AmerGen Energy Co. Ex Rel. Exelon Generation Co. v. United States

United States Court of Appeals
for the Federal Circuit
______________________
AMERGEN ENERGY COMPANY, LLC, BY AND
THROUGH EXELON GENERATION COMPANY, LLC,
TAX MATTERS PARTNER,
Plaintiff-Appellant
v.
UNITED STATES,
Defendant-Appellee
______________________
2014-5067
______________________
Appeal from the United States Court of Federal
Claims in No. 1:09-cv-00108-LJB, Judge Lynn J. Bush.
______________________
Decided: March 11, 2015
______________________
PAUL MARCH SMITH, Jenner & Block LLP, Washing-
ton, 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.
2 AMERGEN ENERGY COMPANY, LLC v. US
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.
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 decommission-
ing 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.
1 Title 26 of the United States Code is also referred
to herein as “Internal Revenue Code” or “I.R.C.”
AMERGEN ENERGY COMPANY, LLC v. US 3
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 (“Oys-
ter Creek”), and assumed responsibility for their opera-
tions. 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 liabili-
ties 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 trans-
fer 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 decom-
missioned 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 nonquali-
fied decommissioning trust funds in which they set aside
money to pay for decommissioning in the future. A quali-
4 AMERGEN ENERGY COMPANY, LLC v. US
fied 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 cur-
rently 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 pur-
2 In 2004, the IRS promulgated a regulation that
prospectively provides for an election that effectively
allows purchasers of nuclear power plants to allocate
basis to depreciable plants and equipment before allocat-
ing it to nonqualified funds. See Treas. Reg. § 1.338-
6(c)(5). That regulation, however, does not apply here
because AmerGen’s acquisitions took place in 1999 and
2000, under the old basis-allocation rules.
AMERGEN ENERGY COMPANY, LLC v. US 5
chase, 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 de-
commissioning and thus the liability would not be in-
curred 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 acquisi-
tions 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
3 In 2005, Congress amended § 468A and eliminat-
ed certain statutory limitations on the allowable amount
of contributions to a qualified fund. The 2005 amendment
also permits a taxpayer maintaining a qualified fund to
make a deductible catch-up contribution to that fund.
I.R.C. § 468A(f)(1). In 2008, AmerGen transferred $454
million from its nonqualified funds to its qualified funds
and deducted the entire $454 million on its 2008 return.
J.A. 505, 3336.
6 AMERGEN ENERGY COMPANY, LLC v. US
contribute additional money of its own to those funds
after the purchase. J.A. 505.
AmerGen filed its tax returns on a calendar-year ba-
sis 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 decom-
missioning 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
4 According to AmerGen, of the $1.69 billion, $950
million was to fund future decommissioning required by
the NRC. Appellant’s Br. 10–11. The rest was to fund the
management of spent nuclear fuel and site restoration not
required by the NRC. Id. Moreover, the $1.69 billion
figure reflects the entire estimated decommissioning
obligation, with no reduction for the portion allocable to
qualified funds, for which AmerGen has already received
favorable tax treatment under § 468A. Appellee’s Br. 20.
AMERGEN ENERGY COMPANY, LLC v. US 7
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 judg-
ment. The Claims Court granted the government’s mo-
tion 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., decommis-
sioning. Id. at 72. Because AmerGen would not decom-
mission its nuclear power plants until years later, the
court concluded that AmerGen did not incur the decom-
missioning liabilities and thus may not include them in
the basis of the acquired assets at the time of purchase.
Id. at 73.
8 AMERGEN ENERGY COMPANY, LLC v. US
The Claims Court entered final judgment in favor of
the government. AmerGen timely appealed. We have
jurisdiction under 28 U.S.C. § 1295(a)(3).
DISCUSSION
We review the Claims Court’s grant of summary
judgment de novo. Abbott Labs. v. United States, 573
F.3d 1327, 1330 (Fed. Cir. 2009). Summary judgment is
appropriate when, drawing all justifiable inferences in the
nonmovant’s favor, “there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a
matter of law.” Fed. Cl. R. 56(a); Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 255 (1986). Issues of statutory
interpretation are also reviewed de novo. Qantas Airways
Ltd. v. United States, 62 F.3d 385, 387 (Fed. Cir. 1995).
