Nuclear decommissioning fund transfer qualified for tax-free treatment

Plain-English summary

A seller agreed to transfer a nuclear generating unit and its qualified and nonqualified decommissioning fund assets to a buyer that would assume the decommissioning liabilities. The IRS ruled that the buyer's fund would qualify under section 468A and that the transaction would not disqualify the seller's fund. Neither parent nor either qualified fund would recognize gain, loss, income, or a deduction from the qualified-fund asset transfer. The buyer's qualified fund would take a carryover basis in the transferred assets. All rulings were conditioned on approval of the transaction by the responsible regulator.

Ruling snapshot

• Question: What are the section 468A consequences of transferring a nuclear unit and its qualified decommissioning fund assets to a buyer?
• Outcome: approved, the funds retained qualified status, the transfer was nonrecognition, and asset basis carried over
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-5, and 1.468A-6

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201937006                                              Third Party Communication: None
Release Date: 9/13/2019                                        Date of Communication: Not Applicable
Index Number: 468A.00-00
                                                               Person To Contact:
-------------------------                                      --------------------, ID No. ------------------
-----------------------------------------------------          Telephone Number:
-----------------------------------                            ----------------------
------------------------                                       Refer Reply To:
--------------------------------------                         CC:PSI:B06
                                                               PLR-126721-18
                                                               Date:
                                                               June 03, 2019
In Re: Transfer of Assets of a Qualified Fund
Under Section 468A




Legend

Date 1                              =        ---------------------------
Seller Parent                       =        ----------------------------------------------------
Seller                              =        -----------------------------------------------
Unit                                =        --------------------------------------------------------
Buyer Parent                        =        ----------------------------------------------------
Buyer                               =        ------------------------------------------------------------
Buyer Affiliate                     =        -----------------------------------------------------------
Joint Venture Partnership           =        ------------------------------------------------------------------------
State 1                             =        -------------------
State 2                             =        ----------
State 3                             =        -----------------
State 4                             =        ----------
Regulator                           =        --------------------------------------------
Date 2                              =        ------------------
Date 3                              =        -----------------------
Date 4                              =        -------------------
Date 5                              =        -------
Date 6                              =        -------
Date 7                              =        -------------------
a                                   =        -------------------
b                                   =        -------------------

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

      This letter responds to your request for private letter ruling dated Date 1. You
requested rulings regarding the tax consequences under section 468A of the Internal
PLR-126721-18                                           2

Revenue Code and Section 1.468A-6 of the Treasury Regulations to the transfer of
assets of Seller Parent’s qualified nuclear decommissioning fund.

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

       Seller Parent is incorporated in State 1 and acts as a holding company. Seller
Parent’s headquarters are in State 2. Seller Parent and its subsidiaries and affiliates,
with which it files a consolidated federal income tax return, operate on a calendar year
basis and use the accrual method of accounting.

         Seller Parent and its subsidiaries and affiliates engage in two business
segments: ----------------------and --------------------------------------------------------------------------
-------. Seller Parent engages in -------------------------------------------------------------------------
----------------.

        Among other assets, Seller owns Unit, which is located in State 3. The Unit is a
nuclear electric generating station that consists of a reactor capable of generating
electrical power. The operating license for the Unit is issued by Regulator and expires
on Date 2. The Unit was scheduled to cease electricity production on Date 3.

      On Date 4, Seller Parent filed a report with Regulator that detailed plans for
decommissioning the Unit. Seller Parent selected a method of decommissioning with a
planned license termination in Date 5 and site restoration on Date 6.

       Seller Parent maintains two separate nuclear decommissioning trust funds for the
Unit: one that meets the requirements for a qualified fund within the meaning of Section
468A, and one that does not meet the requirements of Section 468A. As of Date 7, the
value of the qualified decommissioning fund was a.

         Buyer Parent is a----------------------with headquarters in State 4. Buyer Parent
files its federal income tax return on a calendar year basis using the accrual method of
accounting.

         Buyer Parent is a -----------------------------------------company that, with its affiliates,
specializes in --------------------------------------------------------------------------------------------------
------------------.

