Nuclear decommissioning funds retain status through plant transfers

Plain-English summary

Two utility companies proposed to transfer nuclear plants, related liabilities, and qualified nuclear decommissioning funds to a buyer outside their consolidated group. The IRS ruled that the transfers would not disqualify the funds, which would continue satisfying section 468A, and that neither the parties nor the funds would recognize gain, loss, income, or deductions merely from transferring the qualified funds. The funds' asset bases would carry over unchanged. Each seller's amount realized would include the decommissioning liability assumed by the buyer, except for the portion funded by the transferred qualified fund on the transfer date. Because the liabilities were fixed and reasonably estimable, the sellers could treat the included liabilities as satisfying economic performance under Treasury Regulation section 1.461-4(d)(5). The IRS expressed no opinion on whether section 351 applied to the broader transaction.

Ruling snapshot

• Question: What are the section 468A, amount-realized, basis, and economic-performance consequences of transferring two nuclear plants and their decommissioning funds?
• Outcome: Approved, all eight requested rulings were granted.
• Key authorities: IRC §§ 351, 357(c), 461, 468A, and 1001; Treas. Reg. §§ 1.461-4 and 1.468A-5 through 1.468A-8

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201521005
Release Date: 5/22/2015
Index Number: 468A.04-02

--------------------------------- Person To Contact:
------------------------------------------------------------ ---------------------- ID No. ----------------
------------- Telephone Number:
-------------------------- --------------------
------------------------- Refer Reply To:
-------------------------------------- CC:PSI:B06 – PLR-127639-14
PLR-127764-14
Date:
January 08, 2015

Legend:

Taxpayer = -----------------------------
-----------------------
Buyer = --------------------------------------------------------

Seller 1 = ------------------------------------

Seller 2 = ----------------------------------

State A = -------------
State B = --------
State C = ------------
Plant A = ------------------------
Plant B = ---------------
Location A = ---------------------------------
Location B = -------------------
Date A = ---------------------
A = -----------------
B = -----------------
C = -----------------
D = -----------------
E = -----------------
F = --------------------
G = -----------------
X = -------
Y = --------
Z = ------
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Director = ---------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------

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

   This letter responds to your request for private letter ruling dated

July 17, 2014. You requested that we rule on certain tax consequences, under section
468A of the Internal Revenue Code, of the restructuring 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 common parent of an

affiliated group of corporations filing a consolidated federal income tax return. It uses
an accrual method of accounting.

     Seller 1, a limited liability company organized under the laws of State C, is a

member of the affiliated group. Seller 1 has elected to be treated as a corporation for
federal tax purposes. It is a regulated public utility engaged in the generation and
purchase of electricity, and the distribution and transmission of such electricity, to both
retail and wholesale customers. It owns X percent of Plant A, a nuclear-powered
electric generating plant. It maintains a nuclear decommissioning trust that is
irrevocably committed to the decommissioning of the facility. The nuclear
decommissioning trust includes a fund that meets the requirements of § 468A and
Treas. Regs. §§ 1.468A-1 through 1.468A-9 (the Plant A Qualified Fund). As of Date A,
the Plant A Qualified Fund was approximately $A. The nonqualified decommissioning
funds totaled approximately $B. As of Date A, the estimated nuclear decommissioning
liability was $C, which exceeded the fair market value of the assets held in the Plant A
Qualified Fund and the nonqualified decommissioning funds by approximately $D.

  Seller 2 is also a member of the affiliated group. It is a regulated public utility

engaged in the generation and purchase of electricity, and the distribution and
transmission of such electricity, to both retail and wholesale customers. It owns Y
percent and leases Z percent of Plant B, a nuclear-powered electric generating plant. It
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maintains a nuclear decommissioning trust that is irrevocably committed to the
decommissioning of the facility. The nuclear decommissioning trust includes a fund that
meets the requirements of § 468A and Treas. Regs. § 1.468A-1 through 1.468A-9 (the
Plant B Qualified Fund). As of Date A, the Plant B Qualified Fund was approximately
$E. There is no nonqualified decommissioning fund. As of Date A, the estimated
nuclear decommissioning liability was $F, which exceeded the fair market value of the
assets held in the Plant B Qualified Fund by approximately $G.

