PLR 200850017: a reactor shut down since 1974 moves up one rung of its corporate ladder, and its decommissioning funds survive the trip

Plain-English summary

A seven page private letter ruling, control number "PLR-121573-08", dated September 02, 2008 and released 12/12/2008. It is routed "CC:PSI:B06", carries Index Number "468A.04-02", and is signed by Peter C. Friedman, Senior Technician Reviewer, Branch 6, Office of Associate Chief Counsel, Passthroughs and Special Industries. The date of the ruling request is redacted.

The subject is nuclear decommissioning money. When a company builds a nuclear power plant it takes on an obligation that will not come due for decades: at the end of the plant's life someone has to decontaminate it, take it apart and haul it away, at very large cost. Ordinary tax accounting would not let the owner deduct any of that until the work was actually done. Section 468A changes the answer. An owner may set money aside in a qualified nuclear decommissioning fund and deduct the contributions as they are made, which is what makes it possible to charge today's electricity customers for tomorrow's teardown. In exchange the fund is ring-fenced. It is a separate taxpayer, its permitted uses are prescribed, and the regulations allow only one qualified fund per nuclear power plant.

That ring-fence is why this letter exists. The structure here runs four entities deep. Taxpayer is the parent of an affiliated group. Company B is a limited liability company that elected to be treated as a corporation. Company C was another such LLC, wholly owned by Company B. Company D is an LLC disregarded for tax purposes, wholly owned by Company C. Through that chain, Company C owned two plants at a single site, called the Plants.

Plant 2 is the working one, a nuclear power plant generating electricity that Company C sells wholesale to a subsidiary, which resells it on. Plant 1 is not working. It "has been permanently shut down since October 1974 and is maintained in SAFSTOR status." SAFSTOR is one of the recognised decommissioning strategies: rather than dismantle a reactor immediately, the owner secures it, monitors it, and waits, sometimes for fifty or sixty years, letting the radioactivity decay before taking it apart. Plant 1 has been sitting in that condition since 1974, and its decommissioning fund has been sitting alongside it.

Each of the two plants has two funds, a qualified one and a nonqualified one, and all four are held in a single master trust. Only the qualified funds matter to this ruling. The nonqualified funds are named once in the facts and never mentioned again.

Then, on a redacted date, Company C merged into its parent Company B. The letter describes this as a statutory merger qualifying as a tax-free liquidation of a subsidiary into a parent under section 368(a)(1)(A). Company B became the owner of the Plants and the funds, and Company D became Company B's direct disregarded subsidiary. Nothing left the group. The plants moved up one rung of a ladder they were already on.

The worry is that the tax law does not necessarily see it that way. A qualified fund belongs to a particular taxpayer with respect to a particular plant. If ownership of the plant changes hands, the fund has in principle been disposed of, and a fund that is disposed of carelessly can be treated as making a distribution, which is taxable, or as receiving a fresh contribution, which is not deductible, or as failing the one-fund-per-plant rule and losing its qualified status outright. Section 1.468A-6T exists to keep that from happening on a real transfer. If the transferor maintained a qualified fund for the interest given up, the transferee maintains one for the interest acquired, the interest acquired is a qualifying interest, the fund travels with the plant, and the transferee still holds only one fund per plant, then the transfer has no tax consequences on either side and basis carries straight through.

One detail of that regulation is doing quiet work for Plant 1. A shut down reactor is not generating anything, so it is fair to ask whether it is still a nuclear power plant at all. The letter quotes the answer: for purposes of section 1.468A-6T, "a nuclear power plant includes a plant that previously qualified as a nuclear power plant and that has permanently ceased to produce electricity." That sentence is what keeps a reactor idle since 1974 inside the regime, and keeps its fund qualified when it changes hands.

Four rulings were requested and all four were given. The qualified funds were not disqualified by the merger and continue to satisfy section 468A. The funds recognize no gain, loss, income or deduction as a result of it. Neither Taxpayer nor Company A nor Company B nor Company C recognizes any gain, loss, income or deduction on the transfer of the funds from Company C to Company B. And after the restructuring the funds hold their assets at the same basis they had immediately before.

The requested and granted rulings are near mirror images, and the difference between them is the interesting part. The taxpayer asked for outcomes. The Service granted outcomes pinned to specific subsections: rulings 2 and 3 are prefaced "Pursuant to § 1.468A-6T(c)(1) and (2)", and ruling 4 "Pursuant to § 1.468A-6T(c)(3)", prefaces the request did not contain. Ruling 1 alone is restated word for word.

