Nuclear plant sale preserved decommissioning fund treatment

Plain-English summary

A partnership owned a shut-down nuclear generating unit, its qualified nuclear decommissioning fund, and the associated decommissioning liability. It planned to place the unit and related assets into a disregarded entity and sell that entity to a buyer that would assume the liabilities. The IRS ruled that transferring the qualified fund would not disqualify it, trigger gain, loss, income, or a deduction for the fund or seller, or change the fund's basis in its assets. The seller's amount realized would include the decommissioning liability assumed by the buyer only to the extent the liability exceeded the qualified fund's value. Because the liability was fixed and reasonably determinable, and based on the representation that this would be the seller's only generating plant, economic performance would occur under Treasury Regulation Section 1.461-4(d)(5) to the extent the liability was included in amount realized. The IRS expressed no opinion on Section 351 or other consequences not specifically addressed.

Ruling snapshot

• Question: What tax consequences would follow when the seller transferred a nuclear unit, its qualified decommissioning fund, and its decommissioning liability to a buyer?
• Outcome: Approved: the fund retained tax-free carryover treatment, and the unfunded liability entered amount realized and satisfied economic performance as specified.
• Key authorities: IRC §§ 461, 468A, and 1001; Treas. Reg. §§ 1.461-4(d)(5) and 1.468A-6

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201825021                                              Third Party Communication: None
Release Date: 6/22/2018                                        Date of Communication: Not Applicable
Index Number: 468A.06-03
                                                               Person To Contact:
-----------------------                                        --------------------------, ID No. ----------------
----------------                                               -----------------
-----------------------------------------------------          Telephone Number:
-----------------------------------                            ----------------------
 ----------------------------                                  Refer Reply To:
                                                               CC:PSI:B06
                                                               PLR-131802-17

                                                               Date:
                                                               March 07, 2018


LEGEND:
Taxpayer/Seller                     =        -----------------------------------------------------
                                             (EIN: -----------------)
X                                   =        ------------------------------------------------------------------------
                                             (EIN: -----------------)
Y                                   =        ------------------------------------------------------------------------
                                             (EIN: -----------------)
Parent                              =        (EIN: -----------------)
State A                             =        --------------
State B                             =        ------------
Unit                                =        ------------------------------------------------------
Operator                            =        --------------------------------------------
State B Commission                  =        -----------------------------------------------
Buyer                               =        ----------------------------------------------------------
Date 1                              =        --------------------------
Date 2                              =        ------------------------
Date 3                              =        --------------------
Date 4                              =        ---------------------------
Year 1                              =        -------
Year 2                              =        -------
a                                   =        ----------------
b                                   =        --------------
c                                   =        ----------------
d                                   =        --------------
e                                   =        ----------------
Director                            =
PLR-131802-17



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

      This letter responds to your request for private letter ruling dated
September 27, 2017. You requested that we rule on certain tax consequences of the
proposed transaction discussed below.

      Taxpayer has represented that, at the time that the private letter ruling was
submitted, the facts were as follows:

      X, a State A limited liability company, is an indirectly wholly-owned subsidiary of
Parent. Y, a State A corporation is a direct, wholly-owned subsidiary of Parent. Both X
and Y are included in the consolidated federal income tax return of Parent.

       In Year 1, X, through its disregarded subsidiary Taxpayer, acquired the Unit and
the associated nuclear decommissioning trust (NDT) and assumed the nuclear
decommissioning liability (NDL) for the Unit. X was the tax owner of the Unit until Date
1, at which time Taxpayer issued an equity interest to Y, thereby converting Taxpayer to
a partnership for federal income tax purposes.

         Taxpayer is the owner of the Unit, which is operated by Operator, a corporate
affiliate of Taxpayer. With respect to the Unit, Taxpayer is subject to the jurisdiction of
the Federal Energy Regulatory Commission (“FERC”), the Nuclear Regulatory
Commission (“NRC”), and the State B Commission. Taxpayer shut down and defueled
the Unit in Year 2. The Unit began decommissioning on Date 2. As the owner,
Taxpayer is obligated to undertake the decommissioning of the Unit.

       Taxpayer is also the tax owner of the NDT that is dedicated to the
decommissioning of the Unit. The NDT currently holds assets in a trust that meets the
requirements for a qualified decommissioning fund within the meaning of § 468A of the
Internal Revenue Code (the Qualified Fund). As of Date 3, the assets of the NDT had a
fair market value of approximately $a that were held entirely in the Qualified Fund.
Taxpayer also maintains a trust (SRT) separate and apart from the NDT for the
restoration of the site as required by the State B Commission. This SRT is treated as a
Nonqualified Fund. As of Date 3, the fair market value of the SRT was approximately
$b.

      Prior to the closing date of the proposed transaction (on or about Date 4)
Taxpayer will transfer the Unit and associated assets such as land and improvements,
and the NDT to a limited liability company that will be a disregarded entity for federal
income tax purposes. The proposed transaction contemplates, subject to obtaining

                                             2
PLR-131802-17

regulatory approval, that all assets held by the SRT will be converted to cash and
contributed to the Qualified Fund prior to the closing date.