This appeal raises only issues of law and there is no
genuine dispute concerning issues of fact.
I
I.R.C. § 1012 provides in relevant part that “[t]he ba-
sis of property shall be the cost of such property . . . .”
The “cost of such property” is the “cost to the taxpayer.”
Detroit Edison Co. v. Comm’r, 319 U.S. 98, 102 (1943). A
property’s basis may be adjusted over time to reflect
capital expenditures on the property, as well as exhaus-
tion and wear and tear. I.R.C. §§ 1011, 1016.
In Crane v. Commissioner, 331 U.S. 1 (1947), the Su-
preme Court held that “the proper basis [of a property] is
the value of the property, undiminished by mortgages
thereon.” Id. at 11. Subsequently, courts have extended
the holding of Crane and determined that, under certain
circumstances, the basis of an acquired asset includes, not
only the purchase price, but also noncontingent liabilities
assumed by the buyer or encumbering the asset. See, e.g.,
Denver & Rio Grande W. R.R. Co. v. United States, 505
F.2d 1266, 1269 (Ct. Cl. 1974).
AMERGEN ENERGY COMPANY, LLC v. US 9
According to case law, a liability of a taxpayer using
the accrual method of accounting is deemed incurred
when all events have occurred that determine the fact of
liability and the amount of that liability with reasonable
accuracy. See United States v. Anderson, 269 U.S. 422,
441 (1926). In 1984, Congress enacted I.R.C. § 461(h),
which provides in relevant part as follows:
(h) Certain liabilities not incurred before econom-
ic performance.
(1) In general. For purposes of this title, in de-
termining whether an amount has been
incurred with respect to any item during
any taxable year, the all events test shall
not be treated as met any earlier than
when economic performance with respect
to such item occurs.
...
(4) All events test. For purposes of this sub-
section, the all events test is met with re-
spect to any item if all events have
occurred which determine the fact of lia-
bility and the amount of such liability can
be determined with reasonable accuracy.
I.R.C. § 461(h)(1), (4) (2000) (emphases added).
AmerGen argues that the economic performance re-
quirement codified in § 461(h) is inapplicable in calculat-
ing the basis of purchased assets. According to AmerGen,
purchase-price basis is governed by Crane and its proge-
ny, which only require a liability to be noncontingent and
definite. AmerGen asserts that the “all events test” is a
term of art, and, according to the case law before 1984,
the test only applied to expense deductions by an accrual
method taxpayer, not to basis calculation. AmerGen
contends that when Congress enacted § 461(h), it did not
expand the scope of the “all events test”; it only added the
10 AMERGEN ENERGY COMPANY, LLC v. US
economic performance requirement. AmerGen also ar-
gues that because the “all events test” is not directed to a
taxpayer using the cash method of accounting, the test is
inapplicable to purchase-price basis calculation, which
concerns both cash method and accrual method taxpayers.
The government responds that § 461(h) should be ap-
plied to determine when and whether a liability or cost is
incurred for purposes of basis calculation. According to
the government, the plain text of § 461(h)(1) makes clear
that the economic performance rule is applicable to “any
item” for “purposes of this title,” i.e., the Internal Revenue
Code, and that the statute makes no reference to any pre-
1984 “all events test.” The government also argues that
the test for determining whether a liability could be
included in the basis of purchased assets (what AmerGen
calls the “contingency” test under Crane) is substantively
indistinguishable from the “all events test.” The govern-
ment also notes that Congress enacted both § 461(h) and
§ 468A in 1984 to address the issue of premature accrual
of nuclear decommissioning liabilities and that AmerGen
improperly seeks to circumvent this statutory scheme.
