On March 27, 2017, the U.S. District Court for the Southern District of Florida ruled that disposal fees paid by NextEra Energy Inc. and its subsidiary, Florida Power & Light Co. (NextEra or taxpayer) into the Nuclear Waste Fund do not constitute eligible decommissioning costs for purposes of Section 172(f) of the Internal Revenue Code and are thus not eligible for the special carryback period of Section 172(f)(3).1 While the case is likely to be appealed, similarly situated energy companies seeking to take advantage of, or which have already taken advantage of, these carryback provisions for nuclear power plant decommissioning costs should take note of this interpretation of eligible decommissioning costs.
In its operation of nuclear power plants, NextEra utilizes fuel in the form of uranium fuel assemblies. Inserted into a nuclear reactor core, the assemblies create a nuclear fission reaction that ultimately creates electricity. At the end of their useful lives, the assemblies are highly radioactive and must be disposed of carefully. In 1983, Congress passed the Nuclear Waste Policy Act, which assigned responsibility for nuclear waste disposal to the Department of Energy (DOE). In return for the DOE taking responsibility for nuclear waste, nuclear power plant operators were obligated to pay fees to the DOE based on the amount of electricity generated by the plant, not the cost of disposal to the DOE. NextEra sought tax refunds claiming that the fees paid to the DOE qualified as decommissioning costs under Section 172(f)(3), which are eligible for a special carryback period if included in a net operating loss (NOL).
Section 172 “Decommissioning Costs”
Section 172 governs the tax treatment of NOLs, with Section 172(b)(1)(A) generally allowing taxpayers to either carry forward NOL deductions to a future tax year or carry back deductions to no more than two prior tax years. The carryback period for an NOL attributable to a specified liability loss (SLL) is generally 10 years, as set forth in Section 172(b)(1)(C). An SLL includes numerous types of costs, including, among other things, costs for product liability, reclamation, environmental remediation, workers’ compensation, and nuclear decommissioning. A decommissioning cost is defined as any amount allowable as a deduction that is incurred in satisfaction of a liability under a federal or state law requiring the decommissioning of a nuclear power plant (or any unit thereof) and that is taken into account in computing the NOL for the taxable year.2 Unlike the other enumerated types of SLLs in Section 172(f), an SLL attributable to decommissioning costs has a unique carryback period. Section 172(f)(3) provides that the portion of an SLL that is attributable to decommissioning costs may be carried back to each taxable year in which the plant was in service (beginning with the taxable year that the plant was placed in service and ending with the taxable year preceding the loss year).3
Although Section 172(f) does not explicitly define the phrase “amounts incurred in the decommissioning of a nuclear power plant,” the Service has interpreted the term to have the same meaning as “nuclear decommissioning costs” provided in Section 468A.4 For Section 468A purposes, nuclear decommissioning costs as described in Treas. Reg. § 1.468A-1(b)(6) are:
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, whether that nuclear power plant will continue to produce electric energy or has permanently ceased to produce 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 also includes costs incurred in connection with the construction, operation, and ultimate decommissioning of a facility used solely to store, pending acceptance by the government for permanent storage or disposal, spent nuclear fuel generated by the nuclear power plant or plants located on the same site as the storage facility. 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).
The Court’s Decision
NextEra and the Service disagreed about the types of costs properly characterized as “amounts incurred in the decommissioning of a nuclear plant” under Section 172(f)(3). Siding with the Service, the court held that fees paid to the DOE for the disposal of nuclear waste did not qualify as decommissioning expenses for purposes of Section 172(f).5 Relying on the ordinary, dictionary meaning of the term, the court reasoned that NextEra’s payment of fees to the DOE did not constitute an act of decommissioning because:
- Unlike the commission and decommission of ships, airplanes, and nuclear power plants, the removal of waste from a power plant does not constitute decommissioning of such waste;
- “Just as fuel would not qualify as a unit of a fleet of ships,” nuclear fuel rods, and the ultimate radioactive waste that the DOE disposes of, are not “a unit” of a nuclear power plant;
- While the other situations in Section 172(f) that qualify for special carryback treatment tend to be “particularly ‘large and sporadic,’”6 NextEra seeks to carry back fees that it makes “regularly, quarterly.”
Eversheds Sutherland Observation: Further, the court’s discussion of decommissioning ships and planes could suggest that decommissioning occurs only upon cessation of operations. As is clear from Treas. Reg. § 1.468A-1 and numerous private letter rulings,7 decommissioning frequently occurs during the life of the plant, typically during outages.
The court dismissed NextEra’s reliance on the definition of decommissioning costs in Treas. Reg. § 1.468A-1 because, in the court’s view, the regulation’s definition of the term has no bearing on the term’s meaning for purposes of Section 172(f) and costs incurred in connection with the disposal of spent nuclear fuel under the Nuclear Waste Policy Act are expressly excluded from the purview of the regulation.
The court also rejected NextEra’s attempt to cite the numerous private letter rulings applying the Treas. Reg. § 1.468A-1 definition of decommissioning costs to support its position. The court noted that the letter rulings were not cited as evidence of administrative practice, but rather as substantive precedent. Citing 27 U.S.C. Section 6110(k)(3), the court refused to consider them for this purpose.
Finally, the court concluded that the fees paid to the DOE in satisfaction of NextEra’s obligation under the Nuclear Waste Policy Act were not costs incurred “in satisfaction of a liability under federal or state law,” as otherwise required under Section 172(f)(3) because: (a) the Nuclear Waste Policy Act did not impose a decommissioning obligation on NextEra; rather, it imposed a fee that NextEra was liable to pay for the DOE to fulfill its obligation to dispose of spent fuel; and (b) the fees imposed by the Nuclear Waste Policy Act did not reflect the DOE’s actual costs to dispose of the spent fuel, but rather were based on the amount of energy produced by NextEra at its plant.
Eversheds Sutherland Observation: As previously noted, the Service has expressly stated, in a private letter ruling, that the definition of nuclear decommissioning costs in Treas. Reg. § 1.468A-1 is applicable for purposes of Section 172(f)((3). Although private letter rulings cannot be relied upon by taxpayers other than the taxpayer to whom they are issued, they are frequently cited as reflecting the position of the Service.8 By ignoring the Service’s guidance, the court has introduced uncertainty into a settled area of the law. Even more surprising is that the Service’s guidance has expressly addressed the nuclear fuel issue by specifically providing that nuclear decommissioning costs include “costs incurred in connection with . . . spent nuclear fuel generated by the nuclear power plant.” The Service’s regulations note that decommissioning costs include the costs incurred in connection with spent fuel when such costs are attributable to the ultimate decommissioning of a facility used to store, or pending acceptance by the government for permanent storage or disposal of such fuel. See Treas. Reg. § 1.1468A-1(b)(6). However, these same regulations acknowledge that these amounts do not include “expenses in connection with the disposal of spent nuclear fuel.”