Nuclear decommissioning arrangement preserves qualified fund status

Plain-English summary

A utility arranged for an independent contractor and affiliate to decommission a shut-down nuclear unit, restore the site, maintain spent fuel, and later dismantle the spent-fuel storage installation. The utility would retain ownership of the unit and site while paying decommissioning costs from a subaccount of its qualified nuclear decommissioning fund. It also would transfer the spent fuel, storage installation, and rights under a Department of Energy contract. Based on representations that the payments were decommissioning costs and the contractor parties were not disqualified persons, the IRS ruled that the arrangement would not disqualify the fund, the payments were permissible fund uses, and the transfers were not a disposition of a qualifying interest in the plant. The ruling was conditioned on required regulatory approvals, including Nuclear Regulatory Commission acceptance of a change from SAFSTOR to the DECON method.

Ruling snapshot

• Question: Does the contractor-led decommissioning arrangement preserve the qualified fund and permit payments and related spent-fuel transfers?
• Outcome: approved (subject to regulatory approvals and the stated representations)
• Key authorities: IRC §§ 468A, 4951; Treas. Reg. §§ 1.468A-1, 1.468A-5, 1.468A-6

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202017007                                              Third Party Communication: None
Release Date: 4/24/2020                                        Date of Communication: Not Applicable
Index Number: 468A.00-00
                                                               Person To Contact:
----------------------------                                   -------------------------, ID No. -----------------
---------------------------                                    -----------------------------------------------------
-----------------------------                                  Telephone Number:
--------------------------------------------                   --------------------
--------------------------------------------------             Refer Reply To:
                                                               CC:PSI:B06
                                                               PLR-116905-19
                                                               Date:
                                                               January 15, 2020

LEGEND:
Taxpayer          =                 ------------------------------------------------------
Parent            =                 ------------------------------------------------------------
X                 =                 ----------------------------------
Y                 =                 ----------------------------------------
Contractor        =                 --------------------
Affiliate         =                 --------------------
Unit              =                 ------------------------------------------------
State             =                 -------------------
Site              =                 ----------------------------
Date 1            =                 ---------------------
Date 2            =                 ---------------------------
Date 3            =                 -------------------------
Date 4            =                 ---------------------
Date 5            =                 -----------------------
Director          =                 ---------------------------------------
                                    -------------------------------------------

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

This letter responds to your request for private letter ruling dated July 17, 2019. You
requested rulings regarding the tax consequences under section 468A of the Internal
Revenue Code and the regulations promulgated thereunder to Taxpayer’s qualified
nuclear decommissioning fund.

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

Taxpayer is a public utility holding company that, through its wholly owned subsidiaries,
is principally engaged in the generation, transmission, distribution, and sale of electric
energy. Taxpayer is a wholly-owned subsidiary of Parent that is incorporated in State.
Parent and its affiliated group of corporations, including Taxpayer, file a consolidated

PLR-116905-19                                2

federal income tax return on a calendar year basis using the accrual method of
accounting.

The Unit is located at Site and is wholly owned and operated by X, a disregarded entity
that is wholly owned by Y. Both X and Y are disregarded entities of Taxpayer. The Unit
began commercial operations on Date 1 and was shut down on Date 2. X filed its Post
Shutdown Decommissioning Activities Report (PSDAR) with the Nuclear Regulatory
Commission (NRC) on Date 3 and it was accepted by the NRC on Date 4. The PSDAR
accepted by the NRC provides that the decommissioning status of Unit is SAFSTOR.
Taxpayer has represented that it will seek from the NRC all approvals necessary to
perform the decommissioning activities described herein. As of Date 5, the reactor was
defueled and all spent fuel was transferred and stored in the on-site independent spent
fuel storage installation (ISFSI).

The Unit and surrounding site (Unit Site) are regulated by the NRC under a license to
own and possess the Unit (NRC License). X, as owner of the Unit, is obligated to fund
and remains liable for the safe and timely decommissioning of the Unit under the NRC
License. X maintains a qualified nuclear decommissioning fund (Qualified Fund) for the
decommissioning of the Unit in accordance with § 468A.

