AmerGen Energy Co. v. United States

• Citation: 779 F.3d 1368
• Decision Date: 11 March 2015
• Docket Number: No. 2014–5067.,2014–5067.
• Parties: AMERGEN ENERGY COMPANY, LLC, by and through EXELON GENERATION COMPANY, LLC, Tax Matters Partner, Plaintiff–Appellant v. UNITED STATES, Defendant–Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

779 F.3d 1368

AMERGEN ENERGY COMPANY, LLC, by and through EXELON GENERATION COMPANY, LLC, Tax Matters Partner, Plaintiff–Appellant

v.UNITED STATES, Defendant–Appellee.

No. 2014–5067.

United States Court of Appeals, Federal Circuit.

March 11, 2015.

Paul March Smith, Jenner & Block LLP, Washington, DC, argued for plaintiff-appellant. Also represented by Terri L. Mascherin, John J. Hamill, Chicago, IL.

Arthur Thomas Catterall, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Richard Farber, Gilbert Steven Rothenberg, Tamara W. Ashford.

B. John Williams, Jr., Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, for amicus curiae Entergy Corporation. Also represented by David W. Foster.

Before LOURIE, MOORE, and CHEN, Circuit Judges.

Opinion

LOURIE, Circuit Judge.

AmerGen Energy Company, LLC (“AmerGen”), by and through Exelon Generation Company, LLC, appeals from the decision of the United States Court of Federal Claims (the “Claims Court”) granting summary judgment that AmerGen may not include future nuclear decommissioning liabilities that it assumed when it purchased three nuclear power plants in the basis of the acquired assets in its 2001 through 2003 tax returns. AmerGen Energy Co. v. United States, 113 Fed.Cl. 52 (2013) (“Summary Judgment ”). The Claims Court reasoned that because those nuclear power plants would not be decommissioned until years later, AmerGen's decommissioning liabilities did not satisfy the economic performance requirement of 26 U.S.C. § 461(h) (2000).¹ Id. at 73.

We conclude that the Claims Court correctly decided that § 461(h) is applicable in determining when and whether an accrual method taxpayer, such as AmerGen, incurs future nuclear decommissioning liabilities for purposes of calculating the basis of an acquired nuclear power plant and associated assets. Because AmerGen did not economically perform the decommissioning activities at issue as of 2001 through 2003, the relevant tax years, we affirm.

Background

In 1999 and 2000, AmerGen purchased three nuclear power plants, viz., the Three Mile Island Unit–1 nuclear plant (“TMI–1”), the Clinton Power Station (“Clinton”), and the Oyster Creek Nuclear Generating System (“Oyster Creek”), and assumed responsibility for their operations. AmerGen paid a purchase price of $93 million for those plants and related assets. J.A. 507. According to AmerGen, it also assumed future decommissioning liabilities associated with each plant.

Operating a nuclear power plant within the United States requires a license from the Nuclear Regulatory Commission (“NRC”). See 42 U.S.C. § 2131. AmerGen applied for and obtained the NRC's approval of the transfer of the plants' operating licenses. As a licensee, AmerGen was subject to the regulations promulgated by the NRC, including the obligation to decommission its nuclear power plants after they would permanently cease operations. See 10 C.F.R. §§ 50.2, 50.82(a)(3).

None of the three nuclear power plants was decommissioned as of the relevant 2001 through 2003 tax years. The operating license for Oyster Creek was originally set to expire in 2009, and has since been extended to 2029. The operating license for TMI–1 was originally set to expire in 2014, and has also been extended to 2034. The operating license for Clinton will not expire until 2026, and may be extended to 2046. Under 10 C.F.R. § 50.82(a)(3), the process of decommissioning may take sixty years after a nuclear power plant permanently ceases operations. Thus, AmerGen might not fully satisfy its decommissioning obligations until 2106. Summary Judgment, 113 Fed.Cl. at 58.

Before AmerGen acquired the nuclear power plants, the prior owners had established qualified and nonqualified decommissioning trust funds in which they set aside money to pay for decommissioning in the future. A qualified fund satisfies the requirements of I.R.C. § 468A and receives special tax treatment. A taxpayer's contribution to a qualified fund is subject to statutory limitations on the allowable amount of contributions as well as a “ruling amount” set by the Internal Revenue Service (“IRS”). See I.R.C. § 468A(b), (d) (2000). The contributions are currently deductible, and investment incomes are taxed at a fixed rate. See id. § 468A(a), (e) (2000). A nonqualified fund, however, does not have those tax advantages; in particular, contributions are not currently deductible, and earnings are taxed at a taxpayer's otherwise applicable rate.

