PLR 200123042: Nuclear decommissioning funds may transfer within a restructuring

Plain-English summary

A utility planned to transfer nuclear plants and their decommissioning funds to an affiliated company as part of a restructuring. The IRS ruled that the qualified funds would not be disqualified by the transfer, and that neither the utility nor its funds would recognize gain or loss from it. The funds' asset basis would carry over to the new owner. The IRS also treated the new owner as eligible to make deductible contributions to the funds, subject to the limits and ruling amount requirements of IRC § 468A. These rulings depended on a regulatory clarifying order that directed customer decommissioning charges to the new owner and on continued ownership and control within the parent group.

Ruling snapshot

• Question: What happens to the qualified decommissioning funds when the nuclear plants move to an affiliate, and may the affiliate contribute to them?
• Outcome: Approved, subject to the clarifying order and continued group ownership conditions
• Key authorities: IRC §§ 88, 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, 1.468A-5, 1.468A-6

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200123042
Washington, DC 20224
Release Date: 6/8/2001
Index Number: 468A.00-00, 461.00-00, Person to Contact:
1012.06-00,1060.00-00,
Telephone Number:

Refer Reply To:
CC:PSI:6-PLR-103029-00
Date:
March 9, 2001

Legend:

Taxpayer =

Parent =

Plant 1 =
Plant 2 =
Facility =

Company A =
Company B =

Commission A =
Commission B =

State =

Law =
a =
b =
c =
d =
e =

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f =
g =
h =
i =

This letter responds to your request, dated February 3, 2000, and subsequent correspondence, that we rule on certain tax consequences under section 468A of the Internal Revenue Code of the transfer of the Plants in the context of a reorganization. As set forth below, you have requested rulings regarding the tax consequences to the Taxpayer and its qualified nuclear decommissioning funds.

The Taxpayer has represented the following facts and information relating to the ruling request:

The Taxpayer owns and operates the Plants and the related Facility in State.
The Taxpayer is under the regulatory jurisdiction of Commission A and Commission B. The Taxpayer is a wholly-owned subsidiary of the Parent.

On a, the State enacted Law to create competitive electric markets and deregulate the generation and supply of electricity in State. Under the Law, Commission A requires on or before b structural or legal separation of the regulated and nonregulated businesses of each electric company within State. The Law does not apply to the costs of nuclear generation facilities that as part of a settlement approved by Commission A either remain regulated or are recovered through the distribution function.

On c, the Taxpayer entered into an agreement and stipulation, adopted by Commission A on g, that provided a framework for the recovery of transition costs and nuclear decommissioning costs which would be collected through the delivery service rates. Nuclear decommissioning costs would be charged at a fixed annual rate of d until e. The total collection of nuclear decommissioning costs was frozen at h, which is consistent with prior schedules of ruling amounts issued to the Taxpayer and dated f. Pursuant to Law, Commission A approved recovery of nuclear decommissioning costs through unbundled delivery service rates and recovery of other stranded costs in a non- bypassable transmission and distribution charge.

As part of the agreement and stipulation approved by Commission A, the Taxpayer will “spin off” its generation and related assets, as well as its rights to collect transition costs and nuclear decommissioning costs to affiliated entities within the same

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consolidated group in a reorganization that is expected to qualify as a tax-free reorganization. More specifically, in exchange for the stock of Company A, the Taxpayer will transfer to Company A its interests in the Plants and the Facility; its qualified and nonqualified nuclear decommissioning funds; all of its rights, title, and interests in the revenue to be collected through its unbundled delivery rates for the decommissioning of the Plants; and i percent of its rights, title and interests in the non- bypassable transmission and distribution charge. Company A will assume all the liability to decommission the Plants. Taxpayer will then distribute the stock of Company A to the Parent. Parent will transfer the stock of Company A to Company B, a first tier, single member, limited liability company of the Parent.

The Taxpayer has requested that Commission A issue a clarifying order providing, in part, that as part of the plan of restructuring the Taxpayer will transfer the Plants to an affiliated corporation. In addition, the clarifying order will require that the Taxpayer will continue to collect decommissioning costs as an agent for its affiliated corporation and will require that all such collections be paid to the affiliated corporation owning the Plants.

