Nuclear Plant Operator's Waste Disposal Fees Did Not Qualify as Specified Liability Losses

(Parker Tax Publishing July 2018)

The Eleventh Circuit held that a nuclear plant operator was not entitled to a refund for net operating losses resulting from fees it paid for the disposal of radioactive waste. The Eleventh Circuit found that the taxpayer's losses were not specified liability losses under Code Sec. 172(f) because the disposal of radioactive waste did not qualify as deductible power plant decommissioning costs, the disposal fees were not incurred under a federal or state law requiring decommissioning, and the act giving rise to the liability for such costs did not occur more than three years before the claimed loss. NextEra Energy, Inc. v. U.S., 2018 PTC 192 (11th Cir. 2018).

Background

Nuclear reactors are powered by hundreds of fuel assemblies that contain rods of enriched uranium. The fuel assemblies become less efficient over time and eventually need to be replaced. Used fuel assemblies continue to emit dangerous radiation for thousands of years. Spent nuclear fuel can be stored for years at the nuclear facility, but it ultimately needs to be transferred to a permanent storage site.

The Nuclear Regulatory Commission (NRC) issues licenses for the operation of nuclear power plants, and strict guidelines apply to such operators. For example, the NRC will not terminate a license until a nuclear facility is free of radioactive contamination. In 1982, Congress enacted the Nuclear Waste Policy Act (NWPA) to provide for permanent disposal of spent nuclear fuel. Under the NWPA, the Department of Energy (DOE) is responsible for depositing spent fuel in a permanent disposal site.

Nuclear facilities are required under contracts with the DOE to pay a disposal fee based on the amount of electricity generated by the plant. The fees are paid to the Treasury and placed in the Nuclear Waste Fund. The DOE is authorized to pay from the fund for the disposal of radioactive waste. By paying the fee, the nuclear facility has no further financial obligation to the government for the long-term storage and permanent disposal of spent fuel.

NextEra Energy, Inc. operated two nuclear plants in Florida and one each in Iowa, New Hampshire, and Wisconsin. NextEra entered into NWPA contracts with the DOE and paid approximately $200 million in contract fees to the Nuclear Waste Fund during 2003-2005 and 2008-2010. In 2012, NextEra filed a claim for a refund of approximately $97 million which was based on net operating losses incurred as a result of paying the NWPA fees. In 2015, when the IRS had still made no decision on the refund, NextEra sued for a refund in a district court. The district court granted summary judgment in favor of the IRS because it found that the NWPA contract fees did not qualify as deductible specified liability losses under Code Sec. 172(f).

Analysis

A net operating loss exists when a taxpayer has more deductions in a given year than the taxpayer has income. For the years at issue, net operating losses could be carried forward to future years or back to a previous year, with the carryback generally being limited to the previous two years (although some losses were allowed a longer carryback period).

At all relevant times, Code Sec. 172(f) provided an extended carryback period for certain specified liability losses for decommissioning a nuclear power plant. A ten year carryback applied to liabilities incurred to satisfy a federal or state law requiring the decommissioning of a nuclear power plant if the act giving rise to the liability occurred at least three years before the claimed loss. An even longer carryback applied to a specified liability loss attributable to amounts incurred in decommissioning a nuclear power plant. In that case, the loss could be carried back to the year the plant was placed in service. Thus, to qualify for a refund, NextEra had to show that (1) its payment of NWPA fees was for an act that qualified as nuclear decommissioning, (2) the payments were made pursuant to a law requiring decommissioning, and (3) the act occurred more than three years before the claimed loss. Decommissioning is not a defined term in Code Sec. 172.

The district court granted summary judgment for the government because it found that spent nuclear fuel was not decommissioned under the plain meaning of the term. The district court also found that, even if disposal of spent nuclear fuel qualified as decommissioning, NextEra was still not entitled to a refund because the DOE, not NextEra, was the body with the actual liability under federal law to dispose of the radioactive material. The NWPA contract fees did not go directly to the task of disposing of radioactive material, but instead went to the Nuclear Waste Fund, the district court observed. NextEra appealed to the Eleventh Circuit.

