DECOMMISSIONING TAX DEVELOPMENTS

Transcription

1 DECOMMISSIONING TAX DEVELOPMENTS Nuclear Decommissioning Trust Fund Study Group 2014 Annual Conference May 20, 2014 Justin E. Jesse McDermott Will & Emery LLP Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Paris Rome Seoul Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2014 McDermott Will & Emery. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome.

2 Agenda Dave Camp 2014 Tax Reform Discussion Draft Nuclear Plant Shutdown Income Tax Issues and Considerations Decommissioning Costs Section 165 Abandonment Losses Termination of Section 468A Qualified Fund Recent IRS Rulings on Severance Payments and Other Pre- Dismantlement Costs 2

3 Camp 2014 Tax Reform Proposal February 26, 2014 House Ways and Means Committee Chairman Dave Camp (R-Mich.) released a discussion draft of the Tax Reform Act of Discussion draft proposes to simplify the tax code and lower tax rates with comprehensive reform: Individual and business tax reform Repeal of the alternative minimum tax Participation exemption system for foreign income Reform for tax exempt entities 3

4 Camp 2014 Tax Reform Proposal Proposed corporate income tax rate: flat 25%. Phased-in over four taxable years beginning in % on first $75,000 Phase-in rate on income exceeding $75,000 Taxable years that begin during Tax Rate percent percent percent percent 2019 and after 25 percent 4

5 Camp 2014 Tax Reform Proposal Two Section 468A Proposals 1. Eliminate the current 20% tax rate for Qualified Funds. Qualified Funds would be taxed at the maximum corporate rate. During : between 25% and 33% 2019 and beyond: 25% 2. Income inclusion of the entire balance of the Qualified Fund in the event of a nonqualified distribution. Both proposals would apply to taxable years that begin after December 31,

6 Camp 2014 Tax Reform Proposal Points to Consider Elimination of 20% Rate Tax rate increase on qualified funds could have a severe adverse impact on the adequacy of existing Qualified Funds at a time when many plants are nearing retirement. It would also undermine the efforts of the industry in the 1990s to tie the tax rate applicable to Qualified Funds to that of electricity customers, on average, who are the ultimate contributors to qualified funds. 6

7 Camp 2014 Tax Reform Proposal Points to Consider Income Inclusion on Disqualified Distribution Under current law, IRS may disqualify all or part of a Qualified Fund if it violates any portion of section 468A, including engaging in self-dealing or making an excessive contribution or disqualified distribution. Under current law, there is an income inclusion only to the extent the Qualified Fund is disqualified. Camp s proposal appears duplicative and unnecessary as the IRS already has discretion to disqualify a fund in the event of a disqualified distribution. Camp s proposal also may be more detrimental as the entire balance of the Qualified Fund would be disqualified in the event of a disqualified distribution, and not just the portion that was distributed (small mistake may have big, unintended consequences). 7

8 Camp 2014 Tax Reform Proposal Camp s proposal is merely a discussion draft for tax reform. It has not been introduced as proposed legislation. At this point, it is unclear what level of support or opposition there is to the proposal in Congress. Given the current political climate, it is unclear when tax reform legislation will be seriously considered. However, the proposal could become a starting point for future tax reform proposals, which may include the tax rate proposals and suggested reforms to section 468A. 8

9 Nuclear Plant Closures: Income Tax Issues In 2013, five nuclear plants at four separate sites were closed prior to the expiration of their extended operating licenses. Some units were closed for economic reasons; other closures were due to operational and/or regulatory constraints. It is possible additional closures will occur over the next several years. As nuclear plants are decommissioned, Qualified Funds can pay for decommissioning expenses. Payments from Qualified Funds are included in the taxpayer s income. Taxpayer takes a deduction for the expenses paid (section 162, 165, etc.). 9

10 Nuclear Plant Closures: Income Tax Issues The term nuclear decommissioning costs or decommissioning costs includes 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. 10

