Liabilities Assumed by a Purchaser
Liabilities assumed by a purchaser of three nuclear power plants to decommission the plants cannot be added to the cost basis in the plants, a US appeals court confirmed.
Exelon bought three nuclear plants in 1999 and 2000 for $93.3 million in cash and the assumption of $1.687 billion in decommissioning liabilities. In addition to the plants, it also received funds that had been set aside for decommissioning. Normally, when someone buys assets and also assumes liabilities to which the assets are subject, the liabilities are included in asset basis and can be recovered through depreciation or amortization. An example is where a power plant is purchased subject to outstanding project-level debt to a bank syndicate.
Various accountants and lawyers whom Exelon consulted warned that the IRS would probably not allow the decommissioning cost to be included in basis. Exelon tried to get a private letter ruling from the IRS, but was told the IRS does not believe the liabilities can be put in basis. The company took the position anyway on its tax return.
It lost in the Court of Federal Claims in October 2013. The court said there is no dispute that assumed liabilities go into cost basis, but the issue is when. It said the obligation to pay the decommissioning costs must not only have “accrued,” meaning that there must be a legal obligation to pay and the amount can be determined with reasonable accuracy, but there must also be “economic performance” before it can be added to basis. The court said decommissioning is a service. There is no economic performance of services until they are actually performed.
Exelon complained to a US appeals court that it should not have to show “economic performance” when calculating basis in purchased assets. The court said in March that basic accrual concepts, including economic performance, apply even in situations when someone is purchasing an asset to decide whether liabilities assumed can be put in asset basis.
The case is AmerGen Energy Company, LLC v. United States. Special rules in the US tax code allow utilities to deduct — not add to basis — amounts set aside for decommissioning when they are deposited in qualified decommissioning funds.