Plant transfer preserves qualified nuclear decommissioning fund

Plain-English summary

A corporate owner proposed transferring a nuclear power plant, related assets, and decommissioning obligations to an affiliated corporation. The transferred assets included a qualified nuclear decommissioning fund and a separate nonqualified fund. The IRS ruled that the qualified fund would remain qualified, the transfer would not cause the parties or fund to recognize gain or loss, and the fund assets would keep their tax basis. The transferor's amount realized would include only the part of the decommissioning liability exceeding the qualified fund's fair market value, and economic performance would occur for that included liability at the transfer. The IRS expressed no opinion on section 351 treatment for the overall transaction.

Ruling snapshot

• Question: How will transferring a nuclear plant and its qualified decommissioning fund affect fund qualification, gain recognition, and the assumed liability?
• Outcome: approved
• Key authorities: IRC §§ 461, 468A, and 1001; Treas. Reg. §§ 1.461-4(d)(5), 1.468A-5, 1.468A-6, and 1.1001-2

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202009020                                              Third Party Communication: None
Release Date: 2/28/2020                                        Date of Communication: Not Applicable
Index Number: 468A.06-03
                                                               Person To Contact:
-----------------------------                                  ------------------------------, ID No. ------------
------------------------------------------------------------   -----------------
-----------                                                    Telephone Number:
---------------------------                                    --------------------
-------------------------------                                Refer Reply To:
----------------------------------------                       CC:PSI:B06
------------------------------------                           PLR-114682-19
                                                               Date:
                                                               November 26, 2019
Re: -------------------------------------------

LEGEND:

Parent                     =        ----------------------------------------------------
Transferor                 =        --------------------------------------------------------------------
Transferee                 =        ---------------------------------------------------------------------------------
Operator                   =        --------------------------------------------
State A                    =        -------------
State B                    =        ------------
Location                   =        ------------------------------------
Plant                      =        -------------------------------------------------------------
Date 1                     =        ----------------------
Date 2                     =        --------------------------
a                          =        -----------------
b                          =        ---------
c                          =        -------------------
d                          =        -----------------
Director                   =        --------------------------------------

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

       This letter responds to your request for a private letter ruling, dated June 19,
2019. You requested that we rule on certain federal income tax consequences under
§§ 468A and 461 of the Internal Revenue Code of the proposed transaction discussed
below.

                                                      Facts

      Transferor and Transferee represent the facts and information related to the
request as follows:

      Transferor, a State A limited liability company that elects to be classified as an
association taxable as a corporation for federal income tax purposes, is an indirectly
PLR-114682-19                                 2

wholly-owned subsidiary of Parent. Parent and its affiliated group of corporations,
including Transferor, file a consolidated federal income tax return on a calendar year
basis using the accrual method of accounting.

        Transferor is in the merchant power generation business and is engaged in the
generation of electricity in State B. Transferor is the sole owner of the Plant, which is a
qualifying interest under § 1.468A-1(b)(2) of the Income Tax Regulations. The Plant is
located in Location. Transferor owns no other power plants. The Plant is operated by
Operator, an indirectly wholly-owned subsidiary of Parent. Transferor and Operator
together hold a facility operating license issued by the Nuclear Regulatory Commission
(NRC) for the Plant. With respect to the Plant, Transferor is subject to the jurisdiction of
the NRC, the Federal Energy Regulatory Commission, and the State B Public Service
Commission. Transferor is not subject to the retail ratemaking jurisdiction of any
regulator.

      Transferor maintains a master nuclear decommissioning trust (NDT) that holds
assets dedicated to the decommissioning of the Plant. The NDT is comprised of two
separate state law trusts: one that meets the requirements for a qualified nuclear
decommissioning fund within the meaning of § 468A and § 1.468A-5 (the Qualified
Fund), and one that does not meet those requirements (the Nonqualified Fund). As of
Date 1, the Qualified Fund had a fair market value of approximately $a and the
Nonqualified Fund had a fair market value of approximately $b. As of Date 2, the
estimated nuclear decommissioning liability for the Plant is $c, which exceeds the fair
market value of the assets in the Qualified Fund by approximately $d.

        Transferee is a State A corporation that is indirectly wholly-owned by Parent.
Transferee is not a member of any consolidated group for federal income tax purposes
and files its separate federal income tax return on a calendar year basis using the
accrual method of accounting.

        Transferor and Transferee intend to treat the proposed transaction as part of an
exchange that satisfies the requirements of § 351. Both Transferor and Transferee are
entering the proposed transaction for bona fide business purposes. The proposed
transaction requires Transferor to transfer the Plant, all related Plant assets, including
the Qualified Fund and the Nonqualified Fund, and the associated liabilities of the Plant,
including the nuclear decommissioning liability, to a State A limited liability company that
is disregarded as an entity separate from Transferee for federal income tax purposes.
Therefore, after the transfer, Transferee will be the sole owner for federal income tax
purposes of the Plant, which is a qualifying interest under § 1.468A-1(b)(2), and the
associated Qualified Fund. Transferor and Transferee represent that the Qualified Fund
will continue to meet the requirements of § 1.468A-5 following the transfer of the
Qualified Fund and that Transferee will maintain the Qualified Fund in accordance with
§ 1.468A-5 in the same manner, to the same extent, and subject to the same regulatory
oversight and compliance as Transferor.
PLR-114682-19                               3

       Transferor and Transferee represent that the proposed transaction is a
realization event under § 1001 and § 1.1001-1(a). Accordingly, the amount of the
nuclear decommissioning liability that is assumed by Transferee in excess of the fair
market value of the assets in the Qualified Fund on the date of the transaction will be
included in Transferor’s amount realized in computing taxable income in the year of the
transaction.