X has entered into a Decommissioning Services Agreement (Agreement) with the
Contractor and its Affiliate. Contractor is generally engaged in the business of
decommissioning nuclear reactors, to completely decommission the Unit and restore
the Unit Site. The Contractor’s work will be divided into two separate stages. In the first
stage, the Contractor will decommission the entire Unit, except for the ISFSI, and will
restore the Unit Site, except for the portion where the ISFSI is located. As part of this
stage, X has applied to the NRC to permit Contractor to possess the Unit for purposes
of decommissioning. In the second stage, the Contractor and its Affiliate will take title
and control of the ISFSI and spent nuclear fuel (but not the associated real property).
The Contractor will operate and maintain the ISFSI until all spent nuclear fuel is
removed to an interim or permanent storage facility. The Contractor will then
decommission the ISFSI and restore the remaining portion of the Unit Site. At all times,
X will retain ownership of the Unit and Unit Site, except for the ISFSI and spent nuclear
fuel, which will be transferred to the Affiliate. The Agreement and transactions related
to the acquisition of the spent nuclear fuel and ISFSI are collectively referred to as the
Decommissioning Arrangement.

Pursuant to the Agreement, the Contractor has agreed to provide services to completely
decommission the Unit and restore the Unit Site. In exchange for the Contractor’s
services, X will pay an Agreed Amount under a fixed-price contract. Taxpayer has
represented that neither Contractor nor Affiliate are “disqualified persons,” as defined in
§§ 468A(e)(5), 4951(d), 4951(e), and 1.468A-5(b)(3). Within the Qualified Fund, X will
create a subaccount with the Agreed Amount, which will be increased by all earnings
and decreased by all losses, taxes, and other ratable expenses of the subaccount.
Taxpayer represents that all payments made to Contractor are made for

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decommissioning services which payments, it further represents, are for
decommissioning costs as defined in §1.468A-1(b)(6).

As the Contractor completes defined tasks for decommissioning, it may request that X
make payments based on the percentage of work completed. Upon achievement of the
ISFSI-Only Interim End-State Conditions, X will direct the Qualified Fund to pay the
amount remaining in the subaccount to the Contractor as the final payment for
decommissioning services. The amount payable by X to the Contractor will be limited to
the Agreed Amount as adjusted by earnings, losses, fees, and taxes.

The Contractor will take physical possession of the Unit during decommissioning for the
limited purpose of performing the decommissioning services under a Possession
License, but X will retain legal ownership and title to the Unit and Unit Site. X will also
remain the sole owner of the Unit on the NRC License while the Contractor will act as
an agent for X.

Pursuant to the Agreement, during the second stage of the Decommissioning
Arrangement the Contractor and Affiliate will be responsible for the operation and
maintenance of the ISFSI until the spent nuclear fuel is removed and the ISFSI is
decommissioned, including providing NRC-mandated security. During this stage the
Contractor will work to achieve End-State Conditions.

To facilitate the storage and ultimate removal of the spent nuclear fuel and the
decommissioning of the ISFSI, X will transfer legal title and possession of the spent
nuclear fuel, high-level waste, greater than Class C waste from the Unit, and the ISFSI
to Affiliate. Additionally, X will transfer its rights and obligations under the Standard
Contract with the Department of Energy (DOE Standard Contract), including any rights
to proceeds from any breach of contract litigation, to Affiliate. Additionally, under a
license transfer application, X will transfer the general license to operate and maintain
the ISFSI to the Contractor.

The Contractor will enter into a Spent Fuel Services Agreement with Affiliate pursuant to
which the Contractor will possess and maintain the spent nuclear fuel and high-level
waste until it can be removed from the Unit Site. The Contractor will decommission the
ISFSI once the spent nuclear fuel is completely removed. After decommissioning the
ISFSI and restoration of the remaining portion of the Unit Site, the Contractor will apply
for complete license termination from the NRC. When the NRC terminates the NRC
License, X will take possession of the Unit Site.

Requested Rulings

1. The Decommissioning Arrangement will not cause a disqualification, in whole or in
part, of the Qualified Fund under §1.468A-5.

PLR-116905-19                                 4

2. Payments made to Contractor from the Qualified Fund pursuant to the
Decommissioning Arrangement are a permissible use of the Qualified Fund under §
1.468A-5(a)(3).

3. The sale of the spent nuclear fuel and the ISFSI, and the transfer of the DOE
contract will not constitute a disposition of any qualified interest in a nuclear power plant
under §1.468A-6 or otherwise cause a disqualification of any portion of the Qualified
Fund.

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 (“fund”) that meets the
requirements of § 468A (i.e. a fund that is a “qualified nuclear decommissioning 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)(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 a qualified nuclear
decommissioning fund. 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)(ii) requires an electing taxpayer to have a separate nuclear
decommissioning fund for each nuclear power plant with respect to which the electing
taxpayer possesses a qualifying interest. Additionally, § 1.468A-5(a)(1)(iii) limits an
electing taxpayer to establishing and maintaining only one qualified nuclear
decommissioning fund for each nuclear power plant.