11 Nuclear Plant Closures: Income Tax Issues 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 ). An expense is otherwise deductible for purposes of 468A if it would generally be deductible under another provision of the Internal Revenue Code. 11

12 Nuclear Plant Closures: Income Tax Issues Section 165 Abandonment Loss Deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. Rate recovery. Litigation against third parties (manufacturers and suppliers). Claims against DOE regarding spent nuclear fuel costs. 12

13 Nuclear Plant Closures: Income Tax Issues Using Section 468A Qualified Funds Decommissioning costs broadly defined in regulations and rulings. Applicable to operating and shutdown plants (including removal of components prior to shutdown). Covers capitalized and currently deductible costs. Includes ISFSI and other spent nuclear fuel costs. Claim for reimbursement should not be determinative. Review decommissioning cost studies to identify non-dismantlement costs reflected therein. 13

14 Nuclear Plant Closure: Income Tax Issues Possible Non-Dismantlement Decommissioning Costs Severance payments and associated benefits. Increased plant security costs. Planning and preparation expenses. Contract termination fees. Expenses to modify plant procedures and maintenance projects. Defueling costs. Demolition expenses of non-radioactive buildings. Costs of communicating with residents and local governments. Property insurance and taxes. 14

15 Nuclear Plant Closures: Income Tax Issues Termination of Section 468A Qualified Funds A qualified fund terminates upon substantial completion of the decommissioning of a nuclear power plant. Substantial completion of the decommissioning of a nuclear power plant occurs on the date that the maximum acceptable radioactivity levels mandated by the NRC with respect to the decommissioned plant are satisfied (the substantial completion date ). If a significant portion of the total estimated decommissioning costs with respect to the plant will be incurred after the substantial completion date, a taxpayer may request a ruling from the IRS designating a subsequent date as the termination date. However, such subsequent date will not be later than the last day of the third taxable year after the taxable year that includes the substantial completion date. 15

16 Recent IRS Rulings on Severance Payments and Other Pre-Dismantlement Costs Two recent rulings from the IRS for nuclear taxpayers on severance payments. The IRS issued a ruling to Taxpayer 1 who owned and operated a nuclear power plant. See PLR Taxpayer 1 had previously announced that units of its plant would be retired. As part of the retirement of the units, the plant s workforce would need to be reduced. Under state law, Taxpayer 1 is permitted to collect decommissioning amounts for severance payments to separated employees who become separated as part of the retirement and decommissioning of the units. 16

17 Recent IRS Rulings on Severance Payments and Other Pre-Dismantlement Costs During the decommissioning process, employees would broadly perform the following tasks: Plan and design all of the logistical and technical aspects required to take the units from an operational-ready status to safe shutdown and non-operational status and finally to a fully dismantled and restored site. Ensure the safe and orderly transition of the units from an operationalready status to safe shutdown and non-operational status. Maintain the units in a safe condition during actual dismantlement. Dismantle, remove, and restore the site to its regulatory and legally required condition. 17

18 Recent IRS Rulings on Severance Payments and Other Pre-Dismantlement Costs In addition to the severance payments, Taxpayer 1 would also incur the following additional transition costs relating to the retirement and decommissioning of the units: Preparation for physical decommissioning of the units. Consolidation and restoration of the facilities of the units and the site upon which they are located. Security for the units and the surrounding site. Communication with affected communities regarding the retirement of the units and plans for decommissioning. Staffing costs incurred as a result of the permanent retirement and prior to the commencement of physical dismantlement of major components of the units. 18

19 Recent IRS Rulings on Severance Payments and Other Pre-Dismantlement Costs The IRS held that the severance payments and transition costs constitute decommissioning costs within the meaning of section 468A. Such costs are incurred in connection with the entombment, decontamination, dismantlement, removal, and disposal of the structures, systems, and components of a nuclear power plant. The IRS cautioned that it was not ruling on any particular expense, but on broad categories of expenses. Each specific expense must satisfy the section 468A requirements. To the extent Taxpayer 1 first pays the severance payments and transition costs and then is reimbursed by its Qualified Fund, the IRS ruled that such reimbursements are not self-dealing. 19

