Constellation Nuclear Power Plants LLC v. Tax Appeals Tribunal of State

• Decision Date: 16 July 2015
• Docket Number: 519639
• Citation: 14 N.Y.S.3d 538,131 A.D.3d 185,2015 N.Y. Slip Op. 06183
• Parties: In the Matter of CONSTELLATION NUCLEAR POWER PLANTS LLC, Petitioner, v. TAX APPEALS TRIBUNAL OF the STATE of New York, et al., Respondents.
• Court: New York Supreme Court — Appellate Division

131 A.D.3d 185

14 N.Y.S.3d 538

2015 N.Y. Slip Op. 06183

In the Matter of CONSTELLATION NUCLEAR POWER PLANTS LLC, Petitioner

v.TAX APPEALS TRIBUNAL OF the STATE of New York, et al., Respondents.

519639

Supreme Court, Appellate Division, Third Department, New York.

July 16, 2015.

Hodgson Russ, LLP, Buffalo (Christopher L. Doyle of counsel), for petitioner.

Eric T. Schneiderman, Attorney General, Albany (Kathleen M. Arnold of counsel), for Commissioner of Taxation and Finance, respondent.

Before: PETERS, P.J., LAHTINEN, GARRY and LYNCH, JJ.

Opinion

GARRY, J.

Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to Tax Law § 2016 ) to review a determination of respondent Tax Appeals Tribunal which, among other things, denied petitioner's application for a refund of investment tax credits under Tax Law article 9–A.

Petitioner is the owner and operator of the Nine Mile Point Nuclear Power Station (hereinafter Nine Mile) in the Town of Scriba, Oswego County, and the R.E. Ginna Nuclear Power Station (hereinafter Ginna) in the Town of Ontario, Wayne County. Both Nine Mile and Ginna use nuclear fission to generate electricity, but the two plants employ different processes to do so.¹ Nine Mile has two units, both of which are boiling water reactors. In these facilities, water—known as feedwater—is pumped into a reactor vessel mounted inside a containment structure, where nuclear fission generates heat that causes the feedwater to boil, creating steam. Pressure forces the steam out of the vessel and through a steam line into a separate turbine building, where the steam causes a turbine to spin, generating electricity. The steam then enters a condenser where it is cooled and condensed into water, which is then pumped into the reactor vessel as feedwater, to be converted again into steam. The water never leaves the system as the cycle of conversion from water to steam and back again repeats itself.²

The Ginna power plant is a pressurized water reactor in which feedwater and steam do not pass directly through the reactor vessel. Instead, the feedwater enters a steam generator, where it is heated by exposure to water that has been superheated by passing through the reactor vessel at a pressure too high to boil. The pressurized water is never mixed with the feedwater or steam, but remains in a separate system where it is cooled and then returned to the reactor to repeat the heating cycle. Meanwhile, the heated feedwater is converted to steam and forced by pressure out of the generator to the turbine building, where it spins the turbine, generates electricity and enters a condenser to be converted back to water that is fed into the steam generator. As at Nine Mile, the steam and water never leave the system while the cycle is repeated.³

Beginning in 2005, petitioner filed timely claims for certain investment tax credits and industrial manufacturing business credits (hereinafter collectively referred to as manufacturing tax credits)⁴ for the years 2001 through 2005, alleging that the assets used at both facilities to convert water to steam and steam to water were “principally used by [petitioner] in the production of goods by manufacturing [or] processing” (Tax Law former § 210[12][b][i][A] ).⁵ Petitioner also filed claims for certain other investment tax credits (hereinafter pollution tax credits), alleging that specific assets at Nine Mile and Ginna were used in the treatment of industrial waste and air pollution control (see Tax Law former § 210[12][b][i][B] ). Finally, petitioner filed claims for employment incentive credits that were available to taxpayers who were, among other things, eligible for the foregoing tax credits (see Tax Law former § 210 [12–D] ). In March 2007, the Division of Taxation and Finance denied petitioner's claims. After the Bureau of Conciliation and Mediation Facilities sustained the denial, petitioner filed a petition with the Division of Tax Appeals. In April 2013, an Administrative Law Judge (hereinafter ALJ) sustained the denial and denied the petition.

Thereafter, petitioner submitted a notice of exception to the ALJ's determination to respondent Tax Appeals Tribunal. In June 2014, the Tribunal affirmed the ALJ's determination, finding, among other things, that the assets utilized in the steam conversion cycle were not eligible for the manufacturing tax credits because they were not used in the production of goods by manufacturing or processing, and that the assets claimed to be air pollution control and waste treatment facilities were not eligible for the pollution tax credits because petitioner had failed to obtain required certifications from the Department of Environmental Conservation (hereinafter DEC) (see Tax Law former § 210[12][b][iii] ). Petitioner then commenced this CPLR article 78 proceeding seeking review of the Tribunal's determination (see Tax Law § 2016 ).

