Opinion ID: 773630
Heading Depth: 1
Heading Rank: 2

Heading: The Government's Cross Appeal

Text: 28 At all times relevant to the government's cross appeal, IES was a 70% owner of a nuclear power plant in Iowa. During this period, the government was the exclusive provider of uranium-enrichment services required to fuel such plants. The services were purchased either directly from the United States Department of Energy (DOE) 6 or on a secondary market where utilities that had purchased the services from the DOE resold them to others. Between 1972 and 1992, IES purchased most of the required services from the DOE but did buy some from secondary sources. 29 In 1992, Congress enacted the Energy Policy Act of 1992, Pub. L. No. 102-486, 106 Stat. 2776 (EPACT). Among other things, EPACT establishes a fund for the decontamination and decommissioning of uranium-enrichment plants. The $480 million in annual deposits to the fund are to come largely from congressional appropriations, but up to $150 million annually (adjusted for inflation) is to be collected for fifteen years (1993 through 2008, or until $2.25 billion, adjusted for inflation, is deposited) from domestic utilities. The amount each utility is assessed is calculated based upon that utility's previous use of uranium-enrichment services, regardless of whether those services were purchased directly from the DOE or on the secondary market. See 42 U.S.C. 2297g to 2297g-4 (Supp. IV 1992). 30 Thus, in 1992, IES became liable for fifteen special assessments totaling $16,020,125 (exclusive of the annual adjustment for inflation), and made the first payment in 1993. IES filed an amended corporate federal income tax return for 1992 seeking a tax refund based on its position that the liability for the entire $16 million assessment was incurred in 1992, even though none of it had been paid. The IRS denied the refund. IES brought suit in the District Court, which granted summary judgment to IES on this part of IES's tax refund claim. 7 31 As an accrual method taxpayer, income to IES is taxable in the year the income is accrued, or earned, even if it is not received in that year. Treas. Reg. 1.451-1(a). Likewise, a liability 32 is incurred, and generally is taken into account for Federal income tax purposes, in the taxable year in which [1] all the events have occurred that establish the fact of the liability, [2] the amount of the liability can be determined with reasonable accuracy, and [3] economic performance has occurred with respect to the liability. 33 Id. 1.461-1(a)(2)(i). Conditions [1] and [2] together compose what is known as the all events test. I.R.C. 461(h)(4). There is no dispute that the all events test was satisfied in 1992 with the passage of EPACT. The only issue is whether economic performance has occurred. IES's position is that it has, and therefore IES is entitled to a full deduction of the assessments in tax year 1992. We agree. 34 The general rule is that economic performance occurs as services are provided to the taxpayer if the liability of the taxpayer arises out of . . . the providing of services to the taxpayer by another person. Id. 461(h)(2)(A)(i) (emphasis added); accord Treas. Reg. 1.461-4(d)(2)(i). If, as IES contends, the liability arose out of the DOE's provision of uranium-enrichment services, then all conditions have been met for full deductibility in tax year 1992. But if not, then, as the government argues, Treas. Reg. 1.461-4(g)(7) applies: 35 In the case of a taxpayer's liability for which economic performance rules are not provided elsewhere in this section or in any other Internal Revenue regulation, revenue ruling or revenue procedure, economic performance occurs as the taxpayer makes payments in satisfaction of the liability to the person to which the liability is owed. 36 In that case, the assessments would be deductible only as paid. 37 We think the government's position is untenable on these facts and conclude that the EPACT assessments are properly characterized as arising out of the provision of services, all of which services had been provided by the time the EPACT payments were assessed. Accordingly, 1.461-4(g)(7) is inapplicable. 38 The relevant facts support our conclusion. The amount of the assessments was calculated based on the uranium-enrichment services actually used by IES--including those that were purchased on the secondary market. This establishes a direct link between the amount assessed and the services provided. It is the prior generation of uranium-enrichment services at the DOE's plants that resulted in the need for decommissioning and decontamination. Users pay proportionately: the more they used the services before the passage of EPACT, the more they pay to clean up the contamination that resulted from the provision of those past services. If cleanup costs had been considered up-front, they likely would have been included in the cost of the services provided, to the same effect as the after-the-fact assessment. Only those utilities that were actually provided services before 1992 pay now for cleanup. 