                          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
                                - 2 -

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
                               - 3 -

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,
                                - 4 -

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
                                 - 5 -

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
                                - 6 -

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
                              - 7 -

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; * * *
                                - 8 -

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,
                                - 9 -

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.
                             - 10 -

     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.
                              - 11 -

     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.
                                - 12 -

     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
                                - 13 -

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
                               - 14 -

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
                              - 15 -

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.
                        - 16 -

To reflect the foregoing,

                                  Decision will be entered

                             under Rule 155.