       Buyer seeks to acquire the Unit, and through its indirectly wholly-owned affiliate,
Buyer Affiliate, and a joint venture with Joint Venture Partnership, decommission the
Unit. Buyer Parent would use a different decommissioning method than the one Seller
Parent used in its report to Regulator, and Buyer Parent’s method would accelerate the
decommissioning time by approximately ----- years.
PLR-126721-18                                  3

       Seller Parent and Buyer Parent entered into an Asset Purchase and Sale
Agreement, dated Date 7 (“Purchase Agreement”) regarding the sale of the Unit and
transfer of the assets of the Seller Parent qualified and nonqualified funds. In addition,
Seller Parent and Buyer Parent have entered into other ancillary agreements. In
relevant part, Seller Parent agrees to transfer all rights, title, and interest in the Unit and
assets in the Seller Parent’s qualified and nonqualified decommissioning funds to Buyer
Parent in exchange for b, and Buyer Parent agrees to generally assume all liabilities
with respect to the ownership of the Unit, including the decommissioning of the Unit.
Subsequent to the execution of the purchase agreement, Seller Parent and Buyer
Parent filed the application with the Regulator.

       In connection with this transaction, Seller Parent and Buyer Parent represent that
Seller Parent, Buyer, and other relevant affiliates filed an application with Regulator
requesting approval for the transfer of the Unit’s operating license from Seller Parent to
Buyer Parent and for the transfer of assets from Seller Parent’s qualified and
nonqualified decommissioning funds to Buyer Parent’s qualified and nonqualified
decommissioning funds. The application provided information with respect to the
purpose of the transaction necessitating the license transfer and the technical and
financial qualifications of Buyer Affiliate and Buyer for being licensees under the license.
A Regulator license may only be transferred with written consent of the Regulator.
Approval by the Regulator is a condition to closing the transaction.

       Prior to the closing date of the transaction, Buyer Parent represented that it will
establish two separate nuclear decommissioning trust funds for the Unit: one that meets
the requirements for a qualified fund within the meaning of Section 468A, and one that
does not meet the requirements of Section 468A.

      If approved, Seller Parent represents that immediately before the closing of the
transaction:

        1. Seller Parent will have a qualifying interest in the Unit within the meaning of
          Section 1.468A-1(b)(2);
        2. Seller Parent will have maintained its qualified decommissioning fund as a
          trust under applicable state law for the exclusive purpose of providing funds
          for decommissioning;
        3. Seller Parent will have maintained its qualified decommissioning fund as a
          separate and the sole qualified fund for the Unit;
        4. Seller Parent will not have made any contributions to its qualified
          decommissioning fund other than those for which a deduction will be allowed
          under Section 468A and the regulations thereunder;
        5. The assets of the Seller Parent’s qualified decommissioning fund will have
          been used exclusively to: (a) satisfy, in whole or in part, liability for
          decommissioning costs of the Unit; (b) pay administrative costs and other
          incidental expenses of the Seller Parent’s qualified decommissioning fund;
PLR-126721-18                               4

         and (c) make investments, to the extent the assets of the Seller Parent’s
         qualified decommissioning fund were not needed to satisfy the purposes of
         (a) and (b) above;
        6. The trust agreement for the Seller Parent’s qualified decommissioning fund
         provides that the assets in the Seller Parent’s qualified decommissioning fund
         must be used as authorized in Section 468A and the regulations thereunder,
         including the prohibition against self-dealing, and that the agreement cannot
         be amended to violate such provisions; and
        7. Seller Parent’s qualified decommissioning fund did not engage in self-dealing.