       On the closing date, Taxpayer will sell all membership interests in the
disregarded entity to the Buyer. For federal income tax purposes, Taxpayer will be
treated as conveying to the Buyer all assets and liabilities of the disregarded entity and
the Buyer will be treated as assuming the liabilities associated with the Unit, including
the NDL. On the closing date, the Qualified Fund is expected to hold assets valued at
approximately $c. On the same date, the NDL associated with the Unit is expected to
be approximately $d, which exceeds the fair market value of the assets held in the
Qualified Fund by $e. The transfer of the Unit NDT to the Buyer is referred to as the
Fund Transfer.

Rulings Requested:

1) The Qualified Fund will not be disqualified by reason of the Fund Transfer.

2) The Qualified Fund will not recognize gain or loss or otherwise take any income or
deduction into account by reason of the Fund Transfer.

3) Seller will not recognize gain or loss under § 468A or otherwise take any income or
deduction into account under § 468A by reason of the Fund Transfer.

4) The tax basis of the Qualified Fund in its assets will not change by reason of the
Fund Transfer.

5) The amount realized by Seller from the Proposed Transaction will include the
amount of liabilities assumed by Buyer, including the NDL associated with the Unit, but
not including the portion of the NDL funded by the Qualified Fund on the date of the
Proposed Transaction.

6) To the extent that it is included in the amount realized from the Proposed
Transaction, Seller will be entitled to treat the NDL as satisfying economic performance
under Treas. Reg. § 1.461-4(d)(5).

Law and Analysis

Issues 1-4:

       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” or a “Qualified Fund”).
                                             3
PLR-131802-17


      Section 1.468A-1(b)(4) of the Income Tax regulations provides that a “qualified
nuclear decommissioning fund” is a fund that satisfies the requirements of § 1.468A-5.

       Section 1.468A-5(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-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, § 1.468A-6(b) provides that § 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

             (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
PLR-131802-17

      (4) The transferee continues to satisfy the requirements of § 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
§ 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 § 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 § 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 § 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
                                            5
PLR-131802-17

of the regulations if the Service determines that such treatment is necessary or
appropriate to carry out the purposes of § 468A.

Issue 5

         Section 1001(b) provides that the amount realized from the sale or other
disposition 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 the
amount realized from the sale or other disposition of property includes the amount of
liabilities from which the transferor is discharged as a result of the sale or disposition.

        The decommissioning liabilities from which Taxpayer will be relieved are fixed
and determinable for purposes of § 461 and, as discussed below under Issue 6, are
described in § 1.461-4(d)(5). These amounts are included in the amount realized. As
an owner of a nuclear-powered plant, Taxpayer is required by law to provide for
eventual decommissioning, and the amount of Taxpayer’s liability can be determined
with reasonable accuracy. Accordingly, the amount of Taxpayer’s nuclear
decommissioning liability that is assumed by Buyer in excess of the fair market value of
the assets in the Qualified Fund on the date of the transfer will be included in
Taxpayer’s amount realized and taken into account in computing taxable income in the
year of the proposed transaction. As discussed above, the proposed transaction will not
result in the disqualification of the Qualified Fund, and Taxpayer 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 from Taxpayer to Buyer will not be a
taxable transfer, the amount of the liabilities assumed by Buyer that are included in
Taxpayer's amount realized will not include the portion of the liability to decommission
the Unit that is equal to the fair market value of the assets in the Qualified Fund on the
date of the transfer.

Issue 6

         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

                                              6
PLR-131802-17

§ 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 Taxpayer. Here, Taxpayer, as an owner of a 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). Taxpayer 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 Taxpayer became subject to the
decommissioning requirements associated with the Unit’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. Rpt. 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 be
determined with reasonable accuracy. See § 1.461-1(a)(2)(ii). This prong is also
satisfied. In the instant case, the amount of Taxpayer’s decommissioning liability has
been determined by experts in the nuclear decommissioning industry. The estimate has
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 a
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:

1) The Qualified Fund will not be disqualified by reason of the Fund Transfer.



                                             7
PLR-131802-17

2) The Qualified Fund will not recognize gain or loss or otherwise take any income or
deduction into account by reason of the Fund Transfer.

3) Taxpayer/Seller will not recognize gain or loss under § 468A or otherwise take any
income or deduction into account under § 468A by reason of the Fund Transfer.

4) The tax basis of the Qualified Fund in its assets will not change by reason of the
Fund Transfer.

5) The amount realized by Taxpayer from the proposed transaction will include the
amount of liabilities assumed by Buyer, including the NDL associated with the Unit, but
not including the portion of the NDL funded by the Qualified Fund on the date of the
proposed transaction.

6) Based on Taxpayer’s representation that the Unit will be Taxpayer’s only electricity
generation plant at the time of the proposed transaction, Taxpayer will be entitled to
treat the NDL as satisfying economic performance under Treas. Reg. § 1.461-4(d)(5) to
the extent that Taxpayer includes the NDL in the amount realized from the proposed
transaction.

         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 Taxpayer.

       This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
of the Code provides it may not be used or cited as precedent. In accordance with the
power of attorney on file with this office, a copy of this letter is being sent to your
authorized representatives. We are also sending a copy of this letter ruling to the
Director.

                                             Sincerely,



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




cc:

                                            8