Requested Ruling #1: Neither the Taxpayer, Company A, nor the qualified nuclear decommissioning funds will recognize any gain or loss or otherwise take into account any income or deduction into account by reason of the transfer of the Taxpayer’s qualified nuclear decommissioning trust funds to Company A’s qualified nuclear decommissioning trust funds. The Company A’s qualified nuclear decommissioning funds will have a basis in the assets held equal to the basis of such assets in the Taxpayer’s qualified nuclear decommissioning funds immediately prior to the transfer.

Section 468A(a) provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund (the qualified nuclear decommissioning fund). Section 468A(b) limits the annual deduction of the electing taxpayer to the lesser of the ruling amount or the amount of decommissioning costs included in the electing taxpayer’s cost of service for ratemaking purposes for the taxable year.

Section 468A(d) provides that the ruling amount means the amount determined by the Service to be necessary to (A) fund that portion of the nuclear decommissioning cost with respect to the nuclear power plant that bears the same ratio to the total nuclear decommissioning costs with respect to such nuclear power plant as the period for which the fund is in effect bears to the estimated useful life of the nuclear power plant, and (B) prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level funding.

Under section 1.468A-2(b)(2)(i) of the Income Tax Regulations, decommissioning costs are included in a taxpayer's cost of service for a taxable year to the extent such costs are directly or indirectly charged to customers of the taxpayer by reason of electric energy consumed during the taxable year or otherwise required to be

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included in the taxpayer’s income under section 88 and the corresponding regulations.

Section 1.88-1(a) provides that decommissioning costs directly or indirectly charged to customers of the taxpayer include all decommissioning costs that consumers are liable to pay by reason of electric energy furnished by the taxpayer during the taxable year, whether payable to the taxpayer, a trust, State government, or other entity.

Section 468A(e)(2) provides that the rate of tax on the income of a qualified nuclear decommissioning fund is 20 percent. Section 468A(e)(4) provides, in pertinent part, that the assets in a qualified nuclear decommissioning fund shall be used exclusively for satisfying the liability of any taxpayer contributing to the qualified nuclear decommissioning fund.

Section 1.468A-1(b)(1) of the Federal Income Tax Regulations provides that an eligible taxpayer is a taxpayer that possesses a qualifying interest in a nuclear power plant. Section 1.468A-1(b)(2) provides that a qualifying interest is a direct ownership interest or a leasehold interest meeting certain additional requirements. Section 1.468A-1(b)(4) provides, in part, that a nuclear power plant is any nuclear power reactor that is used predominantly in the trade or business of the furnishing or sale of electric energy, if the rates for such furnishing or sale have been established or approved by a public utility commission.

Section 1.468A-5(a) sets out the qualification requirements for nuclear decommissioning funds. It provides, in part, that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a trust under state law. An electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant. Section 1.468A- 5(c)(1)(i) provides that if, at any time during the taxable year, a nuclear decommissioning fund does not satisfy the requirements of section 1.468A-5(a), the Service may disqualify all or a portion of the fund as of the date that the fund does not satisfy the requirements. Section 1.468A-5(c)(3) provides that if a qualified nuclear decommissioning fund is disqualified, the fair market value (with certain adjustments) of the assets in the fund is deemed to be distributed to the electing taxpayer and included in that taxpayer’s gross income for the taxable year.

Section 1.468A-6 generally provides rules for the transfer of an interest in a nuclear power plant (and transfer of the qualified nuclear decommissioning fund) where after the transfer the transferee is an eligible taxpayer. Under section 1.468A-6(g), the Service may treat any disposition of an interest in a nuclear power plant occurring after December 27, 1994, as satisfying the requirements of the regulations if the Service determines that such treatment is necessary or appropriate to carry out the purposes of section 468A.

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Upon approval by Commission A of the language proposed by the Taxpayer to be included in a clarifying order, the Service will generally treat these transfers as dispositions qualifying under the general provisions of section 1.468A-6. This determination is expressly contingent upon the Taxpayer receiving such order as delineated above. Specifically, this clarifying order will enable the Service to treat these transfers as decommissioning costs that are directly or indirectly charged to customers of Company A by reason of electric energy furnished by Company A, within the meaning of sections 88 and 468A and the corresponding regulations. Thus, assuming the foregoing condition is satisfied, under section 1.468A-6 the Taxpayer’s funds will not be disqualified upon the transfer of the Plants and the funds to Company A.

