Rev. Rul. 72-507

Advice has been requested whether, under the cricumstances described below, the costs of nuclear fuel elements acquired to power electric generating plants are capital expenditures subject to depreciation or are ordinary and necessary business expenses.

The taxpayer is an electric public utility company engaged in the business of generating electric energy. One of its generating plants is a nuclear reactor power plant powered by nuclear fuel elements which were purchased in 1970 and are expected to have useful lives of from three to five years with substantial salvage.

The Private Ownership of Special Nuclear Materials Act, Public Law 88-489, 78 Stat. 603; 42 U.S.C. 2011, as enacted in 1964, permits or requires industry to own nuclear fuel rather than only leasing it from the Federal Government.

The basic purpose of a nuclear reactor power plant is the same as a conventional fossil-fuel (coal, oil, or gas) burning power plant. i.e., the generation of electric energy. However, in a nuclear reactor power plant, instead of using coal, oil, or gas for fuel, heat is supplied by a nuclear reactor which contains the core of nuclear fuel elements. Energy in the form of heat is produced in the reactor by a nuclear fission process.

Presently, nuclear fuel elements are placed in assemblies in a nuclear core. Once the assemblies are placed in the nuclear core of the nuclear power reactor it is necessary to replace approximately 1/3 to 1/5 of the fuel elements in the core each year because of waste fission products that have accumulated in the core as by-products of the nuclear fission process. This accumulation has the effect of dampening the chain reaction. When this occurs, some of the fuel elements are removed and the remaining fuel elements, along with replacement fuel elements, are rearranged to permit them to continue to efficiently support a nuclear chain reaction.

The taxpayer in the instant case is subject to the regulatory jurisdiction of the Federal Power Commission. The Federal Power Commission has reclassified the nuclear fuel elements for regulatory purposes. They were required formerly to be reflected in the operation expense account; they now are required to be reflected in the utility plant account. Thus, the cost of the nuclear fuel elements is considered for Federal regulatory purposes to be a depreciable plant account item rather than a current expense item.

Section 263(a) of the Internal Revenue Code of 1954 provides, in part, that any amount paid out for permanent improvements shall not be deducted. Section 1.263(a)-2 of the Income Tax Regulations provides, in part, that the costs for acquisition, construction or erection of machinery and equipment having a useful life substantially beyond one year are examples of capital expenditures.

Section 167(a)(1) of the Code provides, in part, that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business.

Section 1.167(a)-1 of the regulations provides, in part, that a reasonable allowance for the depreciation of depreciable property is an amount that should be set aside for a taxable year in accordance with a reasonably consistent plan, so that the amounts set aside plus the salvage value at the end of the estimated useful lives of the depreciable property equal the cost or other basis of the property as provided in section 167(g) of the Code and section 1.167(g)-1 of the regulations.

In this case, the nuclear fuel elements have a three to five year useful life with considerable salvage at the end of the useful life.

Accordingly, it is held in this case that the costs of nuclear fuel elements are capital expenditures subject to the allowance for depreciation under section 167 of the Code. The useful lives and salvage values for the fuel elements are questions of fact.