Nuclear plant transfer preserves qualified decommissioning fund treatment

Plain-English summary

A partnership that owned a nuclear generating unit proposed transferring the unit, its decommissioning liability, and its qualified and nonqualified decommissioning funds to a wholly owned disregarded entity that would elect corporate status. The IRS ruled that the qualified nuclear decommissioning fund would remain qualified, recognize no gain or loss, and retain its tax basis in the transferred assets. Neither the transferor nor the new corporation would recognize section 468A income or gain from the fund transfer. The transferor's amount realized would include the decommissioning liability assumed by the corporation, except for the portion funded by the qualified fund. Economic performance would be satisfied for the included liability under the business-sale rule in the regulations.

Ruling snapshot

• Question: How would transferring a nuclear plant, its decommissioning liability, and its qualified fund to a newly taxable subsidiary affect fund qualification, gain, basis, amount realized, and economic performance?
• 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(a)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201730020 Third Party Communication: None
Release Date: 7/28/2017 Date of Communication: Not Applicable
Index Number: 468A.06-03
Person To Contact:
--------------------------- --------------------------, ID No. ----------------
---------------- -----------------
------------------------------------------------------------ Telephone Number:
--------------------- ----------------------
-------------------------------- Refer Reply To:
------------------------------------------- CC:PSI:B06
PLR-134258-16
PLR-134260-16
Date:
April 20, 2017

Legend:
Taxpayer = --------------------------------------------------------------------------
--------------------------
Parent = -----------------------------------------------------
Company = --------------------------------------------------------------------------
Operator = --------------------------------------------
Unit = ------------------------------------------------------
State = --------------
Date 1 = ------------------------
Date 2 = ---------------------------
a = --------------
b = ------------------
c = --------------------
d = ------------------
e = -----

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

   This letter responds to your request for private letter ruling dated

October 24, 2016. You requested that we rule on certain tax consequences of the
restructuring discussed below.

  Taxpayer has represented that, at the time that the private letter ruling was

submitted, the facts were as follows:

    Taxpayer is a limited liability company treated as a partnership for federal income

tax purposes that is indirectly, wholly-owned by Parent. Taxpayer is in the merchant
power generation business and is engaged in the generation of electricity within State.
Taxpayer owns all of the interests in the Unit, its sole electricity generation asset. The
Unit is operated by Operator, a corporate affiliate of Taxpayer. Taxpayer is an accrual
method taxpayer that files its federal income tax returns on a calendar year basis.
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Taxpayer is subject to the jurisdiction of the Federal Energy Regulatory Commission
("FERC"), the Nuclear Regulatory Commission ("NRC"), and the State Public Service
Commission.

    Taxpayer maintains a master nuclear decommissioning trust, which currently

holds assets dedicated to the decommissioning of the Unit, in two separate subsidiary
trusts: one that meets the requirements for a qualified fund within the meaning of
§ 468A of the Internal Revenue Code (the Qualified Fund) and one that does not meet
those requirements (the Nonqualified Fund). As of Date 1, the Qualified Fund totaled
approximately $a and the Nonqualified Fund totaled approximately $b. As of Date 2,
the estimated nuclear decommissioning liability is $c, which exceeds the fair market
value of the assets held in the Qualified Fund and the Nonqualified Fund by
approximately $d. On the date of the proposed transaction, the master nuclear
decommissioning trust is expected to hold the assets valued at approximately $a plus
$b.

   The proposed transaction involves Taxpayer transferring the Unit, its associated

nuclear decommissioning liability, and the master nuclear decommissioning trust to
Company. Company is a single-member limited liability company owned by Taxpayer
and is disregarded as an entity separate from Taxpayer for federal income tax
purposes. Company will also be subject to the jurisdiction of FERC, NRC, and the State
Public Service Commission.

   As part of the proposed transaction, Company will elect to become an

association taxable as a corporation for federal income tax purposes. Taxpayer and
Company will treat such an elective change in classification as Taxpayer contributing all
of the assets and liabilities of the disregarded entity to Company in exchange for stock
of Company. Immediately after the exchange, Taxpayer is in control of Company
because it will own an e% interest in Company.

