Nuclear plant transfers preserve qualified decommissioning funds

Plain-English summary

Two utility subsidiaries planned to transfer nuclear plants, related liabilities, and qualified decommissioning funds to another entity that was not in their consolidated group. The IRS ruled that the transfers would not disqualify the funds, trigger gain or loss under section 468A, or change the basis of fund assets. Each seller's amount realized would include the assumed decommissioning liability only to the extent it exceeded the fair market value of the related qualified fund. For that included liability, economic performance would occur when the buyer assumed it and it was properly included in the seller's amount realized.

Ruling snapshot

• Question: What are the section 468A, amount-realized, and economic-performance consequences of transferring nuclear plants and their decommissioning funds?
• Outcome: Approved on all eight requested rulings
• Key authorities: IRC §§ 461, 468A, 1001; Treas. Reg. §§ 1.461-4(d)(5), 1.468A-5, 1.468A-6, 1.1001-2

Full text (IRS public release)

Number: 201616005
Release Date: 4/15/2016
Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224


Index Number: 468A.04-02

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                                                               Refer Reply To:
                                                               CC:PSI:B06 – PLR-134152-15
                                                                            PLR-134153-15
                                                                            PLR-137641-15

                                                               January 13, 2016



Legend:


Taxpayer                   =         -----------------------------
                                    -------------------------
Seller 1                   =         --------------------------------
-------------------------------------------------------------
Seller 2                   =         --------------------------------------------
-------------------------------------------------------------
Buyer                      =         -----------------------------------------------------
--------------------------------------------------------------------------------------------------------
-------------------------------------------------------------
State A                    =        --------------
State B                    =        --------------
State C                    =        ---------
Plant A-1                  =        ---------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Plant A-2                  =        ---------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Plant B                    =        -------------------------------------
Location A                 =        -------------------------------
Location B                 =        ---------------------------------
Date                       =        ----------------------------
$A                         =        -------------------
$B                         =        ----------------------
$C                         =        -------------------
$D                         =        -------------------

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$E                        =        ----------------------
$F                        =        -------------------
X%                        =        -----------
Y%                        =        -----------
Z%                        =        ------

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




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

       This letter responds to your request for private letter ruling dated
October 6, 2015. 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 State A corporation, 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 State B corporation, is a wholly-owned subsidiary of Taxpayer and a
member of the affiliated group. It is a regulated public utility engaged in the generation
and purchase of electricity, and the distribution, transmission, and retail sale of such
electricity. It is the sole owner of Plant A-1 and Plant A-2, both of which are nuclear-
powered electric generating plants located at Location A. Seller 1 maintains a separate
nuclear decommissioning trust for each of these nuclear plants. Each trust is
irrevocably committed to the decommissioning of the facility. The nuclear
decommissioning trusts each include a fund that meets the requirements of § 468A and
Treas. Regs. §§ 1.468A-1 through 1.468A-9 (the Plant A-1 and Plant A-2 Qualified
Funds). As of Date, the Plant A-1 and Plant A-2 Qualified Funds maintained with
respect to these nuclear plants totaled approximately $A. There is no nonqualified
decommissioning fund. As of Date, the total estimated nuclear decommissioning

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liability for the Plant A-1 and Plant A-2 is $B, which exceeded the fair market value of
the assets held in the Plant A-1 and Plant A-2 Qualified Funds by approximately $C.

       Seller 2, a State B corporation, is also a wholly-owned subsidiary of Taxpayer
and a member of the affiliated group. It is a single-asset base-load electric generator. It
owns X% and leases Y% of Plant B, a nuclear-powered electric generating plant located
at Location B. The remaining Z% is owned by an entity unrelated to Taxpayer. Under
the lease agreements, Seller 2 is fully and primarily liable for decommissioning the
leased interest. 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 B Qualified Fund). As of Date, the Plant B Qualified Fund
was approximately $D. There is no nonqualified decommissioning fund. As of Date,
the estimated nuclear decommissioning liability was $E, which exceeded the fair market
value of the assets held in the Plant B Qualified Fund by approximately $F.

         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 Taxpayer does not own sufficient shares of Buyer to satisfy the
ownership requirements of § 1504. Buyer has sold voting preferred member interests to
the public, and these preferred member interests are 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.

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     Taxpayer has requested the following rulings:

     Requested Ruling #1: The Plant A-1 and Plant A-2 Qualified Funds 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.

     Requested Ruling #2: The Plant A-1 Qualified Fund, the Plant A-2 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-1 Qualified Fund, the Plant A-2 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 liabilities associated, respectively, with Plant A-1 and Plant A-
     2, but not including the portion of the nuclear decommissioning liabilities funded
     by the Plant A-1 and Plant A-2 Qualified Funds 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

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      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").

        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--

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              (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

              (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.

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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-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.

        The decommissioning liabilities from which each seller will be relieved are fixed
and determinable for purposes of § 461 and, as discussed below under Issue 8, are
described in § 1.461-4(d)(5). These amounts are included in amount realized. See §
1.461-4(d)(5). As an owner and operator of a nuclear-powered 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 the qualified funds 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

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will not result in the disqualification of the qualified funds 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
funds to Buyer. Because the transfer of the qualified funds 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
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

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nuclear-powered 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).

       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. 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-1 and Plant A-2 Qualified Funds 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-1 Qualified Fund, the Plant A-2 Qualified Fund, and the
      Plant B Qualified Fund will each continue to be treated as satisfying the

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      requirements of § 468A and § 1.468A-5 following the transfers of the qualified
      funds to Buyer.

      Ruling #3: The Plant A-1 Qualified Fund, the Plant A-2 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.

      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
      liabilities associated, respectively, with Plant A-1 and Plant A-2, but not including
      the portion of the nuclear decommissioning liabilities funded by the Plant A-1 and
      Plant A-2 Qualified Funds 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. In addition, the request notes, without requesting any rulings on this matter, that
Seller 1 and Seller 2 may reincorporate in another state to facilitate the transfers
discussed above and that Taxpayer expects such reincorporation to be a reorganization
described in § 368(a)(1)(F). We express no opinion on any aspect or tax consequence
of such reincorporations, if undertaken. 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.

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      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

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