     The proposed transaction involves Seller 1 and Seller 2 each transferring their

assets and liabilities (including the nuclear-powered electric generating plants and the
associated nuclear decommissioning trusts) to Buyer in exchange for a member
interest. Buyer is currently a subsidiary of Taxpayer, but it is not a member of the
affiliated group because it is subject to § 1504(a)(3). Buyer will sell voting preferred
member interests to the public, and these preferred member interests will be entitled to
more than 20% of the voting power of all outstanding membership interests. Buyer will
not be a member of the Taxpayer affiliated group because Taxpayer and its affiliates will
not own the requisite percentage of voting power pursuant to § 1504(a)(1).

     Seller 1 represents that its liabilities (including the nuclear decommissioning

liability) that are assumed by Buyer will exceed the basis of all of the property that it will
transfer to Buyer in the proposed transaction by an amount at least equal to the nuclear
decommissioning liability. Seller 2 represents that its liabilities (including the nuclear
decommissioning liability) that are assumed by Buyer will exceed the basis of all of the
property that it will transfer to Buyer in the proposed transaction by an amount at least
equal to the nuclear decommissioning liability. The taxpayers will treat the proposed
transfers of their assets and liabilities (including the nuclear-powered electric generating
plants and the associated nuclear decommissioning trusts) as taxable transactions,
regardless of whether they are governed by § 351. If § 351 does not apply, they will
recognize gain under § 1001. If § 351 does apply, the taxpayers will recognize gain
under § 357(c) because the transferors are being relieved of liabilities in excess of the
adjusted basis of the property transferred.

   Taxpayer has requested the following rulings:

   Requested Ruling #1: The Plant A Qualified Fund Will not be disqualified by the
   transfer from Seller 1 to Buyer and the Plant B Qualified Fund will not be
   disqualified by the Seller 2 transfer to Buyer.

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  Requested Ruling #2: The Plant A Qualified Fund and the Plant B Qualified
  Fund will each continue to be treated as satisfying the requirements of § 468A
  and § 1.468A-5 following the transfers of the qualified funds to Buyer.

  Requested Ruling #3: The Plant A Qualified Fund and the Plant B Qualified
  Fund will not recognize any gain or loss or otherwise take any income or
  deduction into account by reason of the transfers of the qualified funds to Buyer.

  Requested Ruling #4: Seller 1, Seller 2, and Buyer will not recognize gain or loss
  under § 468A or otherwise take any income or deduction into account under §
  468A by reason of transfers of the qualified funds to Buyer.

  Requested Ruling #5: Pursuant to § 1.468A-6(c), the tax basis of the assets of
  the qualified funds will not be changed by the transfers of the qualified funds to
  Buyer.

  Requested Ruling #6: The amount realized by Seller 1 from the transfer of its
  assets and liabilities in the proposed transaction will include the nuclear
  decommissioning liability associated with the Plant A, but not including the
  portion of the nuclear decommissioning liability funded by the Plant A Qualified
  Fund on the date of the transfer.

  Requested Ruling #7: The amount realized by Seller 2 from the transfer of its
  assets and liabilities in the proposed transaction will include the nuclear
  decommissioning liability associated with Plant B, but not including the portion of
  the nuclear decommissioning liability funded by the Plant B Qualified Fund on the
  date of the transfer.

  Requested Ruling #8: Seller 1 and Seller 2 will each be entitled to treat their
  respective nuclear decommissioning liability, to the extent that it is included in
  amount realized, as satisfying economic performance under Treas. Reg. § 1.461-
  4(d)(5).

Law and Analysis

Issues 1-5:

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

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

   Section 1.468A-5(a) of the Income Tax regulations 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-5(a)(1)(iii) provides that an electing taxpayer can establish and

maintain only one qualified nuclear decommissioning fund for each nuclear power plant.
If a nuclear power plant is subject to the ratemaking jurisdiction of two or more public
utility commissions and any such public utility commission requires a separate fund to
be maintained for the benefit of ratepayers whose rates are established or approved by
the public utility commission, the separate funds maintained for such plant (whether or
not established and maintained pursuant to a single trust agreement) shall be
considered a single nuclear decommissioning fund.

