The Internal Revenue Service (IRS) and the US Department of the Treasury (Treasury) published a final rule in the September 4 Federal Register updating IRS regulations under Internal Revenue Code (Code) Section 468A. The final rule adopts most of the changes from the notice of proposed rulemaking (NOPR), which was released for comment in December 2016. That said, the IRS and Treasury made a few important changes to the final rule, as discussed below.
Background on Section 468A
The intent of Section 468A is to allow owners of nuclear power plants to put funds into a qualified fund on a tax-free basis and then use those funds and earnings on those funds to pay for decommissioning. To accomplish this, Section 468A allows eligible nuclear power plant owners to elect to deduct certain amounts set aside and transferred to an eligible fund in the current tax year. This provides the plant owner with a federal tax deduction to offset the otherwise taxable income received that is being set aside for decommissioning. When decommissioning activities occur, distributions from the fund become income and subject to income tax, but this income is typically offset by corresponding deductions for the decommissioning expenses. Section 468A restricts the use of the proceeds from a qualified fund to “the decommissioning of a nuclear power plant.” Section 468A also prohibits “self-dealing” in which qualified funds are used in transactions between the qualified fund and related parties.
The Final Regulations
Since the prior regulations regarding Section 468A were finalized in December 2010, several nuclear power plants have begun decommissioning, giving rise to questions on the allowable uses of qualified funds for certain decommissioning activities such as spent fuel management and site restoration. The regulation changes in the final rule thus seek to address these questions and provide clarity to the industry.
- Certain payments are not an act of self-dealing. The final rule adopts the NOPR’s proposal to allow reasonable payments for decommissioning costs to a disqualified person—such as the company contributing to the fund, including its officers and employees, and the trustee—and states that such transactions are not an act of self-dealing. If the total amount of such payment is more than the actual expenses (e.g., for profit or overhead), it does not constitute self-dealing so long as the payment is reasonable as determined under Section 1.162-7 and “not excessive.”
- Onsite and offsite ISFSI costs are part of “nuclear decommissioning costs.” In response to comments on the NOPR, the IRS and Treasury recognized that the lack of a permanent repository could lead to onsite independent spent fuel storage installations (ISFSIs) becoming overcrowded and cause operators to look to offsite ISFSIs for storage capacity. Thus, the IRS and Treasury broadened the definition of nuclear decommissioning costs to include expenses related to spent fuel storage in both onsite and offsite ISFSIs.
- Land improvements are also part of “nuclear decommissioning costs.” In response to comments on the NOPR, the IRS and Treasury agreed to allow qualified funds to be used for land improvements. Thus, the definition of nuclear decommissioning costs now includes “all land improvements and otherwise deductible expenses” to be incurred in connection with decommissioning a nuclear power plant.
- Changes the definition of “substantial completion.” The final rule adopted the NOPR’s proposed change to the definition of “substantial completion.” Thus, substantial completion is that date on which all federal, state, local, and contractual decommissioning liabilities are fully satisfied, so the qualified fund can continue to fund activities at an “ISFSI only” site for many decades after the facility has been otherwise fully decommissioned until final license termination.
The final rule applies to taxable years ending on or after September 4, 2020. Taxpayers who did not request and obtain a schedule of ruling amounts for prior years—as allowed by the NOPR—may apply the rules in the final rule to prior taxable years for which the taxpayer’s deemed payment deadline has not passed before September 4, 2020.