     Taxpayer represents that its liabilities (including the nuclear decommissioning

liability) that are assumed by Company will exceed the basis of all of the property that it
will transfer to Company in the proposed transaction by an amount at least equal to the
nuclear decommissioning liability. Taxpayer will treat the proposed transaction
(including the transfer of the Unit and the associated nuclear decommissioning trust) as
a taxable transaction. Because it is being relieved of liabilities in excess of the adjusted
basis of the property transferred, Taxpayer will recognize gain under § 357(c) assuming
§ 351 applies. Taxpayer will recognize gain under § 1001 if § 351 does not apply.

Rulings Requested:
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  1) The Qualified Fund will not be disqualified by reason of the proposed

transaction.

   2) The Qualified Fund will continue to be treated as satisfying the requirements

of § 468A and Treas. Reg. § 1.468A-5 following the proposed transaction.

  3) The Qualified Fund will not recognize any gain or loss or otherwise take any

income or deduction into account by reason of the proposed transaction.

  4) Neither Taxpayer nor Company will recognize gain or loss under § 468A or

otherwise take any income or deduction into account under § 468A by reason of the
proposed transaction.

   5) The tax basis of the Qualified Fund and its assets will not change by reason

of the proposed transaction.

   6) The amount realized by Taxpayer from the proposed transaction will include

the nuclear decommissioning liability associated with the Unit, but not including the
portion of the nuclear decommissioning liability funded by the Qualified Fund on the
date of the proposed transaction.

    7) Taxpayer will be entitled to treat the nuclear decommissioning liability as

satisfying economic performance under Treas. Reg. § 1.461-4(d)(5) to the extent that
Taxpayer includes the nuclear decommissioning liability in the amount realized from the
proposed transaction.

Law and Analysis

Issues 1-5:

    Section 468A(a) of the Code provides that a taxpayer may elect to deduct

payments made to a nuclear decommissioning reserve fund that meets the
requirements of section 468A (i.e. a fund that is a "qualified nuclear decommissioning
fund").

    Section 1.468A-1(b)(4) provides that a "qualified nuclear decommissioning fund"

is a fund that satisfies the requirements of section 1.468A-5.

   Section 1.468A-5(a) of the Income Tax regulations sets out the qualification

requirements for nuclear decommissioning funds. It provides, in part, that a qualified
nuclear decommissioning fund must be established and maintained pursuant to an
arrangement that qualifies as a trust under state law.
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     Section 1.468A-5(a)(1)(iii) provides that an electing taxpayer can establish and

maintain only one qualified nuclear decommissioning fund for each nuclear power plant.
If a nuclear power plant is subject to the ratemaking jurisdiction of two or more public
utility commissions and any such public utility commission requires a separate fund to
be maintained for the benefit of ratepayers whose rates are established or approved by
the public utility commission, the separate funds maintained for such plant (whether or
not established and maintained pursuant to a single trust agreement) shall be
considered a single nuclear decommissioning fund.

   Section 1.468A-6 provides rules applicable to the transfer of an interest in a

nuclear power plant (and transfer of the qualified nuclear decommissioning fund) where
certain requirements are met. Specifically, section 1.468A-6(b) provides that section
1.468A-6 applies if—

  (1) Immediately before the disposition, the transferor maintained a qualified

nuclear decommissioning fund with respect to the interest disposed of; and

   (2) Immediately after the disposition--

          (i) The transferee maintains a qualified nuclear decommissioning fund with
          respect to the interest acquired;

          (ii) The interest acquired is a qualifying interest of the transferee in the
          nuclear power plant;

   (3) In connection with the disposition, either—

          (i) The transferee acquires part or all of the transferor’s qualifying interest
          in the plant and a proportionate amount of the assets of the transferor’s
          fund (all such assets if the transferee acquires the transferor’s entire
          qualifying interest in the fund) is transferred to a fund of the transferee; or

          (ii) The transferee acquires the transferor’s entire qualifying interest in the
          plant and the transferor’s entire fund is transferred to the transferee; and

     (4) The transferee continues to satisfy the requirements of section 1.468A-

5(a)(iii), which permits an electing taxpayer to maintain only one qualified nuclear
decommissioning fund for each plant.