Section 1.468A-6(c)(1) provides that neither a transferor of an interest in a nuclear power plant nor the transferor’s fund will recognize gain or loss or otherwise take any income or deduction into account by reason of a sale or other disposition. Accordingly, neither the Taxpayer nor its qualified funds will recognize gain or loss or otherwise take into account any income or deduction upon the transfer of the qualified nuclear decommissioning funds to Company A.

Section 1.468A-6(c)(3) provides that transfers to which section 1.468A-6 apply do not affect basis. Thus, the qualified funds in the hands of Company A will have a basis in their assets equal to the basis in their assets prior to the transfer from the Taxpayer.

Requested Ruling #2: Following the transfer of the Plant and nuclear decommissioning funds to Company A, Company A will be treated as the “eligible taxpayer” and the “electing taxpayer” with respect to the Company A qualified nuclear decommissioning funds and therefore, Company A may make deductible contributions to its qualified nuclear decommissioning funds in an amount consistent with section 468A and the regulations thereunder.

Section 1.468A-1(b)(1) defines an eligible taxpayer as any taxpayer that possesses a qualifying interest in a nuclear power plant. Section 1.468A-1(b)(2) defines a qualifying interest to include a direct ownership interest. Pursuant to section 1.468A-2(a) an eligible taxpayer that elects the application of section 468A is an electing taxpayer. Section 1.468A-6(e)(2) provides rules for the determination of a schedule of ruling amounts for a transferee of a nuclear power plant. Section 468A(b) limits the deductible contribution to the lesser of the ruling amount or the nuclear decommissioning costs allocable to the fund which is included in a taxpayer’s cost of service for ratemaking purposes for the taxable year.

Fundamental to making a deductible contribution to a qualified nuclear decommissioning fund pursuant to a schedule of ruling amounts under section 468A are four requirements. First, a taxpayer must be an eligible taxpayer. Second, a taxpayer must be liable for the decommissioning of the nuclear power plant. Third, a

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taxpayer must have decommissioning costs included in its cost of service for ratemaking purposes for the year for which the deductible contribution is made. Fourth, a taxpayer must request and receive a schedule of ruling amounts from the Service.

Based on the information submitted by the Taxpayer, Company A satisfies the requirements for being an eligible taxpayer under section 1.468A-1(b) and an electing taxpayer under section 1.468A-2. In addition, as part of the restructuring plan approved by Commission A and the NRC, the liability to decommission the Plants has been transferred to Company A. Upon receipt from Commission A of a clarifying order providing that the Taxpayer collect decommissioning costs as an agent for Company A and requiring that such amounts be paid to Company A, Company A will have satisfied the requirement of having decommissioning costs included in its cost of service for ratemaking purposes for the year for which the deductible contribution is made. Company A may rely on the provisions of section 1.468A-6(e)(2) for a determination of the ruling amount in the year of transfer. Pursuant to section 1.468A-6(e)(2)(ii), Company A must request a revised schedule of ruling amounts for any tax year subsequent to the tax year in which the Plants are transferred. Finally, section 468A(b) limits the deductible contribution to the lesser of the ruling amount or the nuclear decommissioning costs allocable to the fund which is included in a taxpayer’s cost of service for ratemaking purposes for the taxable year.

The rulings expressed, herein, are expressly conditioned on the clarifying order remaining in effect and on the continued direct or indirect ownership and control of Company A by the Parent or its subsidiary Company B.

Except as specifically determined above, no opinion is expressed or implied concerning the Federal income tax consequences of the transaction described above. In particular, no opinion is expressed or implied concerning whether the rights to decommissioning costs and the non-bypassable charge transferred to Company A is includible in the gross income of, and deductible by, any entity other than Company A.

This letter ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) provides that this ruling may not be used or cited as precedent.

In accordance with the powers of attorney, we are sending a copy of this ruling to your authorized representative. We are also sending a copy of this letter ruling to the Industry Director, Natural Resources, Large and Mid-Size Business Division.

Sincerely,
CHARLES B. RAMSEY
Chief, Branch 6
Office of Associate Chief Counsel
Passthroughs and Special Industries