PLR 200852024: Nuclear decommissioning funds ride through a deemed liquidation intact

Plain-English summary

Taking a nuclear power plant apart at the end of its life costs an enormous amount, and section 468A lets a utility deduct money set aside for that work in advance, decades before it happens. The price of that deduction is a tightly controlled trust. The fund has to be a trust under state law, an electing taxpayer may maintain only one qualified fund per plant, and anything distributed out of a fund is includible in income for the year. That last rule is what makes corporate restructuring risky for a utility: if a reshuffle were treated as pulling assets out of the fund, the deduction taken years earlier would come back as income.

The taxpayer here is a holding company sitting on top of a tower of single-member limited liability companies, each disregarded for federal tax purposes. Below them was a partnership that owned three nuclear plants along with their qualified decommissioning trusts and their nonqualified ones. One entity in the chain then elected to be disregarded too. That single election collapsed the structure: the entity was deemed to liquidate, the partnership dropped to one member and so ceased to be a partnership, and the plants and their trusts were deemed distributed up through the disregarded entities until the holding company itself became their owner for tax purposes.

No plant was sold and no fund was touched, but for tax purposes the funds changed hands, which is precisely the event the regulations police. Section 1.468A-6T supplies the answer. Where a transferor maintained a qualified fund for the interest disposed of, the transferee maintains one for the interest acquired, the whole interest and the whole fund move together, and the transferee still keeps only one fund per plant, the transfer carries no tax consequences. Neither side recognizes gain or loss, the movement is not treated as a distribution by the transferor's fund, it is not treated as a contribution by the transferee to its fund, and basis is unaffected.

The Service so ruled on all four requests. Nobody recognizes gain, loss, income or deduction on the deemed transfer of the trusts; the trusts still satisfy section 468A and the temporary regulations immediately afterward; the basis of the assets inside them is the same before and after; and the holding company becomes the eligible and electing taxpayer, entitled to rely on section 1.468A-6T(e)(2) to determine its ruling amount for the year of the transfer.

That last point explains the subject line the IRS assigned this ruling. The relief for the year of transfer is a one-year accommodation. For any later year, the holding company has to request a revised schedule of ruling amounts before it can contribute anything further to the funds.

The letter is careful to rule on section 468A and nothing else. It expresses no opinion on the tax results of the deemed liquidation or of the partnership's termination under any other provision, including the nonrecognition treatment the taxpayer represented for those steps.

This is a clean digital release rather than a scan, so no OCR correction was needed. The ownership percentages throughout are behind IRS redaction and appear below as runs of dashes.

Ruling snapshot

• Question: When a check-the-box election collapses a chain of entities and a partnership is deemed to distribute its nuclear plants and decommissioning trusts up to the parent, do the qualified funds survive without tax consequence?
• Outcome: approved. No gain, loss, income or deduction results from the deemed transfer, the funds continue to satisfy section 468A afterward, asset basis is unchanged, and the parent becomes the eligible and electing taxpayer who may rely on section 1.468A-6T(e)(2) for the year of transfer.
• Key authorities: Code sections 332, 461(h)(2), 468A(a), 468A(c)(1), 468A(c)(2), 468A(e)(5), 708(b)(1)(A), 731(a); Treas. Reg. sections 301.7701-3(c), 1.468A-1T(b)(4), 1.468A-1T(b)(6), 1.468A-5T(a), 1.468A-5T(a)(1)(iii), 1.468A-6T(b), 1.468A-6T(c), 1.468A-6T(e)(2), 1.468A-6T(f).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200852024
Release Date: 12/26/2008
Index Number: 468A.04-02

--------------------------------- Person To Contact:
------------------------------------------------------ ----------------------- ID No. -------------
-------------------------- Telephone Number:

------------- Refer Reply To:
--------------------------------------- CC:PSI:B06
PLR-128721-08
Date:
September 17, 2008

Legend:

Taxpayer = ---------------------------
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Company A = --------------------------------------------
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Company B = ----------------------------------------------
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Company C = ---------------------------------------------
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Company D = -----------------
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Company E = ------------------------------------
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Company F = -----------------------------------------
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Plant 1 = -----------------------------

