by Parr Thomson
RSM US LLP is an IMA B2B Partner…
The U.S. Court of Appeals for the Federal Circuit recently released its opinion in AmerGen Energy Co. v. U.S., 115 AFTR 2d 2015-1056 (Fed. Cir.), affirming the lower court holding that an accrual-method purchaser of assets could not include the assumption of performance liabilities in cost basis on the acquisition date where the performance had yet to occur. This holding could significantly impact the ability of a taxpayer acquirer to include assumed liabilities in the basis of assets acquired in a taxable asset acquisition. Taxpayers that have assumed or will assume liabilities as part of the purchase price of taxable asset acquisitions should carefully consider the impact of this case when determining the timing of when such liabilities may be included in the basis of the acquired assets.
As part of the taxable acquisition of three nuclear power plants, AmerGen Energy Co. (the Taxpayer) assumed significant liabilities for the future decommissioning of the plants. Because the liabilities were fixed at the time of the acquisition, the Taxpayer argued that it should immediately include them in the capitalized basis of the acquired assets even though the plants were fully operational and any decommissioning activities would not occur until future years. The primary questions before the lower court included whether the economic performance rules of section 461 applied to the determination of when an assumed liability could be included in the bases of acquired assets, and, if so, whether the Taxpayer could rely on Reg. section 1.461-4(d)(5) in treating economic performance as occurring at the time of transfer. The lower court ultimately ruled that the economic performance rules under section 461 do apply for purposes of calculating the basis of acquired assets and that Reg. section 1.461-4(d)(5) could only be relied on by the seller in an asset transfer and is thus inapplicable in determining when economic performance with respect to the buyer occurs.
The Court of Appeals for the Federal Circuit (the Court) affirmed the lower court’s ruling that section 461’s economic performance rules apply for purposes of determining whether and when an accrual method taxpayer incurs liabilities for purposes of calculating the basis of acquired assets. Interestingly, however, the Court did not discuss the applicability of Reg. section 1.461-4(d)(5). Instead, the Court focused its discussion on whether the liability to decommission the nuclear power plants was one arising out of the provision of property to the Taxpayer by another person (i.e., the seller), as the Taxpayer argued, or was one arising out of the provision of services by the Taxpayer. Under the Taxpayer’s argument, the liability arose out of the transfer of the assets from the seller and should thus be treated as a liability arising out of the provision of property to the Taxpayer. Thus, notwithstanding the inapplicability of Reg. section 1.461-4(d)(5), the Taxpayer argued that economic performance for the decommissioning liabilities was met at the time of the asset transfer (i.e., when the nuclear plant assets were provided to the Taxpayer) and the assumed liabilities should be included in the basis of the acquired assets at such time.
The Court rejected this argument, stating that the Taxpayer misinterpreted the character of the liability by treating it as arising out of the transfer of the assets from the seller. Instead, the underlying nature of the assumed liability determines the type of liability. Here, the decommissioning liability arose out of Nuclear Regulatory Commission licenses and regulations of state and local governments. As the underlying liability was to provide decommissioning services, economic performance could only occur as the taxpayer provides such services. Until such services are provided, the cost of the assumed liabilities may not be included in the acquired assets.
The Court’s ruling could impact taxpayers that have, or intend to, include assumed liabilities in basis immediately upon acquisition that are fixed but for which economic performance has yet to occur. The Court’s discussion and affirmation of the lower court’s decision not only reinforces the inapplicability of Reg. section 1.461-4(d)(5) to buyers but also increases the risk that an assumed liability, even if fixed, may not provide a basis step-up upon assumption, rather only includable in the acquired asset basis upon performance.
As a result of the Amergen case, accrual method taxpayers should consider the impact of the economic performance rules on the treatment of the assumed liabilities in a taxable asset acquisition and should consult with their tax advisors to determine the timing of when such liabilities are included in the basis of the acquired assets. In addition, taxpayers should consider whether this case impacts their basis in any previous acquisitions.
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