Petitioner first contends that the Tribunal erred in determining that its assets are not eligible for the manufacturing tax credits. This Court defers to the Tribunal's construction and application of statutory provisions pertaining to investment tax credits and will uphold the Tribunal's determination if it is supported by a rational basis (see Matter of Brooklyn Union Gas Co. v. New York State Tax Appeals Trib., 107 A.D.3d 1080, 1081, 967 N.Y.S.2d 174 [2013] ). Exemptions from taxation such as tax credits “[are] not a matter of right, but [are] allowed only as a matter of legislative grace” (Matter of Grace v. New York State Tax Commn., 37 N.Y.2d 193, 196, 371 N.Y.S.2d 715, 332 N.E.2d 886 [1975] ; accord Matter of 677 New Loudon Corp. v. State of N.Y. Tax Appeals Trib., 19 N.Y.3d 1058, 1060, 955 N.Y.S.2d 795, 979 N.E.2d 1121 [2012], cert. denied ––– U.S. ––––, 134 S.Ct. 422, 187 L.Ed.2d 280 [2013] ). As such, statutes that create tax credits are construed against the taxpayer, and, in addition to establishing its entitlement to the credits, the taxpayer must also “demonstrate that its own reading is the only reasonable construction of the statute” (Matter of Astoria Fin. Corp. v. Tax Appeals Trib. of State of N.Y., 63 A.D.3d 1316, 1318, 880 N.Y.S.2d 389 [2009] [internal quotation marks, brackets, ellipsis and citations omitted]; see Matter of We Care Transp. v. Tax Appeals Trib. of State of N.Y., 298 A.D.2d 717, 719, 749 N.Y.S.2d 299 [2002] ).

Petitioner contends that it is eligible for manufacturing tax credits because the assets in the Nine Mile and Ginna facilities are principally used to manufacture or process goods in the form of steam and water (see Tax Law former § 210[12][b][i][A] ).⁶ For this purpose, the term “goods” is defined as “tangible movable personal property having intrinsic value” (Matter of Leisure Vue v. Commissioner of Taxation & Fin., 172 A.D.2d 872, 873, 568 N.Y.S.2d 175 [1991] [internal quotation marks and citation omitted] ). The statute specifically provides that the “the term ‘goods' shall not include electricity” (Tax Law former § 210[12][b][i] ). Although petitioner concedes that the Nine Mile and Ginna plants produce electricity and that electricity is the only product that petitioner sells, it nevertheless asserts that its claim satisfies the statutory requirements because it does not seek manufacturing tax credits for turbines, generators or other equipment directly used to produce electricity. Instead, it seeks the credits for assets such as the containment structures, reactor vessels, nuclear fuel and fuel assemblies, steam generators and condensers that are continuously engaged—even when the turbines are shut down and no electricity is being produced—in producing steam from water and in converting the steam back to water again.

In petitioner's view, the Tribunal erred in analyzing the disputed assets as part of a larger system that generates electricity as an end product. Instead, petitioner contends that the Tribunal was required by this Court's precedent to consider the function of each claimed asset separately, and that when the assets are thus analyzed in isolation, they are eligible for manufacturing tax credits because each of them produces steam or water. We reject this contention. Our decision in Matter of Brooklyn Union Gas Co. v. New York State Tax Appeals Trib., 107 A.D.3d 1080, 967 N.Y.S.2d 174 [2013], supra did not, as petitioner contends, mandate an asset-by-asset approach or any other specific form of inquiry as the prescribed method by which the Tribunal must determine eligibility for investment tax credits. Instead, this Court found that the record supported the Tribunal's determination that a taxpayer's integrated gas delivery system, considered as a whole, was principally used for the distribution and delivery of natural gas rather than for processing the gas to make it suitable for consumer use (id. at 1081–1082, 967 N.Y.S.2d 174 ). We further found record support for the Tribunal's alternate determination that certain component parts of the gas delivery system that performed actions such as adding odorants to the gas, considered individually, were not used for manufacturing or processing (id. at 1082, 967 N.Y.S.2d 174 ). Significantly, the purpose of this individualized assessment was to determine whether these assets were used for the separate purpose of manufacturing rather than distribution; the Tribunal analyzed the assets in terms of their relationship to the overall system and found that they were not used for manufacturing because they did not significantly change the nature of the gas (id. ).

Here, by contrast, all of the disputed assets are necessary to the power plants' ultimate purpose of producing electricity, and the separate components create water and steam only to serve that purpose. The Tribunal found that the power plants utilized “unified, integrated processes that harnessed the energy from nuclear fission and produced electricity,” that “it is inappropriate to artificially divide a unitary process when the facts show that the parts and...