      Transferor and Transferee have requested the following rulings:

   1) The Qualified Fund will not be disqualified under § 468A by reason of the transfer
      of the Qualified Fund to Transferee.

   2) The Qualified Fund will continue to be treated as satisfying the requirements of
      § 468A and § 1.468A-5 following the transfer of the Qualified Fund to Transferee.

   3) The Qualified Fund will not recognize gain or loss under § 468A by reason of the
      transfer of the Qualified Fund to Transferee.

   4) Transferor and Transferee will not recognize gain or loss under § 468A by reason
      of the transfer of the Qualified Fund to Transferee.

   5) The tax basis of the assets in the Qualified Fund will not change by reason of the
      transfer of the Qualified Fund to Transferee.

   6) Transferor’s amount realized from the proposed transaction will include the
      nuclear decommissioning liability associated with the Plant, but not including the
      portion of the nuclear decommissioning liability funded by the Qualified Fund on
      the date of the proposed transaction.

   7) To the extent that it is included in the amount realized from the proposed
      transaction, Transferor will be entitled to treat the nuclear decommissioning
      liability for the Plant as satisfying economic performance under § 1.461-4(d)(5).

                                   Law and Analysis

Issues 1-5:

       Section 468A(a) provides that a taxpayer may elect to deduct payments made to
a nuclear decommissioning reserve fund that meets the requirements of § 468A (i.e. a
fund that is a “qualified nuclear decommissioning fund” or a “Qualified Fund”).

        Section 1.468A-1(b)(4) provides that a “qualified nuclear decommissioning fund”
is a fund that satisfies the requirements of § 1.468A-5.
PLR-114682-19                                  4

       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 qualified nuclear decommissioning fund.

       Section 1.468A-6 provides the rules applicable to the transfer of an interest in a
nuclear power plant (and transfer of the associated 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;

       (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
                  qualified nuclear decommissioning fund (all such assets if the
                  transferee acquires the transferor’s entire qualifying interest in the
                  plant) is transferred to a qualified nuclear decommissioning fund of the
                  transferee; or

              (ii) The transferee acquires the transferor’s entire qualifying interest in the
                   plant and the transferor’s entire qualified nuclear decommissioning
                   fund is transferred to the transferee; and
PLR-114682-19                               5

      (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 or deduction 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 the fund
          assets is allowed under § 468A(f)(2)(C) for the taxable year that includes the
          date of the transfer of the fund or the fund assets.

      (2) Neither the transferee nor the transferee’s qualified nuclear decommissioning
          fund will recognize gain or loss or otherwise take any income or deduction
          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 the 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 disposition.

      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
PLR-114682-19                                  6

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

Issue 6:

          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 amount of Transferor’s nuclear decommissioning liability that is assumed by
Transferee, in excess of the fair market value of the assets in the Qualified Fund on the
date of the transfer will be included in Transferor’s amount realized and taken into
account in computing taxable income in the year of the sale or disposition.

       Because the transfer of the Qualified Fund from Transferor to Transferee will not
be a taxable transfer, the amount of the liabilities assumed by Transferee that are
included in Transferor’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 7:

         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)(i) 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
PLR-114682-19                                 7

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 Transferor. Here, Transferor, 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). Transferor 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 Transferor 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 Transferor’s decommissioning liability has
been determined by experts in the nuclear decommissioning industry. Their estimates
have been accepted by the NRC, which is charged with ensuring that sufficient funds
are available to decommission the Plant. In addition, there is also support in the 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.

       Given that the two prongs of the all events test are satisfied, economic
performance with respect to the decommissioning liability occurs as of the date of the
proposed transaction to the extent the liability is included in Transferor’s amount
realized. At that time, Transferor will be entitled to a deduction for the amount of its
decommissioning liability associated with the Plant expressly assumed by Transferee
and included in Transferor’s amount realized.
PLR-114682-19                                 8

Conclusions:

       Based on the information submitted by Transferor and Transferee, we reach the
following conclusions:

1) The Qualified Fund will not be disqualified under § 468A by reason of the transfer of
   the Qualified Fund to Transferee.

2) The Qualified Fund will continue to be treated as satisfying the requirements of
   § 468A and § 1.468A-5 following the transfer of the Qualified Fund to Transferee.

3) The Qualified Fund will not recognize gain or loss under § 468A by reason of the
   transfer of the Qualified Fund to Transferee.

4) Transferor and Transferee will not recognize gain or loss under § 468A by reason of
   the transfer of the Qualified Fund to Transferee.

5) The tax basis of the assets in the Qualified Fund will not change by reason of the
   transfer of the Qualified Fund to Transferee.

6) Transferor’s amount realized from the proposed transaction will include the nuclear
   decommissioning liability associated with the Plant, but not including the portion of
   the nuclear decommissioning liability funded by the Qualified Fund on the date of the
   proposed transaction.

7) To the extent that it is included in the amount realized from the proposed
   transaction, Transferor will be entitled to treat the nuclear decommissioning liability
   for the Plant as satisfying economic performance under § 1.461-4(d)(5).

       Except as specifically determined above, no opinion is expressed or implied
concerning the federal income tax consequences of the transactions 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 Transferee resulting from the acquisition of assets
and liabilities (including the nuclear-powered electric generation plant and the nuclear
decommissioning liability) of Transferor.
PLR-114682-19                                9

       This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
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 to the Director.


                                          Sincerely yours,



                                          Jennifer A. Records
                                          Senior Technician Reviewer, Branch 6
                                          Office of the Associate Chief Counsel
                                          (Passthroughs and Special Industries)




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