When you abandon business property and your adjusted basis is more than the amount you realize, you can generally claim an ordinary loss. “Abandonment” means you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership and without passing the property on to anyone else, such as by sale or gift. You can prove that you intend to abandon the property by having both the intent to abandon it and affirmatively acting to do so.
In private letter ruling 201612003, the taxpayer was a public utility with the responsibility for decommissioning a nuclear power plant that permanently ceased operations. The taxpayer made contributions to a qualified fund to cover the estimated costs of the decommissioning, and signed an agreement with the US Department of Energy for disposal of the nuclear waste.
As part of the decommissioning process, the taxpayer removed all the spent nuclear fuel from the plant and placed the fuel in a “spent fuel pool” to cool before moving the fuel to dry storage. The taxpayer also constructed an Independent Spent Fuel Storage Installation for the dry storage of the nuclear waste pending transfer to the Department of Energy. The taxpayer pays the costs to maintain and expand the Independent Spent Fuel Storage Installation until the transfer.
The taxpayer recovers the decommissioning costs from utility customers, and the customers receive refunds of unspent funds.
Because the Department of Energy has not yet constructed a permanent repository for nuclear waste and will not accept the taxpayer’s nuclear waste for disposal, the taxpayer filed lawsuits for breach of contract to recover costs incurred in storing the nuclear waste in the Independent Spent Fuel Storage Installation. The taxpayer was awarded damages for several years, lawsuits are pending for other years, and the taxpayer plans additional litigation for future years.
The taxpayer agrees that it is not entitled to the litigation proceeds, except for reimbursement of reasonable litigation costs, and the taxpayer will refund recovered amounts to utility customers.
The IRS said the taxpayer had taken affirmative, overt actions necessary to abandon the nuclear plant and the taxpayer sustained an abandonment loss.
The remaining question was whether the reimbursement due to the ongoing litigation, for which there was a reasonable prospect of recovery, meant the taxpayer couldn’t claim the deduction for the decommissioning costs of the Independent Spent Fuel Storage Installation.
Here’s the relevant law.
From internal revenue code section 468A(a): Allows taxpayers with a qualifying interest in a nuclear power plant to currently deduct the future costs of decommissioning the nuclear power plant by making contributions to a fund prior to when economic performance occurs.
From internal revenue code section 468A(c)(1): Generally requires a taxpayer to include in gross income amounts that are distributed from a fund. In addition to any deduction under section 468A(a) for contributions to a fund, section 468A(c)(2) recognizes that such taxpayer may deduct otherwise deductible nuclear decommissioning costs.
From treasury regulation 1.468A-1(b)(6): States that “nuclear decommissioning costs” means 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. An expense is otherwise deductible for purposes of this paragraph (b)(6) if it would be deductible under chapter 1 of the Internal Revenue Code without regard to section 280B.
From internal revenue code section 165: Provides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.
From treasury regulation 1.165-1(b): Provides that to be allowable as a deduction under section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the taxable year.
From treasury regulation 1.165-1(d)(2)(i): Provides that, if an event occurs which may result in a loss and, in the year of the event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained until it can be ascertained with reasonable certainty whether or not such reimbursement will be received.
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The taxpayer is engaged in litigation with the Department of Energy for breach of contract related to the department’s refusal to accept the taxpayer’s nuclear waste for permanent disposal, and the taxpayer has prevailed with respect to claims for certain years.
The taxpayer has no legal right to the litigation proceeds, is not in actual or constructive receipt of the proceeds, and is legally obligated to refund all such proceeds to utility customers, with interest.
Therefore, the taxpayer has no claim for reimbursement with respect to which there is a reasonable prospect of recovery and is entitled to a deduction pursuant to section 165(a) for the costs associated with the construction and decommissioning of the Independent Spent Fuel Storage Installation.
Under section 468A and the regulations thereunder, to be included within the ambit of nuclear decommissioning costs, all costs must be “otherwise deductible.” Section 468A does not provide an independent basis for the deduction of any amounts except for those amounts contributed to a qualified fund as provided in section 468A(a).
Those 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 must also be “otherwise deductible.”
The costs associated with the construction and decommissioning of the Independent Spent Fuel Storage Installation are otherwise deductible under section 165.
Accordingly, we rule that these costs constitute decommissioning costs within the meaning of section 1.468A–1(b)(6) of the regulations and, to the extent they are used for the purposes specified in section 1.468A-1(b)(6), may be paid out of the funds.