We conclude that § 461(h) is applicable in determining
when and whether an accrual method taxpayer incurs
nuclear decommissioning liabilities for purposes of calcu-
lating the basis of an acquired nuclear power plant and
associated assets. First, § 461(h)(1) plainly states that it
applies for all “purposes of this title,” i.e., the Internal
Revenue Code, not just to a subset of tax provisions, such
as specific deduction provisions. Second, the text of
§ 461(h)(1) and § 461(h)(4) specifies that they apply “with
respect to any item” and thus the statutory “all events
test” is not limited to expense deductions. Prior to 1984,
there was no statutory “all events test,” and Treasury
regulations provided a two-prong “all events test” for
determining when an expense was deductible for an
accrual method taxpayer. Treas. Reg. § 1.461-1(a)(2)
(1967). However, when Congress enacted § 461(h), it used
AMERGEN ENERGY COMPANY, LLC v. US 11
broader language, namely, “with respect to any item” of a
liability. Thus, Congress not only added the economic
performance requirement in § 461(h)(1), but also enacted
a new and more inclusive “all events test” in § 461(h)(4)
that is not limited to expense deductions by an accrual
method taxpayer.
Moreover, we find AmerGen’s argument that the term
“all events test” in § 461(h) has certain historical limita-
tions that preclude its application in calculating basis to
be unavailing. As indicated, the plain text of § 461(h)
shows that the “all events test” codified therein is appli-
cable to “any item” of a liability. The cases cited by
AmerGen do not establish that the test was necessarily
limited to expense deductions. Notably, AmerGen itself
argued to the Claims Court that courts have applied a
two-prong “contingency” test similar to the pre-1984
regulatory “all events test” in determining whether a
liability is includable in the basis of purchased assets.
AmerGen’s Cross-Motion and Supporting Memorandum
for Summary Judgment at 20, AmerGen Energy Co. v.
United States, No. 09-108T (Fed. Cl. June 19, 2012), ECF
No. 53.
Section 461(h) allows taxpayers to account for a fu-
ture liability for tax purposes when it is incurred, and
thus allows AmerGen, an accrual method taxpayer, to
recognize its nuclear decommissioning liabilities at the
appropriate time. As Congress explained, taking into
account estimated future liability currently “overstates
the true cost.” H.R. Rep. No. 98-432 pt. 2 at 1254 (1984),
reprinted in 1984 U.S.C.C.A.N. 697, 917. Here, AmerGen
might not fully satisfy its nuclear decommissioning liabil-
ities until 2106. The actual decommissioning process can
take sixty years to complete after the plants cease opera-
tions, with costs incurred along that time frame. The
interpretation of § 461(h) that AmerGen urges would
create disparate treatment of taxpayers facing the same
nuclear decommissioning liabilities. Thus, there is no
12 AMERGEN ENERGY COMPANY, LLC v. US
support for a conclusion that the economic performance
rule applies only to taxpayers who build and retain
plants, but not to those who buy and sell plants.
When Congress enacted § 461(h) in 1984, it also en-
acted § 468A and § 172(f) specifically for nuclear decom-
missioning costs. Those two provisions provide limited
means for a nuclear power plant owner to alter the effect
of the otherwise applicable timing rules of § 461(h).
Under § 468A, contributions to qualified decommissioning
funds are deductible at the time of contribution before
decommissioning is economically performed; and, after
economic performance occurs, a taxpayer may take addi-
tional deductions that are not previously accounted for as
the taxpayer incurs decommissioning costs. I.R.C.
§ 468A(a), (c)(2) (2000). Section 468A, however, sets
specific limits on the allowable amount of contributions to
prevent excessive funding and to ensure level funding
over the useful life of a plant. Id. § 468A(b), (d) (2000). In
addition, § 172(f) provides a special net operating loss
carry-back provision for nuclear decommissioning costs,
under which a taxpayer, after it actually incurs nuclear
decommissioning costs, may be able to carry back the loss
to previous tax years. See I.R.C. § 172(f)(3) (certain
nuclear decommissioning costs carried back to each of the
taxable years during the period beginning with the taxa-
ble year in which the plant was placed in service and
ending with the taxable year preceding the loss year).