While planning the purchase of the nuclear power plants, AmerGen was advised by its tax accountants that it was “unlikely” that the IRS would allow AmerGen “to include the assumed decommissioning liability in the basis of the assets acquired on the date of the purchase” because the economic performance requirement of Treas. Reg. § 1.461–1(a)(2)(i) would not “be met at the planned purchase date.” J.A. 1238. The tax accountants further advised that, under the then-existing basis-allocation rules, the entire amount of cash consideration that AmerGen planned to pay would be allocated to the basis of transferred nonqualified funds, rather than to the basis of the nuclear power plants.² J.A. 1239.

AmerGen sought private letter rulings on the matter from the IRS. The IRS ruled that, at the time of purchase, AmerGen would “not be entitled to treat as a component of its cost basis ... any amount attributable to the future decommissioning liability” because AmerGen would not have performed any services relating to decommissioning and thus the liability would not be incurred for tax purposes under § 461(h). I.R.S. P.L.R. 200004040 (Oct. 29, 1999) ; I.R.S. P.L.R. 200034008 (May 18, 2000) ; I.R.S. P.L.R. 200037020 (June 9, 2000). The IRS also confirmed that AmerGen must allocate basis of the acquired assets under the then-existing basis-allocation rules. In addition, the IRS ruled that AmerGen would obtain a carry-over basis for qualified funds to be transferred to AmerGen, and those funds would remain qualified under § 468A.

AmerGen accordingly evaluated its planned acquisitions under the assumption that the decommissioning liabilities would not be added to the basis of the acquired assets at the time of purchase. J.A. 1880–81. AmerGen required the sellers to make additional contributions to their decommissioning trust funds prior to closing and then to transfer both qualified and nonqualified trust funds to AmerGen. According to AmerGen, it received a total of $974 million in transferred funds from the sellers, including $393 million in qualified funds and $581 million in nonqualified funds.³ J.A. 503–04. AmerGen did not contribute additional money of its own to those funds after the purchase. J.A. 505.

AmerGen filed its tax returns on a calendar-year basis using the accrual method of accounting. J.A. 58. On its amended tax returns for 2001 and 2002, and on its tax return for 2003, AmerGen claimed that, in addition to the $93 million it paid in purchase price, it assumed decommissioning liabilities in the amount of $2.15 billion that should be included in the basis of the acquired assets at the time of purchase, a position contrary to that of the IRS. J.A. 1236, 2944. According to AmerGen, the total basis of the acquired assets should be $2.24 billion rather than $93 million. With that basis adjustment, and the corresponding depreciation and amortization deductions and reduced amount of capital gains, AmerGen attempted to reduce its taxable income by more than $110 million per year. The IRS rejected AmerGen's request to include the assumed decommissioning liabilities in the basis of the acquired assets for its 2001 through 2003 tax returns.

In February 2009, AmerGen deposited $2.9 million with the IRS and then sued the United States in the Claims Court. J.A. 55. There, it changed the valuation of its decommissioning liabilities and instead claimed that it assumed decommissioning liabilities in the amount of $1.69 billion.⁴

J.A. 507. AmerGen alleged that it should be allowed to include that amount in the basis of its acquired assets at the time of purchase, i.e., a total basis of $1.78 billion rather than $93 million, and that for 2001 through 2003, with the increased basis, it was entitled to claim (1) reduced capital gains recognized on the sale of securities in its nonqualified funds, (2) depreciation deductions of the nuclear power plants, (3) amortization of goodwill in the amount of $72 million per year, and (4) additional deductions based on a note receivable that AmerGen acquired from one of the sellers. J.A. 66–73.

The parties filed cross-motions for summary judgment. The Claims Court granted the government's motion and denied AmerGen's motion. The parties disagreed as to whether § 461(h) is applicable in calculating the basis of the purchased assets. The court agreed with the government and concluded that the plain text of the statute indicates that § 461(h) and its statutory “all events test” is “of general applicability and should be applied to determine when liabilities are incurred for the purpose of cost basis calculations.” Summary Judgment, 113 Fed.Cl. at 63 (emphasis added). The court then considered the case law, the legislative history, and the relevant Treasury regulations, and found additional support for its reading of the plain statutory text. Id. at 64, 67, 69, 70.

The court considered whether AmerGen incurred the decommissioning liabilities at the time of purchase, specifically, whether at that time those liabilities satisfied the economic performance requirement of § 461(h). The court concluded that the timing rule of § 461(h)(2)(B) applies, under which economic performance occurs when AmerGen provides the required services, i.e., decommissioning. Id. at 72. Because AmerGen would not decommission its nuclear power plants until years later, the court concluded that AmerGen did not incur the decommissioning liabilities and thus may not include them in the basis of the acquired...