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

Plant 3 = -------------------------------------------- 2 PLR-128721-08

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

b = ---------------------

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 is a holding company that, through its subsidiaries, is engaged in the generation and sale of electricity, at wholesale and retail, and the delivery of electricity. Taxpayer is the single member of Company A, a single member limited liability company (LLC) that is disregarded for federal income tax purposes. Company A is the single member of Company B, also a single-member LLC that is disregarded for federal income tax purposes. Company C is owned --------percent by Company B and ---------- percent by Company D. Company C, prior to b, is a partnership engaged in the generation and sale of electricity at wholesale and retail. Company C owns Plant 1, Plant 2, and Plant 3, nuclear power plants (the Plants), as well as their associated qualified nuclear decommissioning trusts (QDT) and their nonqualified nuclear decommissioning trusts (NQDT). Company D is owned --- percent by Company E and -
---percent by Company F. Company E, a single-member LLC that is disregarded for federal income tax purposes as of a, owns ----- percent of Company F. Company F is also a single-member LLC that is disregarded for federal income tax purposes. Company B is the sole member of Company E.

Effective b, Company D elected to be disregarded for federal income tax purposes under the provisions of § 301.7701-3(c) of the income tax regulations. As a result of that election, Company D was deemed to liquidate for federal income tax purposes. As a result, Company C ceases to be a partnership and becomes a single-member LLC, disregarded for federal income tax purposes. Company C is disregarded as of b, and is deemed to distribute the Plants and associated QDTs and NQDTs to Taxpayer through the disregarded entities Company A and Company B. Taxpayer thus becomes the owner of the Plants and their associated QDTs and NQDTs for federal tax purposes. Taxpayer represents that the deemed liquidation of Company D qualifies for non- recognition treatment under § 332 of the Internal Revenue Code and that Company C’s ceasing to be a partnership will be treated as a partnership termination within the 3 PLR-128721-08

meaning of § 708(b)(1)(A) and that the distribution of the Plants and associated QDTs and NQDTs is governed by § 731(a) (a nonrecognition provision).

Taxpayer has requested the following rulings:

Requested Ruling #1: Neither Taxpayer, Company C, nor the QDTs will recognize any gain or loss or take any income or deduction into account as a result of the deemed transfer of the QDTs from Company C to Taxpayer.

Requested Ruling #2: Immediately following the deemed transfer from Company C to Taxpayer, the QDTs will satisfy the requirements of § 468A and § 1.468A-6T of the temporary Income Tax Regulations.

Requested Ruling #3: The tax basis in each of their assets held by the QDTs will remain the same immediately before and after the deemed transfer from Company C to Taxpayer.

Requested Ruling #4: Following the deemed transfer, Taxpayer will be the eligible and electing taxpayer with respect to the QDTs and therefore Taxpayer may rely on § 1.468A-6T(e)(2) for a determination of the ruling amount in the year of transfer.

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, 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 4 PLR-128721-08

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;

(3) In connection with the disposition, either—
5
PLR-128721-08

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

Ruling #2: Pursuant to § 1.468A-6T, immediately following the deemed transfer from Company C to Taxpayer, the QDTs will satisfy the requirements of § 468A and § 1.468A-6T of the temporary Income Tax Regulations.

Ruling #3: Pursuant to § 1.468A-6T(c)(3), the tax basis in each of their assets held by the QDTs will remain the same immediately before and after the deemed transfer from Company C to Taxpayer.

Ruling #4: Pursuant to § 1.468A-6T, Taxpayer will be the eligible and electing taxpayer with respect to the QDTs following the deemed transfer from Company C and therefore Taxpayer may rely on § 1.468A-6T(e)(2) for a determination of the ruling amount in the year of transfer.

While it owns interests in the Plants, Taxpayer is eligible to maintain the qualified nuclear decommissioning funds. Under § 1.468A-6T(e)(2)(ii), for any tax year subsequent to the year of the deemed transfer, Taxpayer must request a revised schedule of ruling amounts in order to contribute additional amounts to the QDTs.

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 deemed liquidation of Company D or Company C’s ceasing to be a partnership as 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.

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