   Section 1.468A-6(c) provides that a disposition that satisfies the requirements of

section 1.468A-6(b) will have the following tax consequences at the time it occurs:
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    (1)(i) Neither the transferor nor the transferor’s qualified nuclear

decommissioning fund will recognize gain or loss or otherwise take any income into
account by reason of the transfer of a proportionate amount of the assets of the
transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear
decommissioning fund (or by reason of the transfer of the transferor’s entire qualified
nuclear decommissioning fund to the transferee). For purposes of the regulations under
section 468A, this transfer (or the transfer of the transferor’s qualified nuclear
decommissioning fund) will not be considered a distribution of assets by the transferor’s
qualified nuclear decommissioning fund.

   (ii) Notwithstanding § 1.468A-6(c)(1)(i), if the transferor has made a special

transfer under § 1.468A-8 prior to the transfer of the fund or fund assets, any deduction
with respect to that special transfer allowable under § 468A(f)(2) for a taxable year
ending after the date of the transfer of the fund or fund assets is allowed under
§ 468A(f)(2)(C) for the taxable year that includes the date of the transfer of the fund or
fund assets.

    (2) Neither the transferee nor the transferee’s qualified nuclear decommissioning

fund will recognize gain or loss or otherwise take any income into account by reason of
the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear
decommissioning fund to the transferee’s qualified nuclear decommissioning fund (or by
reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund
to the transferee). For purposes of the regulations under section 468A, this transfer (or
the transfer of the transferor’s qualified nuclear decommissioning fund) will not
constitute a payment or a contribution of assets by the transferee to its qualified nuclear
decommissioning fund.

    (3) Transfers of assets of a qualified nuclear decommissioning fund to which this

section applies do not affect basis. Thus, the transferee’s qualified nuclear
decommissioning fund will have a basis in the assets received from the transferor’s
qualified nuclear decommissioning fund that is the same as the basis of those assets in
the transferor’s qualified nuclear decommissioning fund immediately before the
distribution.

   Under section 1.468A-6(f), the Service may treat any disposition of an interest in

a nuclear power plant occurring after December 27, 1994, as satisfying the
requirements of the regulations if the Service determines that such treatment is
necessary or appropriate to carry out the purposes of § 468A.

Issue 6
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     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 7, 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 Company 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
Company. Because the transfer of the Qualified Fund from Taxpayer to Company will
not be a taxable transfer, the amount of the liabilities assumed by Company 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 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,
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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 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 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 NRC, 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 and Company, we reach the

following conclusions:
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  1) The Qualified Fund will not be disqualified by reason of the proposed

transaction.

   2) The Qualified Fund will continue to be treated as satisfying the requirements

of section 468A and Treas. Reg. § 1.468A-5 after the proposed transaction.

  3) The Qualified Fund will not recognize gain or loss or otherwise take any

income or deduction into account by reason of the proposed transaction.

  4) Neither Taxpayer nor Company will recognize gain or loss under § 468A or

otherwise take any income or deduction into account under § 468A by reason of the
proposed transaction.

   5) The tax basis of the Qualified Fund and its assets will not change by reason

of the proposed transaction.

   6) The amount realized by Taxpayer from the proposed transaction will include

the nuclear decommissioning liability associated with the Unit, but not including the
portion of the nuclear decommissioning liability funded by the Qualified Fund on the
date of the proposed transaction.

    7) Taxpayer will be entitled to treat the nuclear decommissioning liability as

satisfying economic performance under Treas. Reg. § 1.461-4(d)(5) to the extent that
Taxpayer includes the nuclear decommissioning liability 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 or § 752. Also, except as specifically determined above, we express no opinion
on the federal income tax consequences to Company resulting from the acquisition of
assets and liabilities (including the nuclear-powered electric generating plants and the
nuclear decommissioning liabilities) of Taxpayer.
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   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,



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