After ruling 4, and before the caveats, the letter adds a sentence that was not among the four questions: "While it owns interests in the Plants, Company B is eligible to maintain the qualified nuclear decommissioning funds." Its position was confirmed in the extracted text before this entry was written. It is an unnumbered fifth conclusion, and it is the one that tells Company B it may go on running the funds rather than merely that the move did not break them. A copy of the letter goes to the Industry Director, Natural Resources (LM:NR), so the examination side of the house is told as well.

Four points of transcription and format, recorded rather than repaired, since the document came from a clean text layer.

First, the header block is short one field. This letter prints Number, Release Date and Index Number and stops. Three other rulings released the same day, docs/2008/0850018.md, docs/2008/0850016.md and docs/2008/0850015.md, each print a "Third Party Communication" line and a "Date of Communication" line beside the Number. This one prints neither, and the phrase does not appear anywhere in it. That was verified against all four documents before this entry was written.

Second, the quotation marks are inconsistent, and the inconsistency tracks a particular term rather than a particular page. The term qualified nuclear decommissioning fund is quoted twice, both times with straight typewriter quotation marks. The curly form of that same phrase does not appear at all. Meanwhile "nuclear decommissioning costs" and "otherwise deductible" are quoted with curly marks in the ordinary way. Something handled that one phrase differently from the others.

Third, the signature is set in full capitals where the corpus norm is mixed case. The mixed case spelling of the name does not appear in the document.

Fourth, the legend heading is written with a colon, as "Legend:", where sibling letters in this release write it without one, and where two of them, docs/2008/0850018.md and docs/2008/0850026.md, print no heading at all.

The redaction is heavy and, as often in this corpus, uneven. Every company name, the state, the plant identities, the site, both regulatory commissions and the merger date are replaced by runs of hyphens. What survives is "October 1974" and the word SAFSTOR. A shutdown date and a decommissioning status are precisely the sort of facts that narrow a list of American reactors to a very short one, and they were left in a document from which the taxpayer's own name was removed with care.

The citation check this corpus normally runs could not be performed because the legal research tool is unavailable in this session. Every section listed above was verified against the released text itself, and nothing has been supplied or corrected from memory.

Ruling snapshot

• Question: When a subsidiary holding two nuclear plants and their decommissioning funds merges up into its own parent in a tax-free liquidation, do the qualified funds lose their qualified status, trigger gain or a deemed distribution, or take a new basis?
• Outcome: Approved. All four requested rulings were given. The qualified funds were not disqualified by the merger and continue to satisfy section 468A and section 1.468A-6T; neither the funds nor any of the corporations recognize gain, loss, income or deduction as a result of it, pursuant to section 1.468A-6T(c)(1) and (2); and the funds keep the basis they had immediately before, pursuant to section 1.468A-6T(c)(3). An unnumbered further statement confirms that Company B is eligible to maintain the funds while it owns interests in the Plants. No opinion was expressed on the merger under any Code section other than 468A.
• Key authorities: Section 468A and sections 1.468A-1T, 1.468A-5T and 1.468A-6T of the temporary regulations, in particular the transfer rules of section 1.468A-6T(b) and (c), with section 368(a)(1)(A) supplying the form of the merger.

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200850017
Release Date: 12/12/2008
Index Number: 468A.04-02

---------------------------------- Person To Contact:
------------------------------------------------------------ ----------------------- ID No. -------------
-------------- Telephone Number:
--------------------------- ---------------------
-------------------------- Refer Reply To:
--------------------------------------- CC:PSI:B06
PLR-121573-08
Date:
September 02, 2008

Legend:

Taxpayer = ----------------------------
-----------------------

Company A = -----------------------------------------------
-----------------------

Company B = --------------------------------------------------, ------
------------------------

Company C = ----------------------------------------------------------
------------------------

Company D = ------------------------------------------------
------------------------

State A = --------------

State B = ------- ------

Plant 1 = --------------------------------

Plant 2 = ----------------------------------------------------------------------

Location = -------------------------------------------------------

Commission A = -------------------------------------------
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PLR-121573-08

Commission B = -----------------------------------------------------

a = --------------------------

Dear ---------------------

     This letter responds to your request for private letter ruling dated

------------------. You requested that we rule on certain tax consequences, under section
468A of the Internal Revenue Code, of the reorganization discussed below.

Facts:

    Taxpayer has represented the following facts and information relating to the

ruling request:

   Taxpayer, a corporation organized in State A, is the parent of an affiliated group

of subsidiary corporations. Company A, also organized in State A, is wholly-owned by
Taxpayer and is a member of the affiliated group. Company B, a limited liability
company (LLC) organized under the laws of State A and wholly-owned by Taxpayer,
has elected to be treated as a corporation for federal income tax purposes. Prior to a,
Company C was an LLC organized under the laws of State A that had elected to be
treated as a corporation for federal income tax purposes. Company C was wholly-
owned by Company B. Company B and Company C are also members of the affiliated
group of Taxpayer. Company D, an LLC disregarded for federal income tax purposes,
was wholly-owned by Company C prior to a.

