• Ambiguity in the Proposed Section 468A Nuclear Fund Regulations—Sometimes Less Is More
  • October 31, 2017
  • On October 25, 2017, the Internal Revenue Service (IRS) held a public hearing to provide taxpayers with an opportunity to comment on proposed regulations under section 468A of the Internal Revenue Code of 1986, as amended (Code), which were issued on December 28, 2016, and published in the Federal Register on December 29, 2016 (81 Fed. Reg. 95,929). These proposed regulations attempt to clarify certain ambiguities that exist in current Treasury regulation section 1.468A-1.1 Specifically, the proposed regulations attempt to clarify (1) the “otherwise deductible” language in the current regulations, which arguably limited the amount of costs for long-term storage that could be funded by a qualified fund, (2) the “self dealing” rules for payments to related parties, and (3) the “substantial completion” of decommissioning. Brad Seltzer, on behalf of the Energy Tax Group of Eversheds Sutherland (US) LLP, offered comments on the first two issues, supporting the IRS efforts but recommending a “minimalist approach” that is “simpler, truer to the statute, and will stand the test of time.”


    Section 468A contains certain taxpayer-favorable rules for “nuclear decommissioning costs.” The current regulations limit qualified nuclear decommissioning costs to amounts that are “otherwise deductible,” creating ambiguity regarding whether any portion of the cost of a capital item, such as an Independent Spent Fuel Storage Installation (ISFSI), is eligible to be treated as a qualified nuclear decommissioning cost that can be funded at all, or only partially, through a qualified nuclear decommissioning fund. With respect to the self-dealing issue, the question presented under the existing regulations is whether amounts paid to a related party to conduct decommissioning could include not only direct costs, but also indirect overhead costs, and a reasonable profit element.

    IRS Hearing Testimony

    View the full transcript of the hearing testimony.2 In summary, Mr. Seltzer made two main points through his testimony. First, the issue of deductibility never should have been a part of the determination of whether costs are qualified nuclear decommissioning costs under the section 468A regulations. Rather, so long as the costs are “incurred in connection with the entombment, decontamination, dismantlement, removal and disposal of the structures, systems and components of a nuclear power plant,” they should be qualified nuclear decommissioning costs that can be funded in a qualified nuclear decommissioning fund. Any attempt to more specifically define qualified nuclear decommissioning costs is unlikely to survive the test of time over the many decades during which existing, let alone any future, nuclear plants will be decommissioned. The issue of deductibility should be governed by the provisions of Chapter 1 of the Code, not section 468A.

    With respect to the self-dealing rules, the thrust of Mr. Seltzer’s testimony was that the tax rules should not skew economic decisions with respect to using related versus unrelated persons for decommissioning activities. The regulations should make clear that amounts paid from a qualifying fund to a related party may reflect direct and allocated indirect costs as well as a reasonable profit motive so that related parties are not disadvantaged relative to unrelated third parties. It should not matter whether those costs are embedded in the service cost paid to an unrelated third party or represent allocated costs of in-house personnel.

    1The Department of the Treasury’s 2017-2018 Priority Guidance Plan includes issuing final regulations under section 468A before June 30, 2018.

    2 For a copy of comments submitted by Eversheds-Sutherland in advance of the hearing.