T.C. Memo. 2002-176
UNITED STATES TAX COURT
MAINE YANKEE ATOMIC POWER COMPANY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15446-98. Filed July 29, 2002.
Edwin A. Heisler and William K. McKinley, for petitioner.
Marvis A. Knospe and Barry Laterman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies of
$408,949 and $710,318 in petitioner’s Federal income tax for 1990
and 1991, respectively. After concessions, the remaining issue
for decision is whether petitioner is entitled to an investment
tax credit with respect to nuclear fuel assemblies placed in
service in 1990. Unless otherwise indicated, all section
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references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner Maine Yankee Atomic Power Company was incorporated
under the laws of Maine in 1966 and had its principal place of
business in Wiscasset, Maine, at the time the petition in this
case was filed.
Petitioner owned and operated a nuclear power electric
generating plant (plant) that utilized a pressurized water
reactor, fueled with slightly enriched uranium oxide. The plant
was located in Wiscasset, Maine, on an 820-acre site that was
owned in fee by petitioner.
The stockholders of petitioner were investor-owned New
England utility companies. In 1990, petitioner was owned by 10
investor-owned New England utility companies, each of which was
committed under a power contract dated May 20, 1968 (power
contracts), to purchase a percentage of the capacity and output
of the plant equivalent to its percentage ownership.
The construction permit for the plant was issued in October
1968 by the Atomic Energy Commission (AEC). Construction of the
plant was completed in 1972, except for certain discharge
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temperature control facilities designed to meet the requirements
of the Maine Board of Environmental Protection, which were
completed in 1975. The plant began commercial operation in
December 1972 under Facility Operating License No. DPR-36 dated
September 15, 1972 (operating license). The plant was closed for
economic reasons in August 1997.
The Nuclear Regulatory Commission (NRC) oversees the safety
of all U.S. nuclear power plants. NRC reviews the initial plans
before issuing a construction permit and reviews the plant as
built before issuing an operating license. The NRC assumed the
regulatory responsibilities of AEC, its predecessor organization,
in a 1975 reorganization.
Petitioner’s nuclear power facility used fuel assemblies,
which contained fuel rods, in the reactor core to generate
energy. The reactor core consisted of 217 fuel assemblies.
Before new fuel assemblies could be placed in the reactor core,
petitioner submitted an application to the NRC for an amendment
to its operating license.
For purposes of this case, a fuel cycle (Cycle) begins upon
the shutdown of the prior cycle, continues through refueling,
followed by an operating cycle, and ends upon shutdown. During
shutdown, the plant is taken offline for refueling, maintenance,
and planned construction activities. The first 12 reloads,
designated Cycle 1A through Cycle 12, occurred one each in 1974,
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1975, 1977, 1978, 1980, 1981, 1982, 1984, 1985, 1987, 1988, and
1990.
For Cycles 3 through 12, there were 72 fuel assemblies that
were replaced with 72 new fuel assemblies. The 72 fuel
assemblies in issue in this case were for Cycle 12 and were
placed in service on June 30, 1990. Cycle 12, including the
shutdown for reload and the operating cycle, began on April 7,
1990, and ended on February 14, 1992. The total cost of the fuel
assemblies for Cycle 12 was $28,181,923, with an approximate cost
of $391,500 for each of the 72 fuel assemblies. The fuel
assemblies that were used by petitioner had a class life of
5 years under the Modified Accelerated Cost Recovery System
(MACRS).
Petitioner’s goal was to produce electricity as economically
as possible, and, in order to minimize fuel costs, petitioner
used a variety of tail assays, varied enrichment levels, and a
combination of uranium procurement and enrichments. Although fit
and form of the fuel assemblies may have been essentially the
same, the function, or performance, of the fuel assemblies
changed over the course of the operation of the plant. For
example, higher enrichment levels in the fuel assemblies allowed
for a longer operating cycle.
Petitioner entered into general contracts for fuel assembly
fabrication services. Because petitioner sought maximum
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flexibility in all of its contracts, the actual number and
specifications of the fuel assemblies ordered were established by
purchase order and paid pursuant to invoices.