20 Recent IRS Rulings on Nuclear Plant Shutdowns: Severance Payments and Other Pre- Dismantlement Costs Taxpayer 2 also recently received a ruling from the IRS on this same issue regarding severance payments and predismantlement decommissioning costs (similar to transition costs). In addition, Taxpayer 2 sought a ruling that the severance payments and pre-dismantlement decommissioning costs will qualify as section 172(f) specified liability losses to the extent such expenses generate a net operating loss ( NOL ). 20

21 Recent IRS Rulings on Nuclear Plant Shutdowns: Severance Payments and Other Pre- Dismantlement Costs Section 172 Extended Carryback Period for NOL Associated with Decommissioning Liability. Act giving rise to liability must occur more than three years before the liabilities were satisfied. Accrual method requirement. Correlation to section 468A decommissioning costs. Carryback decommissioning liability NOL to later of placed in service date or The IRS ruled that the severance payments would qualify as specified liability losses because the act giving rise to such payments was when the severance costs were statutorily allowed to be treated as decommissioning expenses. The act giving rise to the liabilities for pre-dismantlement decommissioning costs occurred when the license to operate each unit was granted and the unit was placed into service. 21

22 Recent IRS Rulings on Severance Payments and Other Pre-Dismantlement Costs These two rulings confirm: Severance payments and other costs incurred pre-dismantlement of a nuclear power plant are decommissioning costs and can be paid from Qualified Funds. The IRS has confirmed that NOLs generated by decommissioning expenses can be carried back to the tax year that a nuclear plant was placed in service, but in no event can such NOLs be carried back to a tax year that begins before January 1,

23 Justin Jesse is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm s Washington, DC office. He focuses his practice on U.S. and International Tax and Tax Controversy. Justin advises clients on all aspects of tax disputes, including cases before the U.S. Tax Court, U.S. district courts, and the IRS. Such matters have included disputes relating to captive insurance (Securitas Holdings, Inc. v. Commissioner, docketed in the Tax Court), research and development credits, transfer pricing, and other tax advantaged transactions. He has also represented clients before Congress relating to investigations of tax-related matters. Justin has experience with tax-exempt organizations, nuclear decommissioning trust funds, privilege and discovery issues, international tax restructurings, and requesting Internal Revenue Service private letter rulings. Justin earned his J.D., cum laude, from Duke Law School and his B.A., cum laude, from Brigham Young University. He is admitted to practice in the District of Columbia. jjesse@mwe.com Tel:

24 Martha Groves Pugh is counsel in the law firm of McDermott Will & Emery LLP and is based in its Washington, D.C., office. She focuses her practice on federal income tax issues with a particular emphasis on the nuclear and energy industries. Marty has helped clients seek and receive many private letter rulings and has extensive experience in drafting legislative language for tax proposals. Her practice also includes tax planning for proposed transactions and advising clients on audits, appeals and litigation issues. Marty has extensive experience with various tax credits including renewable energy incentives, such as, production tax credits for wind, biomass, and geothermal projects and investment tax credits related to solar projects. Marty has been heavily involved in developing opportunities for clients related to the American Recovery and Reinvestment Act of 2009, including the Section 1603 Grant Program, the advanced energy credit, converting of the production tax credit to the investment tax credit and others. She has experience with new market tax credits in both the context of transactions and legislative efforts related to new market tax credits. Marty also has extensive experience counseling energy industry companies on tax accounting issues such as repairs, placed-in-service, depreciation and contract restructuring issues; contribution in aid of construction issues and corporate and partnership issues involved in restructurings. She is well known for advising clients on nuclear decommissioning issues before the Internal Revenue Service, the Nuclear Regulatory Commission, the Federal Energy Regulatory Commission and state public service commissions. Marty is chair of the Taxation and Accounting Committee of the Section of Public Utility Communications and Transportation Law of the American Bar Association. She is admitted to practice in the District of Columbia and California. mpugh@mwe.com Tel: