On September 3, 2020, the Internal Revenue Service (IRS) released long-awaited final regulations (Final Regulations) under section 468A of the Internal Revenue Code of 1986, as amended (Code). The Final Regulations generally follow proposed regulations issued on December 28, 2016 (Proposed Regulations), and address the definition of nuclear decommissioning costs, the self-dealing rules, and the definition of substantial completion.
Section 468A contains certain taxpayer-favorable rules for “nuclear decommissioning costs.” Before release of the Final Regulations, the regulations limited qualified nuclear decommissioning costs to amounts that are “otherwise deductible,” which created ambiguity regarding whether any portion of the cost of a capital item, such as an Independent Spent Fuel Storage Installation (ISFSI), was a qualified nuclear decommissioning cost that can be funded at all, or only partially, through contributions to a qualified nuclear decommissioning fund. With respect to the self-dealing issue, the question presented under the prior regulations was whether amounts paid to a related party to conduct decommissioning could include not only direct costs, but also indirect overhead costs, and/or a reasonable profit element.
The release of the Final Regulations follows Proposed Regulations issued on December 28, 2016 and a public hearing on the Proposed Regulations on October 25, 2017.1 The Proposed Regulations attempted to clarify certain ambiguities that existed in Treas. Reg. §§ 1.468A-1 and -5. Specifically, the Proposed Regulations attempted to clarify (1) the “otherwise deductible” language in the regulations, which arguably limited the amount of costs for long-term storage that could be funded by a qualified fund, (2) the “self-dealing” rules for payments to related parties, and (3) the “substantial completion” of decommissioning. Provided below is a summary of the Final Regulations.
Definition of nuclear decommissioning costs
Despite comments urging it to do so, the Final Regulations do not eliminate the requirement that qualified nuclear decommissioning costs must be “otherwise deductible,” but clarify that land improvements and expenses that would be deductible or recoverable through depreciation and amortization satisfy that requirement. Perhaps more importantly, the Final Regulations confirm that expenditures attributable to the construction and maintenance of ISFSIs are qualified nuclear decommissioning costs and, in response to our specific request at the hearing, make clear that the ISFSI can be located off-site from the nuclear plant itself and remain eligible.
Eversheds Sutherland Observation: Although the expansion of the “otherwise deductible” definition to include depreciation and amortization will cover most expenditures incurred in connection with decommissioning, we continue to believe that it would have been preferable to eliminate this requirement. As noted in our testimony, and as Treasury acknowledges in the Preamble, whether the expenditures are ultimately deductible is not a function of section 468A. In our view, expenditures incurred in connection with decommissioning should be eligible for funding through the qualified fund, and deductibility should be determined under other provisions of the Code. Finally, while we welcome the addition of off-site storage to the categories of eligible nuclear decommissioning expenses, the retention of the “otherwise deductible” standard potentially excludes the acquisition of land necessary to store spent fuel off-site. With the prospect of a Federal repository so uncertain, the necessity for off-site storage is only likely to increase.
The Final Regulations adopt the language in the Proposed Regulations that reimbursement of decommissioning costs by a qualified fund to a disqualified person that paid such costs is not an act of self-dealing.
Under the prior regulations, payment of compensation and payment or reimbursement of expenses by a qualified fund to a disqualified person for personal services that are decommissioning costs and are reasonable and necessary are not an act of self-dealing if such payment is purely for such services and would be ordinarily paid for such services. The preamble to the Proposed Regulations indicated that the IRS has issued several private letter rulings concluding that reimbursements paid to an electing taxpayer are not self-dealing but, that the IRS wished to clarify that reimbursements paid to related parties also are not self-dealing. The preamble to the Proposed Regulations provided that no amount beyond what is actually paid by a disqualified person, including direct or indirect overhead or a reasonable profit, may be included in the reimbursement by the qualified fund.
The preamble to the Final Regulations notes that several commenters recommended expanding the types of expenses permitted to be reimbursed as nuclear decommissioning costs to include direct and indirect overhead and a reasonable profit element. In the Final Regulations, the IRS adopted by that recommendation by modifying the language of Treas. Reg. § 1.468A-5(b)(2)(v) to refer to the determination of whether a payment is reasonable under section 4951(d)(2)(C) and Treas. Reg. §§ 53.4951-1(a), 53.4941-3(c), and 1.162-7.
Eversheds Sutherland Observation: It is increasingly common for utilities to perform their own decommissioning or perform decommissioning through the use of an affiliate rather than contracting with third parties. In our testimony at the public hearing on the Proposed Regulations, we suggested that such parties that perform their own decommissioning directly or through affiliates should be treated on the same basis as third party decommissioning contractors who would obviously recoup their indirect costs and a profit element in the price charged for their services. The Final Regulations adopted this view.
Having received no criticisms of the Proposed Regulations on substantial completion, the Final Regulations provide that the substantial completion date is the date on which all federal, state, local, and contractual decommissioning liabilities are fully satisfied.
Eversheds Sutherland Observation: In general, we believe that Treasury and the IRS carefully considered the comments received on the Proposed Regulations and adopted Final Regulations that should be well-received by the industry. Whether the retention of the “otherwise deductible” standard proves to be problematic, given the general exception for ISFSI costs, remains to be seen.