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

PLR-116905-19                                  5

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 468A(e)(4) limits the use of the amounts in a Fund to satisfying any liability of
any person contributing to the Fund for the decommissioning of a nuclear power plant,
the payment of administrative and other incidental expenses of the Fund, and making
investments.

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
make investments. For purposes of this paragraph, § 1.468A-5(a)(3)(ii) defines the
term administrative costs and other incidental expenses of a nuclear decommissioning
fund to mean all ordinary and necessary expenses incurred in connection with the
operation of the nuclear decommissioning fund.

Section 1.468A-1(b)(6) states, in part, that “nuclear decommissioning costs” means all
otherwise deductible expenses to be incurred in connection with the entombment,
decontamination, dismantlement, removal and disposal of the structures, systems and
components of a nuclear power plant, whether that nuclear power plant will continue to
produce electric energy or has permanently ceased to produce electric energy. Such
term includes all otherwise deductible expenses to be incurred in connection with the
preparation for decommissioning, such as engineering and other planning expenses,
and all otherwise deductible expenses to be incurred with respect to the plant after the
actual decommissioning occurs, such as physical security and radiation monitoring
expenses. Such term also includes costs incurred in connection with the construction,
operation, and ultimate decommissioning of a facility used solely to store, pending
acceptance by the government for permanent storage or disposal, spent nuclear fuel
generated by the nuclear power plant or plants located on the same site as the storage
facility. Such term does not include otherwise deductible expenses to be incurred in
connection with the disposal of spent nuclear fuel under the Nuclear Waste Policy Act of
1982 (P.L. 97-425). An expense is otherwise deductible for purposes of this paragraph
(b)(6) if it would be deductible under chapter 1 of the Internal Revenue Code without
regard to § 280B.

Section 1.468A-6 describes the Federal income tax consequences of a transfer of the
assets of a nuclear decommissioning fund (Qualified Fund) within the meaning of
§ 1.468A-(1)(b)(4) in connection with a sale, exchange or other disposition by a
taxpayer (transferor) of all or a portion of its qualifying interest in a nuclear power plant
to another taxpayer (transferee). For purposes of this section, a nuclear power plant
includes a plant that previously qualified as a nuclear power plant and that has
permanently ceased to produce electricity.

PLR-116905-19                                6


Section 468A(e)(5) prohibits qualified nuclear funds from engaging in self-dealing, within
the meaning of §1.468A-5(b). Self-dealing is generally defined as any act described in
§ 4951(d) between a qualified nuclear decommissioning fund and a disqualified person.
Section 468A(e)(6) provides that in any case in which the Fund violates any provision of
this section or § 4951, the Secretary may disqualify such Fund from the application of
this section. Section 1.468A-1(b)(4) provides that a “qualified nuclear decommissioning
fund” is a Fund that satisfies the requirements of § 1.468A-5.

Section 1.468A-5(c)(1) provides that if at any time during the taxable year a qualified
nuclear decommissioning fund does not satisfy a requirement of § 1.468A-5(a), or the
fund and a disqualified person engage in an act of self-dealing, the Service may, in its
discretion, disqualify all or a portion of the fund as of the date that the fund does not
satisfy such requirements. If all or any portion of a nuclear decommissioning fund is
disqualified under this subparagraph, then, pursuant to § 1.468A-5(c)(3), the portion of
the nuclear decommissioning fund that is disqualified is treated as distributed to the
electing taxpayer on the date of disqualification. The effects of disqualification are
further explained by § 1.468A-5(c)(3) and (4).

Section 1.468A-5(b)(1) provides that, except as otherwise provided in paragraph (b), the
excise taxes imposed by § 4951 apply to each act of self-dealing between a disqualified
person and a nuclear decommissioning fund. Further, § 1.468A- 5(b)(2) provides that
(with exceptions not relevant to this analysis), for purposes of paragraph (b), the term
self-dealing means any act described in § 4951(d).

Section 4951(d)(1) provides, in relevant part, that the term “self-dealing” means any
direct or indirect sale, exchange, or leasing of real or personal property between a trust
described in § 501(c)(21) and a disqualified person. Section 1.468A-5(b)(3) provides
that, for these purposes, the term “disqualified person” includes each person described
in § 4951(e)(4) and § 53.4951-1(d).

The Decommissioning Arrangement consists of the Agreement and all actions taken
under the Agreement, as well as transactions related to the spent nuclear fuel and the
ISFSI among the Taxpayer (and its disregarded entities), Contractor, and Affiliate.
Under the terms of the Agreement, the Contractor will decommission the Unit and
restore the Unit Site, and X will pay the Contractor an Agreed Amount plus any earnings
and less any losses, expenses, or taxes over time.