Power Contracts and Amendments
In regards to the operation and maintenance of the plant,
the power contracts entered into between petitioner and owners,
who were also purchasers, state:
Maine Yankee [petitioner] will operate and
maintain the Unit [plant] in accordance with good
utility practice under the circumstances and all
applicable law, including the applicable provisions of
the Atomic Energy Act of 1954, as amended, and of any
licenses issued thereunder to Maine Yankee. Within the
limits imposed by good utility practice under the
circumstances and applicable law, the Unit will be
operated at its maximum capability and on a long hour
use basis.
Outages for inspection, maintenance, refueling and
repairs and replacements will be scheduled in
accordance with good utility practice and insofar as
practicable shall be mutually agreed upon by Maine
Yankee and the Purchaser. In the event of an outage,
Maine Yankee will use its best efforts to restore the
Unit to service as promptly as practicable. [Emphasis
added.]
Amendments to the power contracts were made in 1984. The
purpose of “Amendment No. 1 to Power Contract” dated March 1,
1984, was to incorporate the costs of decommissioning the plant
into the contractual payments from the owners. The purpose of
“Amendment No. 2 to Power Contract” dated January 1, 1984, was to
change the formula for computing charges to the purchasers in
order to allow for a higher return on equity than was provided in
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the power contracts. The purpose of “Amendment No. 3 to Power
Contract” dated October 1984 was to bring petitioner into
compliance with an August 1984 order by the Federal Energy
Regulatory Commission (FERC) requiring that the power contracts
be amended to conform to FERC’s regulations regarding the
treatment of nuclear fuel in process in rate base.
An “Additional Power Contract” was dated February 1, 1984,
and its operative terms were to commence in January 2003. The
additional power contracts had two purposes: to extend the power
contracts from their original January 2003 termination date and
to provide for the collection and handling of funds for the
decommissioning of the plant.
The availability of the investment tax credit had no impact
on the decision by petitioner to enter into the power contracts
or the subsequent amendments to the power contracts. Also, when
petitioner entered into the power contracts in 1968, it could not
have predicted whether any fuel assemblies would be put in
service at the plant in 1990.
Operating License and Amendments
The operating license, dated September 15, 1972, authorized
fuel loading, low power testing, and further operations at power
levels not in excess of 1830 megawatts thermal (MWT), 75 percent
of the facility’s rated power level of 2440 MWT. In 1978, the
plant was authorized to increase its rated power level from
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2440 MWT to 2630 MWT; in 1989, a second increase to 2770 MWT was
authorized.
Changes with respect to the plant, including changes related
to fuel assemblies, were submitted by petitioner to the NRC and,
if considered safe, the changes were approved through the
issuance of an amendment to the operating license. Petitioner’s
application for amendment to the operating license for Cycle 12
was submitted to the NRC and dated January 16, 1990. In response
to petitioner’s application, Amendment No. 116 to the operating
license was issued by the NRC on May 17, 1990. Amendment No. 116
states, in part:
1. The Nuclear Regulatory Commission (the Commission
or the NRC) has found that:
A. The application for amendment filed by Maine
Yankee Atomic Power Company [petitioner] (the
licensee) dated January 16, 1990 complies
with the standards and requirements of the
Atomic Energy Act of 1954, as amended (the
Act), and the Commission’s rules and
regulations set forth in 10 CFR Chapter I;
* * * * * * *
C. There is reasonable assurance: (i) that
the activities authorized by this
amendment can be conducted without
endangering the health and safety of the
public, and (ii) that such activities
will be conducted in compliance with the
Commission’s regulations set forth in 10
CFR Chapter I;
D. The issuance of this amendment will not
be inimical to the common defense and
security or to the health and safety of
the public; * * *
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Tax Returns
Petitioner did not claim an investment tax credit with
respect to the nuclear fuel assemblies that were placed in
service in 1990 on its 1990 Form 1120, U.S. Corporation Income
Tax Return. Based on the advice of its accountants, petitioner
filed a Form 1120X, Amended U.S. Corporation Income Tax Return,
on September 14, 1994, claiming an additional investment tax
credit. Petitioner claimed an investment tax credit of
$1,831,825 with respect to the fuel assemblies placed in service
in 1990. Respondent disallowed petitioner’s claim for refund in
a notice of deficiency that included other adjustments.
OPINION
The issue presented is whether petitioner is entitled to an
investment tax credit with respect to the fuel assemblies that
were placed in service in 1990. Prior to 1986, an investment tax
credit was available pursuant to sections 38(b), 46, and 48 for
investments in certain types of tangible property placed in
service during the taxable year. The credit was repealed by
section 211 of the Tax Reform Act of 1986 (TRA 1986), Pub. L.