The tax treatment that AmerGen now seeks would ef-
fectively circumvent that statutory scheme. AmerGen
was advised before it purchased the plants that it could
not accelerate the future decommissioning liabilities. It
requested the sellers of the plants to increase the amount
of their decommissioning funds before transferring both
qualified and nonqualified decommissioning funds to
AmerGen. After the purchase, AmerGen did not contrib-
ute additional money of its own to those funds, but in-
stead sought to include the estimated decommissioning
AMERGEN ENERGY COMPANY, LLC v. US 13
costs in the basis of its acquired assets in order to make
depreciation and amortization deductions.
We therefore agree with the Claims Court and con-
clude that § 461(h) is applicable in determining when and
whether an accrual method taxpayer, such as AmerGen,
incurs nuclear decommissioning liabilities for purposes of
calculating the basis of acquired nuclear power plants and
associated assets. AmerGen’s future decommissioning
liabilities must be deemed incurred under § 461(h) before
they are includable in the basis of the purchased assets.
II
Section 461(h)(2) sets specific timing rules on when
economic performance is deemed to occur, and provides in
relevant part as follows:
(2) Time when economic performance occurs. Ex-
cept as provided in regulations prescribed by
the Secretary, the time when economic per-
formance occurs shall be determined under
the following principles:
(A) Services and property provided to the tax-
payer. If the liability of the taxpayer arises
out of
(i) the providing of services to the taxpay-
er by another person, economic perfor-
mance occurs as such person provides
such services,
(ii) the providing of property to the tax-
payer by another person, economic per-
formance occurs as the person provides
such property, or
....
(B) Services and property provided by the tax-
payer. If the liability of the taxpayer requires
the taxpayer to provide property or services,
14 AMERGEN ENERGY COMPANY, LLC v. US
economic performance occurs as the taxpayer
provides such property or services.
I.R.C. § 461(h)(2) (2000).
AmerGen argues, in the alternative, that, even if
§ 461(h) applies to basis calculation, economic perfor-
mance of its decommissioning liabilities has already
occurred. According to AmerGen, the controlling timing
provision is § 461(h)(2)(A)(ii), not § 461(h)(2)(B), because
it became obligated to incur decommissioning costs when
the sellers conveyed the nuclear power plants. The gov-
ernment responds that § 461(h)(2)(A)(ii) is inapplicable,
and instead § 461(h)(2)(B) governs, because AmerGen’s
decommissioning obligations arose out of the NRC licens-
es and regulations of state and local governments, not the
transfer of assets from the sellers. The government
argues, moreover, that economic performance occurs when
decommissioning activities actually begin.
We agree with the government that § 461(h)(2)(A)(ii)
is inapplicable in this case. On the present facts, it is
§ 461(h)(2)(B) that governs because the liabilities at issue
are a service to be provided by the taxpayer, not a proper-
ty provided or a service to be provided to the taxpayer.
Under § 461(h), the economic performance of AmerGen’s
decommissioning liabilities occurs when AmerGen actual-
ly decommissions its nuclear power plants. Here, the
future decommissioning activities are services that
AmerGen would perform to satisfy the requirements of
the NRC or state and local governments. Cf. Treas. Reg.
§ 1.461-4(d)(7) (example 1); H.R. Rep. No. 98-432 pt. 2 at
1255 (1984), reprinted in 1984 U.S.C.C.A.N. 697, 918.
Because all three nuclear power plants were in active use
at the time of purchase, and none of them was decommis-
sioned as of the relevant tax years, the decommissioning
service obligations were not satisfied when the sellers
conveyed the plants to AmerGen.
AMERGEN ENERGY COMPANY, LLC v. US 15
We have considered AmerGen’s remaining arguments
and find them unpersuasive. We therefore conclude that
AmerGen did not incur the decommissioning liabilities
and thus may not include those liabilities in the basis of
the acquired assets.
CONCLUSION
For the foregoing reasons, we conclude that AmerGen
may not include future nuclear decommissioning liabili-
ties that it assumed when it purchased the three nuclear
power plants in the basis of the acquired assets in its
2001 through 2003 tax returns. As the Claims Court
correctly interpreted and applied the relevant law to
determine when and whether AmerGen incurred future
nuclear decommissioning liabilities for purposes of calcu-
lating the basis of the acquired assets, and there are no
genuine issues of material fact, we therefore affirm the
decision of the Claims Court.
AFFIRMED