In the second phase of the Decommissioning Arrangement, the Contractor will enter
into a Spent Fuel Services Agreement with Affiliate pursuant to which the Contractor will
possess and maintain the spent nuclear fuel and high-level waste until it can be
removed from the Unit Site. X will transfer the general license to operate and maintain
the ISFSI to the Contractor who will operate and maintain the ISFSI until all spent
nuclear fuel is removed to an interim or permanent storage facility. The Contractor will
then decommission the ISFSI and restore the remaining portion of the Unit Site.

PLR-116905-19                                 7


At all times, X will retain legal ownership of the Unit and Unit Site. X will remain the sole
owner of the Unit on the NRC License while the Contractor will act as an agent for X.
X engaged the Contractor and the Contractor’s Affiliate to completely decommission the
Unit and restore the Unit Site. Taxpayer has represented that neither the Contractor nor
the Contractor’s Affiliate are a disqualified person. Therefore the Decommissioning
Arrangement will not result in an act of self-dealing as defined in § 1.468A-5(b)(2).

Under the Decommissioning Services Agreement, X will compensate the Contractor by
creating a subaccount within the Qualified Fund to hold the Agreed Amount, which will
be increased by all earnings and decreased by all losses, taxes, and other ratable
expenses of the subaccount. Taxpayer has represented that all payments made to the
Contractor from the Qualified Fund pursuant to the Agreement are for
“decommissioning costs” within the definition of § 1.468A-1(b)(6), and the payments
represent a permissible use of the Qualified Fund under § 1.468A-5(a)(3). Because
funds are being used for a permissible purpose under § 1.468A-5(a)(3), the segregation
of assets in a subaccount within the Qualified Fund will not violate the requirements of §
468A and will not cause a disqualification, in whole or in part, of the Qualified Fund
under § 1.468A-5(c).

Because X is not selling, exchanging, or otherwise disposing of all or a portion of its
qualifying interest in the Unit, the sale of the spent nuclear fuel and the ISFSI, and the
transfer of the DOE Standard Contract will not constitute a “disposition” of any qualifying
interest in a nuclear power plant under § 1.468A-6.

Rulings

1. Execution of the Decommissioning Arrangement and transfer of possession of the
Unit to Contractor under the Possession License will not cause a disqualification, in
whole or in part, of the Qualified Fund under §1.468A-5. All Actions to be taken and
payments made pursuant to that Arrangement, except as specifically described and
analyzed herein, are beyond the scope of this ruling and we specifically do not rule
regarding all possible future actions taken under the Decommissioning Arrangement.

2. The Taxpayer has represented that all payments made to the Contractor from the
Qualified Fund are made for decommissioning services, which, it further represents,
constitute decommissioning costs as defined in §1.468A-1(b)(6). In addition, Taxpayer
represents that neither the Contractor or the Affiliate are disqualified persons under
§1.468A-5(b) and (c). Relying on those representations, we conclude that payments
made to Contractor from the Qualified Fund pursuant to the Decommissioning
Arrangement are a permissible use of the Qualified Fund under § 1.468A-5(a)(3).

3. The sale of the spent nuclear fuel and the ISFSI, and the transfer of the DOE
contract, as described herein and considered only as represented by Taxpayer, will not

PLR-116905-19                                 8

constitute a disposition of any qualified interest in a nuclear power plant under §1.468A-
6 or otherwise cause a disqualification of any portion of the Qualified Fund.

Except as specifically determined above, no opinion is expressed or implied concerning
the Federal income tax consequences of the Decommissioning Arrangement described
above. In addition, this ruling concerns only the Federal income tax consequences of a
disqualification based on the facts represented. We express no opinion on the
permissibility of disqualification under any facts not discussed by Taxpayer or not
addressed in this ruling. We express no opinion on the permissibility of the
disqualification under any other statute, rule, or administrative decision.

This ruling is specifically conditioned on any necessary approvals of the transaction, in
whole or in part, by any regulatory body, state or Federal, having jurisdiction over such
transaction. Specifically, the ruling request states that the PSDAR accepted by the
NRC was based on the use of the SAFSTOR method to decommission the Unit. As
described by Taxpayer, the decommissioning activities discussed in this ruling may be
inconsistent with the SAFSTOR method (as described by Taxpayer). This ruling is
conditioned upon Taxpayer making and the NRC accepting a revision of the method
used to decommission the Unit to the DECON method.

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
representative. We are also sending a copy of this letter ruling to the Director.



                                              Sincerely,



                                              Patrick S. Kirwan
                                              Chief, Branch 6
                                              (Passthroughs & Special Industries)



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