IRS Issues Private Letter Ruling Re: Deductibility of Costs Incurred Nuclear Fuel Assemblies
June 2001
The Internal Revenue Service (IRS) recently issued a private letter ruling to Arizona Public Service that allows the company a current deduction of certain amounts incurred in the storage of spent nuclear fuel assemblies prior to the shutdown of a nuclear power plant owned by the company. It had previously been the ruling position of the IRS that such costs were not deductible until the nuclear power plant, to which the costs relate, permanently ceased production. Prior to a plant's shutdown, such costs were required to be capitalized.
The ruling involved costs incurred with respect to the company's independent spent fuel storage installation (ISFSI). The ISFSI consists of canisters, which contain the spent fuel and the concrete casks into which the sealed canisters are loaded. The company sought to deduct the costs of the canisters and casks at the time they are loaded and sealed. It argued that the casks and canisters were abandoned, despite the fact that the nuclear power plant to which they relate continues to operate.
In the ruling, the IRS focused on whether the casks and canisters could be considered abandoned when the taxpayer does not transfer the assets to another party. In the case of the ISFSI, the casks and canisters remain onsite once sealed. The IRS concluded that legal restrictions upon the physical disposition of the spent fuel assemblies do not preclude a finding of abandonment in cases where the intent is to cease using property permanently. The IRS recognized that the company cannot "simply haul (the casks and canisters) to a local waste disposal facility," and that it has no alternative but to store those items onsite. As a result, the IRS concluded that the company could deduct the canisters, casks and on-going monitoring expenses prior to shutdown. In addition, the IRS concluded that such costs constitute decommissioning costs pursuant to Treasury Regulations section 1.468A-1(b)(5) and may be paid by the qualified nuclear decommissioning reserve fund.
This is an important change in IRS policy that is highly beneficial for owners of nuclear power plants, because the costs involved are generally rather significant. Taxpayers that are preparing to build an ISFSI may want to seek a similar private letter ruling or taxpayers that already have an ISFSI may be interested in seeking a change in accounting method.