   Section 1.468A-6 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. Specifically, section 1.468A-6(b) provides that section
1.468A-6 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 (all such assets if the transferee acquires the transferor’s entire
         qualifying interest in the fund) is transferred to a fund of the transferee; or

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          (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 section 1.468A-

5(a)(iii), which permits an electing taxpayer to maintain only one qualified nuclear
decommissioning fund for each plant.

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

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

    (1)(i) 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.

   (ii) Notwithstanding § 1.468A-6(c)(1)(i), if the transferor has made a special

transfer under § 1.468A-8 prior to the transfer of the fund or fund assets, any deduction
with respect to that special transfer allowable under § 468A(f)(2) for a taxable year
ending after the date of the transfer of the fund or fund assets is allowed under
§ 468A(f)(2)(C) for the taxable year that includes the date of the transfer of the fund or
fund assets.

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

   Under section 1.468A-6(f), 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.

Issues 6 and 7

    Section 1001(b) provides that a seller's amount realized from the sale of property

is the sum of any money received plus the fair market value of the property (other than
money) received. Section 1.1001-2(a)(1) provides that a seller's amount realized from
the sale of property includes the amount of liabilities from which the seller is discharged
as a result of the sale. This amount may include debt and non-debt liabilities. See
Fisher Co. v. Commissioner, 84 T.C. 1319, 1345-47 (1985) (assumption of lessee's
repair liability was part of amount realized on sale of leasehold).

    The decommissioning liabilities from which each seller will be relieved are fixed

and determinable for purposes of § 461, as discussed below under Issue 8. As an
owner and operator of a nuclear plant, each seller is required by law to provide for
eventual decommissioning, and the amount of each seller’s liability can be determined
with reasonable accuracy. Accordingly, the amount of each seller’s nuclear
decommissioning liability that is assumed by Buyer in excess of the fair market value of
the assets in each qualified fund on the date of the transfer will be included in each
seller’s amount realized and taken into account in computing taxable income in the year
of the sale. As discussed above, the proposed transaction will not result in the
disqualification of either qualified fund and each seller will not have any gain or income
as a result of the transfer of its interests in the assets of the qualified fund to Buyer.
Because the transfer of the qualified fund by each seller to Buyer will not be a taxable
transfer, the amount of the liabilities assumed by Buyer that are included in each seller's
amount realized will not include the portion of the liability to decommission the plant that
is equal to the fair market value of the assets in the qualified fund on the date of the
transfer.

Issue 8

     Section 1.446-1(c)(1)(ii)(A) provides that under an accrual method of accounting,

a liability is incurred and generally taken into account for federal income tax purposes in
the year in which all the events have occurred that establish the fact of the liability, the
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amount of the liability can be determined with reasonable accuracy, and economic
performance has occurred with respect to the liability.

   Section 461(h)(1) provides that, in determining whether an amount has been

incurred with respect to any item during any taxable year, the all events test shall not be
treated as met any earlier than when economic performance with respect to such item
occurs. See also § 1.461-4(a)(1). Section 461(h)(4) provides that the all events test is
met with respect to any item if all events have occurred that determine the fact of liability
and the amount of such liability can be determined with reasonable accuracy.

   Section 461(h)(2)(B) provides that in the case of a liability that requires the

taxpayer to provide services, economic performance occurs as the taxpayer provides
the services. Section 1.461-4(d)(4)(i) provides that, except as otherwise provided in §
1.461-4(d)(5), if a liability requires the taxpayer to provide services to another person,
economic performance occurs as the taxpayer incurs costs in connection with the
satisfaction of the liability. Section 1.461-4(d)(5) provides an exception to the general
economic performance rule for services where the taxpayer sells or exchanges a trade
or business. Where the purchaser expressly assumes a liability arising out of the
taxpayer's trade or business that the taxpayer but for the economic performance
requirement would have been entitled to incur as of the date of the sale, economic
performance with respect to that liability occurs as the amount of the liability is properly
included in the amount realized on the transaction by the taxpayer.