    Company C, through the disregarded Company D, was the owner of Plant 1 and

Plant 2 (the Plants). Plant 2 is a nuclear power plant located at Location. Plant 1, also
located at Location, has been permanently shut down since October 1974 and is
maintained in SAFSTOR status. Company C (through and including the disregarded
Company D) is engaged in the generation of electricity produced by Plant 2 and the sale
of that electricity at wholesale to a subsidiary, which then resells the electricity to
various wholesale customers. Company C (through and including the disregarded
Company D) is subject to the jurisdiction of Commission A with regard to the operation
and maintenance of the Plants and to the jurisdiction of Commission B with regard to
the rates charged to wholesale customers for electricity produced by Plant 2.

   Company C, through the disregarded Company D, acquired the Plants, along

with a qualified nuclear decommissioning trust (QDT) fund and a nonqualified nuclear
decommissioning trust (NQDT) fund for each Plant 1 and Plant 2. The four funds are
held in a master trust.
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PLR-121573-08

   On a, Company C merged with its parent, Company B. Taxpayer represents that

this merger is a statutory merger which qualifies as a tax-free liquidation of a subsidiary
into a parent under § 368(a)(1)(A). Under the terms of this merger/liquidation, effective
a, Company B becomes the owner of the Plants and their funds for tax purposes and
Company D becomes the direct and disregarded subsidiary of Company B.

   Taxpayer has requested the following rulings:

   Requested Ruling #1: The QDTs were not disqualified by reason of the
   merger/liquidation of Company C into Company B and the QDTs will therefore
   continue to be treated as QDTs that satisfy the requirements of § 468A and
   § 1.468A-6T of the temporary Income Tax Regulations.

   Requested Ruling #2: The QDTs will not recognize any gain or loss or otherwise
   take any income or deduction into account as a result of the merger/liquidation.

   Requested Ruling #3: Neither Taxpayer, Company A, Company B, nor Company
   C will recognize any gain or loss or take any income or deduction into account as
   a result of the transfer of the QDTs from Company C to Company B in the
   merger/liquidation.

   Requested Ruling #4: Pursuant to § 1.468A-6T(c), after the restructuring, the
   QDTs will have a tax basis in each of their assets that is the same as the tax
   basis in those assets immediately prior to the merger/liquidation.

Law and Analysis:

    Section 468A(a) of the Code provides that a taxpayer may elect to deduct

payments made to a nuclear decommissioning reserve fund that meets the
requirements of section 468A (i.e. a fund that is a "qualified nuclear decommissioning
fund").

  Section 468A(c)(1) provides that any amount distributed from a qualified nuclear

decommissioning fund during any taxable year is includible in the taxable income of the
taxpayer for that year.

  Section 468A(c)(2) provides that, in addition to contributions to a qualified

nuclear decommissioning fund that are deductible under § 468A(a), there is allowable
as a deduction the amount of “nuclear decommissioning costs” with respect to which
economic performance occurs (within the meaning of § 461(h)(2)) during the taxable
year. Nuclear decommissioning costs are defined in § 1.468A-1T(b)(6) as all otherwise
deductible expenses to be incurred in connection with the entombment,
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PLR-121573-08

decontamination, dismantlement, removal, and disposal of the structures, systems, and
components of a nuclear power plant that has permanently ceased the production of
electric energy. This term includes all otherwise deductible expenses to be incurred in
connection with the preparation for decommissioning, such as engineering and other
planning expenses, and all otherwise deductible expenses. Such term does not include
otherwise deductible expenses to be incurred in connection with the disposal of spent
nuclear fuel under the Nuclear Waste Policy Act of 1982 (Public Law 97-425). An
expense is considered “otherwise deductible” for purposes of § 1.468A-1T(b)(6) if it
would be deductible under Chapter 1 of the Code without regard to § 280B.

  Section 468A(e)(5) provides that, for purposes of section 4951, a qualified

nuclear decommissioning fund is treated as a trust described in section 501(c)(21).

   Section 1.468A-1T(b)(4) provides that a "qualified nuclear decommissioning

fund" is a fund that satisfies the requirements of section 1.468A-5T.

   Section 1.468A-5T(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.

  Section 1.468A-5T(a)(1)(iii) provides that an electing taxpayer can establish and

maintain only one qualified nuclear decommissioning fund for each nuclear power plant.