8 39 The government asserts that EPACT's legislative history demonstrates that the contamination resulting from the production of enriched uranium went unrealized until after the services had been provided, and so the special assessments are intended to cover future costs of cleaning up. According to this theory, the liability thus arose out of the passage of EPACT, not the provision of previous services. We find this argument specious. Assuming, arguendo, that the government's interpretation of the legislative history is accurate (much less relevant), that reading does not support the government's position in this appeal. The assessments are based on the services provided even though the cleanup did not begin until the money for it was appropriated and collected. It cannot be denied that it was the operation of the facilities, which operation occurred only to provide enriched-uranium services, that made the decommissioning and decontamination of those facilities necessary, then, now, or into the future. Again, the correlation between the assessments and the services provided to each assessed utility could not be more direct. 40 The government maintains that the opinion in Yankee Atomic Electric Co. v. United States, 112 F.3d 1569 (Fed. Cir. 1997), cert. denied, 524 U.S. 951 (1998), should control the result here. We disagree. Yankee Atomic is a constitutional law case, so the arising out of part of the economic-performance test for the timing of deductible liabilities is never discussed, and the issues that are discussed are not analogous. The government's heavy reliance on the Yankee Atomic decision suggests the government fundamentally misunderstands the opinion. 41 In Yankee Atomic, a utility challenged the EPACT assessments as an unconstitutional exercise of Congress's taxing power. The Federal Circuit concluded otherwise, holding that EPACT is a sovereign act because it is designed to spread the costs associated with the decontamination and decommissioning over all domestic utilities that used the DOE's uranium enrichment services. 112 F.3d at 1581. According to the government, Yankee Atomic is directly relevant because the court held that the proximate cause of a utility's liability for the special assessments was the enactment of EPACT. Brief of United States as Cross Appellant at 59. 42 The government is simply wrong. The Yankee Atomic court repeatedly connected the EPACT assessment to the past use of services provided. See, e.g., 112 F.3d at 1571 (describing EPACT liability as a special assessment to aid in funding the clean-up costs associated with the facilities that provided those enrichment services); 1572 (noting that Congress recognized there would be large costs associated with decontaminating and decommissioning the facilities that had previously been used to provide enrichment services), (Because this decontamination and decommissioning fiscal problem was not recognized until the 1980s, the prices charged in the Government's past uranium enrichment contracts had not accounted for the problem.); 1575 ([T]he Act targets whichever utility eventually used and benefited from the DOE's enrichment services.). In fact, in Yankee Atomic, even though the utility challenging the assessments had closed its nuclear facilities before EPACT was enacted, the court held the utility was liable for the assessments because it had used the services, id. at 1581, that is, the liability arose out of the provision of the services. If anything, the Yankee Atomic opinion supports IES's position, not the government's. 43 The government also relies on Yankee Atomic for its alternative (and poorly developed) argument that the liability also properly could be characterized as 'taxes' under subparagraph (g)(6). Brief of United States as Cross Appellant at 60. If that were the case, the assessment would be deductible only when paid. See Treas. Reg. 1.461-4(g)(6) ([I]f the liability of a taxpayer is to pay a tax, economic performance occurs as the tax is paid to the governmental authority that imposed the tax.). In support of this tax theory, the government merely cites Yankee Atomic, wherein the court said, [T]he assessment appears to be very similar to . . . a general tax that falls proportionally on all utilities that benefited from the DOE's uranium enrichment services. Yankee Atomic, 112 F.3d at 1576. In a footnote, the government suggests that, because the assessments were imposed to support the government, they are taxes. The government's fair reading of the Yankee Atomic opinion--that the special assessments are 'taxes' governed by Section 1.461-4(g)(6), Reply Brief of Cross Appellant United States at 6--is not fair at all. We decline to take an equivocal sentence (appears to be . . . similar to) out of context from a case in which the sole issue was the constitutionality of EPACT and treat it as controlling of the question before us: how EPACT liabilities should be treated for tax deductibility purposes. 44 The summary judgment for IES on this issue is affirmed.