   The first prong of the all events test requires that the fact of the liability be

established at the time of the deduction. This prong of the all events test is satisfied in
the instant case for each seller. Here, each seller, as an owner and operator of a
nuclear plant, was required to obtain an operating license before commercial operations
begun. 10 C.F.R. § 50.10; see also 10 C.F.R. § 50.33(k)(1). Each seller also has an
obligation to seek license termination. 10 C.F.R. §§ 50.82(a)(9) and (10). The license
termination process provides that a licensee shall take actions necessary to
decommission and decontaminate the facility. 10 C.F.R. §§ 50.51(b)(1) and 50.54(bb);
see also 10 C.F.R. § 72.30. The fact of the obligation arose at the time each seller
became subject to the decommissioning requirements associated with the plant's
license. Moreover, Congress recognized the existence of the decommissioning liability
when, in 1984, it enacted § 461(h) and § 468A, noting that "[g]enerally, under Federal
and State laws, utilities that operate nuclear power plants are obligated to
decommission the plants at the end of their useful lives." H.R. Conf. Rep. No. 98-861,
877 (1984). See also S. Prt. No. 169, Vol. 1, 98th Cong., 2d Sess. 277 (1984).
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    The second prong of the all events test requires that the amount of the liability

can be determined with reasonable accuracy. See § 1.461-1(a)(2)(ii). This prong is
also satisfied. In the instant case, the amount of each seller’s decommissioning liability
has been determined by experts in the nuclear decommissioning industry. Their
estimates have been accepted by the Nuclear Regulatory Commission, which is
charged with ensuring that sufficient funds are available to decommission the plants,
and the State C Public Service Commission, which ensures that rate payers are not
overcharged for their share of decommissioning costs. In addition, there is also support
in the Internal Revenue Code for finding that the amount of the decommissioning liability
can be determined with reasonable accuracy at the time of sale. Section 468A(d)
generally permits a current deduction for a "ruling amount," based on estimated future
decommissioning expenses. To the extent the decommissioning costs are sufficiently
determinable to entitle a utility to a deduction under § 468A, it is reasonable to conclude
that the costs must also be sufficiently determinable to satisfy the second prong of the
all events test.

Conclusions:

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

conclusions:

   Ruling #1: The Plant A Qualified Fund Will not be disqualified by the transfer
   from Seller 1 to Buyer and the Plant B Qualified Fund will not be disqualified by
   the Seller 2 transfer to Buyer.

   Ruling #2: The Plant A Qualified Fund and the Plant B Qualified Fund will each
   continue to be treated as satisfying the requirements of § 468A and § 1.468A-5
   following the transfers of the qualified funds to Buyer.

   Ruling #3: The Plant A Qualified Fund and the Plant B Qualified Fund will not
   recognize any gain or loss or otherwise take any income or deduction into
   account by reason of the transfers of the qualified funds to Buyer.

   Ruling #4: Seller 1, Seller 2, and Buyer will not recognize gain or loss under §
   468A or otherwise take any income or deduction into account under § 468A by
   reason of transfers of the qualified funds to Buyer.

   Ruling #5: Pursuant to § 1.468A-6(c), the tax basis of the assets of the qualified
   funds will not be changed by the transfers of the qualified funds to Buyer.

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   Ruling #6: The amount realized by Seller 1 from the transfer of its assets and
   liabilities in the proposed transaction will include the nuclear decommissioning
   liability associated with the Plant A, but not including the portion of the nuclear
   decommissioning liability funded by the Plant A Qualified Fund on the date of the
   transfer.

   Ruling #7: The amount realized by Seller 2 from the transfer of its assets and
   liabilities in the proposed transaction will include the nuclear decommissioning
   liability associated with Plant B, but not including the portion of the nuclear
   decommissioning liability funded by the Plant B Qualified Fund on the date of the
   transfer.

   Ruling #8: Seller 1 and Seller 2 will each be entitled to treat their respective
   nuclear decommissioning liability, to the extent that it is included in amount
   realized, as satisfying economic performance under Treas. Reg. § 1.461-4(d)(5).

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

concerning the Federal income tax consequences of the transaction described above.
Specifically, we express no opinion on the tax consequences of the transaction under
§ 351. Also, except as specifically determined above, we express no opinion on the
federal income tax consequences to Buyer resulting from the acquisition of assets and
liabilities (including the nuclear-powered electric generating plants and the nuclear
decommissioning liabilities) of Seller 1 and Seller 2.

  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 addition, a copy of this letter ruling is being sent to the Director.

                                        Sincerely,



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