   Section 1.468A-6T provides rules applicable to the transfer of an interest in a

nuclear power plant (and transfer of the qualified nuclear decommissioning fund) where
certain requirements are met. For purposes of § 1.468A-6T, a nuclear power plant
includes a plant that previously qualified as a nuclear power plant and that has
permanently ceased to produce electricity.

  Section 1.468A-6T(b) provides that section 1.468A-6T applies if--

  (1) Immediately before the disposition, the transferor maintained a qualified

nuclear decommissioning fund with respect to the interest disposed of; and

  (2) Immediately after the disposition--

         (i) The transferee maintains a qualified nuclear decommissioning fund with
         respect to the interest acquired;

         (ii) The interest acquired is a qualifying interest of the transferee in the
         nuclear power plant;

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PLR-121573-08

   (3) In connection with the disposition, either—

          (i) The transferee acquires part or all of the transferor’s qualifying interest
          in the plant and a proportionate amount of the assets of the transferor’s
          fund is transferred to a fund of the transferee; or

          (ii) The transferee acquires the transferor’s entire qualifying interest in the
          plant and the transferor’s entire fund is transferred to the transferee; and

   (4) The transferee continues to satisfy the requirements of § 1.468A-5T(a)(1)(iii),
   which permits an electing taxpayer to maintain only one qualified nuclear
   decommissioning fund for each plant.

   Section 1.468A-6T(c) provides that a disposition that satisfies the requirements

of section 1.468A-6T(b) will have the following tax consequences at the time it occurs:

    (1) Neither the transferor nor the transferor’s qualified nuclear decommissioning

fund will recognize gain or loss or otherwise take any income into account by reason of
the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear
decommissioning fund to the transferee’s qualified nuclear decommissioning fund (or by
reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund
to the transferee). For purposes of the regulations under section 468A, this transfer (or
the transfer of the transferor’s qualified nuclear decommissioning fund) will not be
considered a distribution of assets by the transferor’s qualified nuclear decommissioning
fund.

    (2) Neither the transferee nor the transferee’s qualified nuclear decommissioning

fund will recognize gain or loss or otherwise take any income into account by reason of
the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear
decommissioning fund to the transferee’s qualified nuclear decommissioning fund (or by
reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund
to the transferee). For purposes of the regulations under section 468A, this transfer (or
the transfer of the transferor’s qualified nuclear decommissioning fund) will not
constitute a payment or a contribution of assets by the transferee to its qualified nuclear
decommissioning fund.

    (3) Transfers of assets of a qualified nuclear decommissioning fund to which this

section applies do not affect basis. Thus, the transferee’s qualified nuclear
decommissioning fund will have a basis in the assets received from the transferor’s
qualified nuclear decommissioning fund that is the same as the basis of those assets in
PLR-121573-08 6

the transferor’s qualified nuclear decommissioning fund immediately before the
distribution.

   Under section 1.468A-6T(f), the Service may treat any disposition of an interest

in a nuclear power plant 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.

Conclusions:

  Based on the information submitted by Taxpayer, we reach the following

conclusions:

   Ruling #1: The QDTs were not disqualified by reason of the merger/liquidation of
   Company C into Company B and the QDTs will therefore continue to be treated
   as QDTs that satisfy the requirements of § 468A and § 1.468A-6T of the
   temporary Income Tax Regulations.

   Ruling #2: Pursuant to § 1.468A-6T(c)(1) and (2), the QDTs will not recognize
   any gain or loss or otherwise take any income or deduction into account as a
   result of the merger/liquidation.

   Ruling #3: Pursuant to § 1.468A-6T(c)(1) and (2), neither Taxpayer, Company A,
   Company B, nor Company C will recognize any gain or loss or take any income
   or deduction into account as a result of the transfer of the QDTs from Company
   C to Company B in the merger/liquidation.

   Ruling #4: Pursuant to § 1.468A-6T(c)(3), after the restructuring, the QDTs will
   have a tax basis in each of their assets that is the same as the tax basis in those
   assets immediately prior to the merger/liquidation.

    While it owns interests in the Plants, Company B is eligible to maintain the

qualified nuclear decommissioning funds.

    Except as specifically determined above, no opinion is expressed or implied

concerning the Federal income tax consequences of the transaction described above.
In particular, we express no opinion on the tax results of the merger/liquidation
described above under any section of the Code other than § 468A.

  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.
PLR-121573-08 7

     In accordance with the power of attorney on file with this office, the original of this

letter is being sent to Taxpayer’s authorized representative. We are also sending a
copy of this letter ruling to Taxpayer and to the Industry Director, Natural Resources
(LM:NR).

                                        Sincerely,



                                        PETER C. FRIEDMAN
                                        Senior Technician Reviewer, Branch 6
                                        Office of Associate Chief Counsel
                                        Passthroughs and Special Industries

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