       Provided Regulator approves the transfer of the Unit’s operating license and
transfer of assets of the Seller Parent qualified and nonqualified decommissioning funds
to the corresponding Buyer Parent qualified and nonqualified decommissioning funds,
Buyer Parent represents that immediately after the closing of the transaction:

        1. Buyer Parent will maintain its qualified decommissioning fund as a trust under
         applicable state law for the exclusive purpose of providing funds for
         decommissioning;
        2. Buyer Parent will maintain its qualified decommissioning fund as a separate
         and the sole qualified fund for the Unit;
        3. Buyer Parent will not make any contributions to its qualified decommissioning
         fund other than those for which a deduction is allowed under Section 468A
         and the regulations thereunder;
        4. The assets of the Buyer Parent’s qualified decommissioning fund will be used
         exclusively to: (a) satisfy, in whole or in part, liability for decommissioning
         costs of the Unit; (b) pay administrative costs and other incidental expenses
         of the Buyer Parent’s qualified decommissioning fund; and (c) make
         investments, to the extent the assets of the Buyer Parent’s qualified
         decommissioning fund were not needed to satisfy the purposes of (a) and (b)
         above; and
        5. The trust agreement for the Buyer Parent’s qualified decommissioning fund
         will provide that the assets in the Buyer Parent’s qualified decommissioning
         fund must be used as authorized in Section 468A and the regulations
         thereunder, including the prohibition against self-dealing, and that the
         agreement cannot be amended to violate such provisions.

Requested Rulings

        Subject to the approval from Regulator, Seller Parent and Buyer Parent request
the following rulings, effective as of the closing of the transaction:

    1. Whether Buyer Parent’s qualified decommissioning fund will be treated as a
      qualified fund that satisfies the requirements of Section 468A and Section
      1.468A-5;
PLR-126721-18                                5

    2. Whether Seller Parent’s qualified decommissioning fund will be disqualified by
      reason of the transaction;
    3. Whether Seller Parent’s qualified decommissioning fund will recognize gain or
      loss or otherwise take any income or deduction into account as a result of the
      transfer of assets from Seller Parent’s qualified decommissioning fund to the
      Buyer Parent’s qualified decommissioning fund as part of the transaction;
    4. Whether Buyer Parent’s qualified decommissioning fund will recognize any gain
      or loss or otherwise take any income or deduction into account as a result of the
      transfer of assets from Seller Parent’s qualified decommissioning fund to the
      Buyer Parent’s qualified decommissioning fund as part of the transaction;
    5. Whether either Seller Parent or Buyer Parent will be required to recognize gain or
      loss or otherwise take any income or deduction into account as a result of the
      transfer of assets from Seller Parent’s qualified decommissioning fund to the
      Buyer Parent’s qualified decommissioning fund as part of the transaction; and
    6. Whether, pursuant to Section 1.468A-6(c)(3), after the transaction, Buyer
      Parent’s qualified decommissioning fund will have a tax basis in each of the
      assets transferred that is the same as Seller Parent’s qualified decommissioning
      fund’s tax basis in those assets immediately prior to the transaction.

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” or a “Qualified Fund”).

       Section 468A(c)(1)(B) authorizes the Treasury Department to prescribe
regulations regarding the disposition of an interest in a nuclear power plant and the tax
treatment of the transfer of the assets of the related qualified fund.

       Section 468A(e)(1) requires each taxpayer who elects the application of § 468A
to establish a Nuclear Decommissioning Reserve Fund for each nuclear power plant to
which that election applies.

      Section 1.468A-1(b)(1) defines the term “eligible taxpayer” as a taxpayer that
possesses a qualifying interest in a nuclear power plant.

        Section 1.468A-1(b)(2) provides that a “qualifying interest” means: (A) a direct
ownership interest; and (B) a leasehold interest in any portion of a nuclear power plant if
the holder of the leasehold interest is primarily liable under Federal or state law for
decommissioning such portion of the power plant, and no other person establishes a
qualified fund with respect to such portion of the nuclear power plant.
PLR-126721-18                                6

       Section 1.468A-1(b)(3) proves that a “direct ownership interest” of a nuclear
power plant does not include ownership of stock of a corporation that owns a nuclear
power plant or ownership of an interest in a partnership that owns a nuclear power
plant.

        Section 1.468A-1(b)(4) defines the terms “nuclear decommissioning fund” and
“qualified nuclear decommissioning fund” as a fund that satisfies the requirements of
§ 1.468A-5. The term “nonqualified fund” means a fund that does not satisfy those
requirements.