99-514, 100 Stat. 2166, which added section 49 to the Internal
Revenue Code. Section 49(a) made the investment tax credit
inapplicable to property placed in service after December 31,
1985. Because TRA 1986 did not become law until October 22,
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1986, the repeal of the investment tax credit was necessarily
retroactive.
Several transition rules were provided that preserve the
investment tax credit for the costs of transition property placed
in service after December 31, 1985, and before January 1, 1991,
as long as the contracts relating to the costs of the property
were entered into on or before December 31, 1985. See TRA 1986
sec. 204(a), 100 Stat. 2146, as amended by TRA 1986 sec. 211, 100
Stat. 2167 (adding Code sec. 49(e)(1)(B)). To qualify for the
transition rules under section 204(a), transition property with a
class life of 20 years or more must be placed in service before
January 1, 1991. See TRA 1986 sec. 203(b)(2)(A), 100 Stat. 2144.
Section 204(a)(3) of TRA 1986 provides the transition rule
for supply and service contracts. TRA 1986 sec. 204(a)(3), 100
Stat. 2149. As modified, section 204(a)(3) of TRA 1986 states:
(3) Supply or service contract.–-The amendments
made by section 201 shall not apply to any property
which is readily identifiable with and necessary to
carry out a written supply or service contract, or
agreement to lease, which was binding on * * *
[December 31, 1985]. [Emphasis added.]
The parties have stipulated that the power contracts and
amendments as of December 31, 1985, qualify as binding written
supply or service contracts under section 204(a) of TRA 1986.
They disagree about whether the fuel assemblies installed in 1990
qualify under the transition rule of section 204(a)(3) of TRA
1986.
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Previous cases have looked to H. Conf. Rept. 99-841 (1986),
1986-3 C.B. (Vol. 4) at 60, for guidance in interpreting the
phrase “readily identifiable with and necessary to carry out” in
section 204(a)(3) of TRA 1986. Id.; United States v.
Commonwealth Energy Sys., 235 F.3d 11 (1st Cir. 2000); Bell Atl.
Corp. v. United States, 224 F.3d 220 (3d Cir. 2000). H. Conf.
Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) at 60, states:
This transitional rule is applicable only where
the specifications and the amount of the property are
readily ascertainable from the terms of the contract,
or from related documents. A supply or service
contract or agreement to lease must satisfy the
requirements of a binding contract * * * [Emphasis
added.]
Petitioner contends that the fuel assemblies placed in
service in 1990 qualify as transition property under the
provision for supply or service contracts in section 204(a)(3) of
TRA 1986, because the fuel assemblies were readily identifiable
in documents related to the power contracts and necessary to
carry out the power contracts. Petitioner acknowledges that
there were no documented specifications for the fuel assemblies
in the power contracts; however, petitioner argues that the
operating license and amendments and appendices thereto are
documents related to the power contracts and that these “related
documents” provide the amount and specifications of the nuclear
fuel assemblies.
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Respondent does not dispute that the fuel assemblies were
necessary for petitioner to carry out the terms of the power
contracts. Instead, respondent contends that the operating
license and amendments and appendices thereto are not “related
documents” to the power contracts.
In Bell Atl. Corp. v. United States, supra, a
telecommunications service provider claimed the investment tax
credit for major improvements to its telephone systems. The
taxpayer asserted that the franchises, tariffs, and contracts
with other local telephone companies were written service
contracts. The court did not find it necessary to decide whether
the franchises, tariffs, and contracts were written service
contracts but, instead, focused on whether any of the property
improvements were readily identifiable with and necessary to
carry out the contracts. The court found that the “franchises,
tariffs, and other contracts contain service quality standards
that regulate telephone service, impose conditions on service and
set service goals.” Id. at 223-224. The court reasoned that the
property for which the taxpayer sought an investment tax credit
“cannot be determined from the terms of any of the tariffs,
franchises, or other contracts * * * because these alleged
‘contracts’ speak only of service quality standards, never
mentioning property of any sort.” Id. at 224.
