U.S. Court of Appeals Upholds Early Deduction for Decontamination and Decommissioning Assessments
June 2001
On June 14, 2001, the U.S. Federal Court of Appeals ruled that an obligation to pay future decontamination and decommissioning (D&D) assessments could be deducted in advance of payment because the liabilities were fixed in 1992. The appeals court, in IES Industries, Inc. and Subsidiaries v. United States of America, concluded that McDermott Will & Emery's client, Alliant Energy Corporation, successor in interest to IES Industries, could deduct in advance 15 years of D&D assessments. Alliant, an accrual method taxpayer, argued that the 1992 deduction was proper because the liability was fixed in 1992 and arose out of prior uranium enrichment services provided by the U.S. Department of Energy (DOE). The government contended that the assessments were not based on the uranium enrichment services. The court ruled in favor of Alliant stating "(w)e think the government's position is untenable on these facts." Alliant was represented in this litigation by a McDermott Will & Emery legal team led by lawyer Thomas C. Borders.
Synopsis of Litigation
For several decades, the U.S. government, through the DOE and predecessor agencies, has provided nuclear utilities with "uranium enrichment" services to enrich the fuel used in nuclear reactors. The utilities had previously paid the government for these services based upon utility contracts with the DOE.
Beginning in the l980s, the U.S. Congress realized that the prices charged by the DOE were not sufficient to allow the government to engage in "decontamination and decommissioning"–that is, to cleanup the plants the government used to provide uranium enrichment services. Thus, in 1992, Congress passed a law called the Energy Policy Act of 1992 (EPACT) that required all domestic nuclear utilities that had previously purchased uranium enrichment services to pay additional "special assessments" to the DOE. These assessments are to be paid by each utility over a 15-year period and are based on the amount of enrichment services the utility had purchased from the government in the past.
The tax treatment of the special assessments has been vigorously disputed by the nuclear utility industry and the IRS since the passage of EPACT. The total amount of payments underlying the dispute, on an industry wide basis, exceeds $2 billion.
Alliant, like many other utilities, claimed that, even though the assessments would be paid over a 15-year period, it could claim immediate tax benefits for the assessments (including depreciation and investment tax credit) all in 1992, when EPACT became law and when Alliant became unconditionally obligated to pay the DOE. The government disagreed and argued that, under applicable tax rules and a prior court opinion in Yankee Atomic , the tax benefits could not all be claimed in 1992. Instead, the government argued that the deductions and ITC must be claimed as the assessments are actually paid over the 15-year period.
The federal appeals court agreed with the lower court that the assessments imposed on Alliant arose out of past DOE enrichment services. Consequently, the court concluded that Alliant could report its entire obligation for all 15 assessments on its 1992 tax return, rather than ratably over a 15-year period. At one point, the court observed that the "government's heavy reliance on the Yankee Atomic decision suggests the government fundamentally misunderstands the opinion."
This ruling is significant for other utilities that deducted the D&D payments in 1992 because the court soundly rejected the arguments advanced by the government to delay the deduction. The appeals court opinion could encourage other utilities to reject an IRS industry wide settlement proposal under which a utility would only receive tax benefits equal to a small fraction of the amount at stake. In some cases, utilities that previously agreed to the settlement at the examination level may be able to file a refund claim if the statute of limitations has not yet expired.
On a separate issue relating to trading in American Depository Receipts (ADRs), the Court of Appeals reversed the lower court's opinion (which followed a U.S. Tax Court ruling in Compaq Computer Corporation). The lower court concluded that Alliant Energy's trades in ADRs were shaped solely by tax avoidance considerations and characterized them as shams. The Court of Appeals disagreed, concluding that Alliant Energy's trades were valid for tax purposes. The court found that the ADR trades were bona fide because they yielded an economic profit, notwithstanding that the transactions also decreased United States income taxes.
A copy of the opinion, which also affirms the tax treatment of Alliant's trading in American Depository Receipts (ADRs) can be accessed by clicking here^.
A press release on this issue may be viewed by clicking here^.
