PLR 1039020: IRS approved the transfer of a qualified nuclear decommissioning fund

Plain-English summary

A parent company planned a series of reorganizations that would move ownership of a nuclear power plant and its qualified nuclear decommissioning fund to another subsidiary. The IRS concluded that the fund would remain qualified after the transfer. It also concluded that the transfer would not trigger gain, loss, income, or deduction for the fund or the entities involved, and that the basis of the fund assets would remain unchanged. The ruling was limited to the requested treatment under section 468A and did not address the tax consequences of the related mergers or contributions under other Code sections.

Ruling snapshot

• Question: Would a planned transfer of a qualified nuclear decommissioning fund preserve its status and tax basis?
• Outcome: Approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-5T and 1.468A-6T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201039020
Release Date: 10/1/2010
Index Number: 468A.04-02

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

-------------------------- Refer Reply To:
--------------------------------------- CC:PSI:B06 – PLR-149294-09
Date:
March 25, 2010

Legend:

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

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

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

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

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

Company E = ---------------------------------------------------

Subsidiary = -----------------------------------------

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

State B = --------

State C = --------------------

Plant = -------------------------------
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Location = -----------------------------------

Commission A = -------------------------------------------

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

$X = ---------------------

Director = ---------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------

Dear --------------------:

   This letter responds to your request for letter ruling dated October 27, 2009, as

modified by your letter dated January 20, 2010. You requested that we rule on certain
tax consequences, under section 468A of the Internal Revenue Code, of the transaction
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. Subsidiary, also organized in State A, is wholly-owned by
Taxpayer and is a member of the affiliated group. Company A, a corporation formed in
State A, is owned in part by Taxpayer and in part by a wholly-owned indirect subsidiary
of Taxpayer. Company A is also a member of the affiliated group. Company B, a
corporation organized under the laws of State C, is wholly-owned by Company A, is
also a member of the affiliated group.

    Company B is the owner of Plant. Plant is a nuclear power plant located at

Location. Company B is subject to the jurisdiction of Commission A with regard to the
operation and maintenance of Plant, and to the jurisdiction of Commission B with regard
to the rates charged to wholesale customers for electricity produced by Plant. Company
B maintains a nuclear decommissioning trust that is composed of a both a fund that is
qualified under § 468A (QDT) and a fund that is not qualified under § 468A (NQDT) with
respect to Plant.

   Taxpayer will undertake the following transactions. Taxpayer will cause those

subsidiaries that own a portion of Company A to convert to limited liability companies
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(LLC). These conversions will result in Taxpayer being the direct owner of all of the
stock of Company A. Company A will then convert, under the laws of State A, into an
LLC and will be disregarded for federal tax purposes. Company B will then be a wholly-
owned direct subsidiary of Taxpayer.

    Taxpayer will form Company C under the laws of State B. Company C is an LLC

under the laws of State B and will elect to be treated as a corporation for Federal tax
purposes. Company B will merge into Company C. Taxpayer represents that this will
be a tax-free reorganization under § 368(a)(1)(F). Taxpayer will form Company D,
wholly-owned subsidiary of Taxpayer, as an LLC under the laws of State A and
Company D will elect to be disregarded for Federal tax purposes. Taxpayer will
distribute its interest in Company D to Company C in a transaction that Taxpayer
represents will be a tax-free contribution of assets under § 351. By operation of the
laws of State B, Company C will contribute most of its assets, including ownership of
Plant, to Company D.

   Subsidiary will form a new subsidiary, Company E, under the laws of State C.

Subsidiary will contribute approximately $X to Company E in exchange for all of the
stock of Company E. Taxpayer represents that this contribution will be a tax-free
contribution of assets under § 351. Company D will merge into Company E, with
Company E surviving. Company E will tender to Company C approximately $X as
consideration for the merger. After these transactions, Company E will hold Plant, the
associated decommissioning liability, and the decommissioning trust, consisting of both
the QDT and the NQDT.

  Taxpayer has requested the following rulings:

  Requested Ruling #1: The QDT will not be disqualified by reason of the transfer
  of the QDT described above and will continue to be treated as satisfying the
  requirements of § 468A and § 1.468A-6T of the temporary Income Tax
  Regulations.

  Requested Ruling #2: The QDT will not recognize any gain or loss or otherwise
  take any income or deduction into account by reason of the transfer of the QDT
  described above.

  Requested Ruling #3: Pursuant to § 1.468A-6T(c), the basis of the QDT assets
  will be unchanged by the transfer of the QDT described above.

Law and Analysis:
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    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
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
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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—

         (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.
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    (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: The QDT will not be disqualified by reason of the transfer of the QDT
   described above and will continue to be treated as satisfying the requirements of
   § 468A and § 1.468A-6T.

   Ruling #2: Pursuant to 1.468A-6T(c), the QDT will not recognize any gain or loss
   or otherwise take any income or deduction into account by reason of the transfer
   of the QDT described above.

   Ruling #3: Pursuant to § 1.468A-6T(c), the basis of the QDT assets will be
   unchanged by the transfer of the QDT described above.

    While it owns a qualified interest in Plant, Company E is eligible to maintain the

qualified nuclear decommissioning fund.

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

concerning the Federal income tax consequences of the transaction described above.
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In particular, we express no opinion on the tax results of any of the mergers or
contributions 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. We are also sending a copy of this letter ruling to
Taxpayer’ authorized representatives and to the Director.

                                        Sincerely,



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