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The taxpayer in Bell Atl. Corp. also asserted that its
estimate files were related documents because the estimate files
documented the purchase of and need for the new property under
the service quality standard. The court held “that property
cannot be shown to be ‘readily identifiable with’ a written
service contract by means of internally generated documents, such
as the estimate files * * *, that were not prepared
contemporaneously with the contract, that had no binding effect
on anyone, and that were not provided to the other contracting
party”. Id. at 225.
In S. Multi-Media Communications, Inc. v. Commissioner, 113
T.C. 412 (1999), a cable television company claimed the
investment tax credit for property used to make extensive
improvements to some of its systems and to extend its lines in
some of its service areas. Even though the company’s franchise
required that the system be “maintained in accordance with the
highest accepted standards of the industry”, this Court held that
“the general language of * * * franchise agreements, without
more, reflects only broad industry standards, not specific
contractual commitments to undertake rebuilds.” Id. at 414, 421.
In United States v. Commonwealth Energy Sys., supra, the
taxpayer entered into a set of power contracts with other
utilities in 1965, pursuant to which it agreed to build a power
plant and the other utilities agreed to purchase the plant output
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for a specified period of years. The contracts required the
taxpayer to build “a new conventional steam plant” with a
capability of “approximately 560 megawatts”, and the taxpayer was
required to “operate and maintain” the plant “in an economical
and efficient manner and in accordance with good utility practice
and all applicable law”. Id. at 12. In 1990 and 1991, the
taxpayer made several repairs and improvements to the plant and
sought the investment tax credit under the transition rules for
supply and service contracts provided for in section 204(a)(3) of
TRA 1986. The Court of Appeals for the First Circuit stated that
the conference report was helpful because “the requirement that
the specifications and amount of the property be readily
ascertainable indicates that the inquiry need be specific,
although not exact.” Id. at 16. The Court of Appeals held that
the taxpayer was not entitled to the investment tax credit under
the transition rules for the cost of repairs and improvements
made to its plant because the contracts did not contain the
amount or specifications of potential replacement parts, and
there was no contractual obligation for the taxpayer to replace
parts on a specific schedule. Id.
We conclude that the operating license and amendments
thereto in this case are not related documents to the power
contracts. Here, the operating license and amendments and
appendices thereto were not incorporated by reference into the
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power contracts. The only reference to the operating license in
the power contracts was to a general standard of operation and
maintenance that was “in accordance with good utility practice
and all applicable law, including the applicable provisions of
the Atomic Energy Act of 1954, as amended, and of any licenses”.
This general standard of operation and maintenance, without more,
does not incorporate the operating license, or amendments or
appendices thereto, into the power contracts.
The operation of the plant was subject to many laws and
regulations. For any changes that petitioner wanted to make in
its plant equipment or operations, it had to submit an
application for an amendment to its operating license to the NRC.
Petitioner’s application was then subject to the review and
approval of the NRC. Thus, the operating license and amendments
and appendices thereto resulted from internally generated
documents that were submitted to NRC by petitioner for approval.
The purpose of the NRC was to oversee nuclear power plants,
protect the health and safety of the public, and assure
compliance with the law. NRC did not initiate or require
petitioner to make modifications to its plant equipment or
operations.
The operating license was not prepared contemporaneously
with the power contracts. The power contracts were entered into
on May 20, 1968, and the operating license was issued on
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September 15, 1972. Petitioner’s application for Amendment
No. 116 to its operating license with respect to the fuel
assemblies for Cycle 12 was not submitted to the NRC until
January 1990, and the amendment was not issued by the NRC until
May 1990. The fuel assemblies for Cycle 12 were placed in
service in June 1990.
Based on our conclusion that the operating license and
amendments and appendices thereto are not related documents, we
look solely to the power contracts and amendments thereto that
were entered into prior to December 31, 1985. Petitioner
acknowledges in its brief that there were no documented
specifications for the fuel assemblies in the power contracts.
We therefore conclude that the Cycle 12 fuel assemblies do not
qualify as transition property under the supply or service
contract transitional rule set forth in section 204(a)(3) of TRA
1986, because the fuel assemblies were not readily identifiable
with the power contracts or amendments thereto, and the operating
license and amendments and appendices thereto are not related
documents to the power contracts. Thus, we need not decide
whether the Cycle 12 fuel assemblies meet the class life and
placed in service requirements under TRA 1986 sections 203(b) and
211(e) as modified by section 49.
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To reflect the foregoing,
Decision will be entered
under Rule 155.