a new paragraph (iii) to Prop. Treas. Reg. § 1.468A-1(b)(6) as follows:

Change Relating to Depreciable and Amortizable Assets is a Clarification of the Interpretation of the Existing Regulations

The Proposed Regulations amend the current regulations to provide that costs recoverable through depreciation or amortization are also included in the definition of nuclear decommissioning costs. However, the Preamble to the Proposed Regulations states that this change is a broadening of the definition of nuclear decommissioning under the current regulations, and notes that under the current regulations, only the portion of the cost that is currently allowed as depreciation or amortization is treated as a nuclear decommissioning cost. This statement is at odds with a technical advice memorandum, a chief counsel advice, and multiple private letter rulings from the IRS.¹⁰ In this published guidance, the IRS has recognized that depreciable or amortizable expenditures are also nuclear decommissioning costs for purposes of section 468A. In TAM 9638001, the IRS stated:

The IRS reiterated this view in PLR 200711015,¹² in which it ruled that costs to store spent nuclear fuel to be nuclear decommissioning costs despite also finding that such costs were nondeductible capital expenditures under section 263(a). Thus, TAM 9638001 and PLR 200711015 affirm that, under the current regulations, the IRS viewed costs that were recoverable through depreciation and amortization as qualifying nuclear decommissioning costs under Treas. Reg. § 1.468A-1(b)(6). Nowhere in this published IRS guidance did the IRS suggest that only the portion of the expenditure that is recovered or amortized is treated as a nuclear decommissioning cost. Therefore, under the current regulations, the entire expenditure for an asset that is depreciable or amortizable is a nuclear decommissioning cost, not just the portion that is currently allowed as depreciation or amortization. The change to add the last sentence in Prop. Treas. Reg. § 1.468A-1(b)(6)(i) regarding depreciable and amortizable costs merely places into the regulation the IRS's existing view with respect to depreciable and amortizable costs. Accordingly, we propose that the following changes be made to the Preamble to the future final regulations:

Under the existing regulations, questions have arisen as to whether a cost must be currently deductible for that amount to be payable currently from the Fund under the "otherwise deductible" language of § 1.468A-1(b)(6). For example, where a depreciable asset is purchased or constructed as part of the decommissioning process (and the asset is not considered abandoned) questions have arisen whether the "otherwise deductible" language is satisfied solely by the fact that the property is depreciable or whether the expense is treated as a deductible decommissioning expense only to the extent that depreciation is currently allowed. This raises a timing issue regarding whether a fund may pay for the purchase or construction of a depreciable asset to be used in decommissioning that is not considered abandoned when completed. Under the present regulations, because the asset would be fully depreciable but the cost of the asset is not otherwise deductible, a fund may only pay for the portion of the depreciation allowable in the tax year in which such property is placed in service. The intent of section 468A is to allow owners of nuclear power plants to put amounts in a Fund on a tax-free basis and then to use those amounts and the earnings on those amounts to pay for decommissioning. In order to effectuate that intent, the final proposed regulations broaden explicitly confirm that the definition of nuclear decommissioning costs to includes the total cost of depreciable assets by adding the words "or recoverable through depreciation" following "otherwise deductible" in§ 1.468A1(b)(6)(i).¹³

Applicability of Effective Date

The Proposed Regulations provide that the changes made in the regulations will apply to taxable years ending on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. Notwithstanding the prospective effective date, the Preamble to the Proposed Regulations states that the IRS will not challenge return positions consistent with the Proposed Regulations for taxable years ending on or after the date the Proposed Regulations are published in the Federal Register (i.e., December 29, 2016). Given that the promulgation of final regulations may occur well into the future and that the intent of the IRS and Treasury is to afford clarification to taxpayers, we believe that exception to the applicability of the effective date should be expanded such that taxpayers should be able to rely on the Proposed Regulations for taxable years that are open as of the date the Proposed Regulations were published in the Federal Register. To reflect this change, we propose that the language in the Preamble to the future final regulations should be changed as follows:

Notwithstanding the prospective effective date, the IRS will not challenge return positions consistent with these proposed regulations for taxable years ending on or after the date the proposed regulations are published taken by a taxpayer in any tax year that was open as of the date of publication of the proposed regulations preceding these final regulations (December 29, 2016).

Additional Comments to the Proposed Regulations

The Proposed Regulations also specify that reimbursements by a qualified fund of decommissioning costs paid to parties related to a qualified fund do not constitute self-dealing. This clarification reflects the position of the IRS in several private letter rulings.¹⁴ In describing this clarification, the Preamble to the Proposed Regulations specifically mentions severance payments and pre-dismantlement decommissioning costs that are paid to satisfy the decommissioning liability of the taxpayer. Oftentimes these expenses are paid by the electing taxpayer, which then seeks reimbursement from the qualified fund. The Preamble states that the purpose for the change is to remove any uncertainty and to avoid the burden on taxpayers of filing ruling requests on the issue. The Preamble also states that "no amount beyond what is actually paid by the related party, including amounts such as direct or indirect overhead or a reasonable profit element, may be included in the reimbursement by the Fund."¹⁵ We recommend that the regulation regarding self-dealing should reflect this quoted language, and proposed the following change to Prop. Treas. Reg. § 1.468A-5(b)(2)(i):

Conclusion

On behalf of the UDTG, we appreciate the added clarity that the IRS and Treasury have provided in the Proposed Regulations, and we respectfully request your consideration and adoption of the suggested refinements described above. We are willing to meet with you to discuss these suggestions, in addition to our request for a public hearing regarding these Proposed Regulations.

Sincerely,

Martha Groves Pugh
Attorney for the Utility Decommissioning Tax Group
McDermott Will & Emery
Washington, DC
202.756.8368
mpugh@mwe.com