       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)(i) provides that a qualified nuclear decommissioning fund
must be established exclusively for the purpose of funding the costs associated with
decommissioning one or more nuclear facilities. Under this provision a single trust
agreement may establish multiple funds for the exclusive purpose of providing funds for
the decommissioning of a nuclear power plant. Thus, for example, a fund to be used for
decommissioning that does not qualify as a nuclear decommissioning fund under
§ 1.468A-5(a) may be established and maintained under a trust agreement that governs
a nuclear decommissioning fund.

         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-5(a)(2) provides that except as otherwise provided in § 1.468A-8
(relating to special transfers under § 468A(f)), a qualified nuclear decommissioning fund
is not permitted to accept any contributions in cash or property other than cash
payments with respect to which a deduction is allowed under § 468A(a) and § 1.468A-
2(a).

         Section 1.468A-5(a)(3)(i) provides that the assets of a qualified nuclear
decommissioning fund are to be used exclusively (A) to satisfy, in whole or in part, the
liability of the electing taxpayer for decommissioning costs of the nuclear plant to which
the fund relates; (B) to pay administrative and other incidental costs of the fund; and (C)
to the extent not currently required for the purposes described in (A) and (B) above, to
PLR-126721-18                                  7

make investments.

        Section 1.468A-5(c)(1)(i) provides that, except as otherwise provided in §
1.468A-5(c)(2), the Service may, in its discretion, disqualify all or any portion of a
nuclear decommissioning fund if at any time during its tax year (A) the fund does not
satisfy the requirements of § 1.468A-5(a); or (B) the fund and a disqualified person
engages in an act of self-dealing (as defined in § 1.468A-5(b)(2)).

      Section 1.468A-6 provides rules applicable to the transfer of all or a portion of a
taxpayer’s qualifying interest in a nuclear power plant (and transfer of the qualified
nuclear decommissioning fund), including a plant that has permanently ceased to
produce electricity, 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; and
                    (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 nuclear power 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 plant) 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-
              5(a)(1)(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
PLR-126721-18                               8

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

Conclusions

        Based on the information submitted by Seller Parent and Buyer Parent, we reach
the following conclusions:
PLR-126721-18                                 9

1) The Buyer Parent’s qualified decommissioning fund will be treated as a qualified
   fund that satisfies the requirements of § 468A and § 1.468A-5.

2) The Seller Parent’s qualified decommissioning fund will not be disqualified by reason
   of the transaction.

3) The Seller Parent’s qualified decommissioning fund will not recognize gain or loss or
   otherwise take any income or deduction into account as a result of the transfer of
   assets from Seller Parent’s qualified decommissioning fund to the Buyer Parent’s
   qualified decommissioning fund as part of the transaction.

4) The Buyer Parent’s qualified decommissioning fund will not recognize any gain or
   loss or otherwise take any income or deduction into account as a result of the
   transfer of assets from Seller Parent’s qualified decommissioning fund to the Buyer
   Parent’s qualified decommissioning fund as part of the transaction.

5) Neither Seller Parent nor Buyer Parent will be required to recognize gain or loss or
   otherwise take any income or deduction into account as a result of the transfer of
   assets from Seller Parent’s qualified decommissioning fund to the Buyer Parent’s
   qualified decommissioning fund as part of the transaction.

6) After the transaction, Buyer Parent’s qualified decommissioning fund will have a tax
   basis in each of the assets transferred that is the same as Seller Parent’s qualified
   decommissioning fund’s tax basis in those assets immediately prior to the
   transaction.

        Except as specifically determined above, no opinion is expressed or implied
concerning the Federal income tax consequences of the transaction described
above. The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalties of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination. This
ruling is specifically conditioned on the approval of the transaction by a regulatory body
having jurisdiction over such transaction.

       This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
of the Code provides that 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 to the appropriate
Industry Director, LB&I. A copy of this ruling must be attached to any federal income
PLR-126721-18                                   10

tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically
may satisfy this requirement by attaching a statement to their return that provides the
date and control number of the letter ruling.

                                                Sincerely,



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




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