Cost basis denied due to failure to meet the all-events test.
Author | Watkins, Tracy |
In ArnerGen Energy Co. LLC, 113 Fed. Cl. 52 (2013), the Court of Federal Claims granted summary judgment to the government and denied AmerGen Energy Co. LLC, an affiliate of Exelon Corp., approximately $1.6 billion in cost basis related to decommissioning liabilities assumed by AmerGen in connection with its purchase of three nuclear power plants. The court ruled that the assumed liabilities did not qualify for purposes of calculating AmerGen's basis in the acquired assets because the liabilities failed the economic performance prong of the three-prong all-events test.
Between 1999 and 2000, AmerGen purchased the Three Mile Island plant near Harrisburg, Pa.; the Clinton Power Station in DeWitt County, Ill.; and the Oyster Creek Station in New Jersey. AmerGen paid approximately $93 million in cash for the three plants and assumed more than $1.6 billion in decommissioning liabilities. As part of the purchases, AmerGen received decommissioning trust funds from the sellers totaling approximately $974 million. The trust funds were required to satisfy certain regulatory requirements for decommissioning. At the time the court issued its opinion, however, none of the three nuclear power plants that AmerGen purchased had actually been decommissioned.
AmerGen argued that its cost basis in the purchased assets was equal to the cash payments made plus the decommissioning liabilities assumed. AmerGen then claimed depreciation and amortization deductions with respect to certain of the purchased assets based on a cost basis that reflected the inclusion of the decommissioning liabilities. The IRS disagreed with this position and did not allow AmerGen to increase its basis by the decommissioning liabilities. AmerGen paid the tax due and then sued the government for a refund in the Court of Federal Claims.
The court considered AmerGen's initial argument that Sec. 1012 is the only relevant provision when determining the cost basis of acquired assets such as nuclear power plants, and that it establishes that noncontingent liabilities are included as part of a taxpayer's basis. The court rejected AmerGen's position and reasoned that Sec. 1012, by itself, was not dispositive of the issue. Instead, the court found, as the IRS had argued, that it was also necessary to consider the rules in Sec. 461(h) to determine whether AmerGen had incurred noncontingent decommissioning liabilities at the time it purchased the power plants. Sec. 461(h) provides, for purposes of...
To continue reading
Request your trialCOPYRIGHT GALE, Cengage Learning. All rights reserved.