NextEra argued on appeal that disposing of spent nuclear fuel was essential to commissioning and decommissioning a nuclear power plant. It asserted that because its plants could not be fully decommissioned until all radioactive material was removed, decommissioning must encompass the removal of spent nuclear fuel. NextEra claimed that federal regulations supported its argument that decommissioning a nuclear power plant involved ridding the site of radioactive waste and spent nuclear fuel so the license could be terminated. NextEra further contended that the cost of permanent disposal should be treated as costs incurred to temporarily store spent fuel pending its delivery to the DOE for permanent disposal, and that such temporary storage costs are considered nuclear decommissioning costs under Reg. Sec. 1.468A-1(b)(6). NextEra argued that its losses were incurred under a law requiring decommissioning because decommissioning could not take place until all spent nuclear fuel was removed and because NextEra paid the costs of permanent disposal of spent fuel. According to NextEra, the act giving rise to the liability for decommissioning was either the initial startup of the plant or the insertion of fuel assemblies into the reactor core.

The Eleventh Circuit rejected NextEra's arguments and affirmed the summary judgment. The Eleventh Circuit found that although removal of radioactive material is required for decommissioning a nuclear power plant, the removal of spent fuel during the life of a facility is not itself an act of decommissioning. A nuclear plant could operate in perpetuity and never be decommissioned, the court explained, and spent fuel would still need to be removed. In the court's view, disposing of spent fuel was best thought of as a periodic operational expense and did not qualify as decommissioning all or part of a nuclear plant.

The Eleventh Circuit also distinguished the NWPA contract fees from temporary storage costs. In the court's view, the contract fees were akin to a tax on the production of nuclear energy to fund the DOE's cost of permanently storing spent fuel. In contrast, temporary storage costs are borne by individual power plants and incurred not when energy is produced but when spent fuel is removed from the reactor and stored in preparation for eventual removal. The court reasoned that a decommissioned plant would still bear the costs of temporary onsite storage. Given these differences, the court was not convinced that permanent storage costs should be treated the same as temporary storage costs under Code Sec. 172(f).

The Eleventh Circuit found that even if NextEra could prevail on the first prong of its argument, it would not qualify for a refund because no law required NextEra or any nuclear facility to engage in decommissioning. The court found that while every nuclear plant must submit a decommissioning plan to the NRC and maintain funds sufficient for decommissioning, nuclear plants may lawfully remain operational in perpetuity, and any operational plant needs to dispose of spent nuclear fuel on an ongoing basis. The court therefore found that NextEra's NWPA contract fees were not made pursuant to a law requiring decommissioning.

The court also rejected NexEra's argument that NextEra was ultimately responsible for decommissioning because it paid the costs of permanent spent fuel disposal. The court reasoned that funding is only part of the responsibility for decommissioning and that the DOE was required to actually dispose of the radioactive waste. In the court's view, the DOE's disposal obligation and the plant's obligation to pay into the Nuclear Waste Fund were two separate legal obligations.

The Eleventh Circuit further found that the NWPA fees were tied not to the cost of waste disposal, but to the production of electricity. The Eleventh Circuit observed that the NWPA contracts determined the fee based on the amount of electricity generated in the preceding quarter and reasoned that if NextEra built nuclear plants but never produced electricity, it would have incurred no NWPA fees. The NWPA fees were therefore not a law requiring decommissioning, in the court's view.

Finally, the court found that the acts giving rise to the liability happened in the quarters immediately preceding the months in which NextEra paid the fees. Therefore, the acts did not occur more than three years before the claimed loss as required under Code Sec. 172(f).

Observation: The Tax Cuts and Jobs Act eliminated the special 10-year carryback provision for specified liability losses arising in tax years ending after 2017.

For a discussion of determining a carryback or carryforward period for net operating losses, see Parker Tax ¶99,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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