Transfer disqualified nuclear decommissioning fund without self-dealing

Plain-English summary

An owner preparing to sell a shut-down nuclear unit planned to transfer all assets from its qualified nuclear decommissioning fund to a nonqualified fund within the same trust. The IRS agreed to disqualify the qualified fund in full on the transfer date. The fund's net asset value would be treated as distributed to the owner, triggering a deemed disposition under § 1001 and gross income to the owner after the specified tax reduction. Because the regulations exclude withdrawals of amounts already treated as distributed upon disqualification, the transfer would not be an act of self-dealing under § 4951. The rulings were conditioned on regulatory approval of the transaction.

Ruling snapshot

• Question: What were the disqualification, distribution, and self-dealing consequences of moving all qualified decommissioning-fund assets to a nonqualified fund?
• Outcome: Approved. The IRS ruled that the entire fund would be disqualified and deemed distributed without self-dealing.
• Key authorities: IRC §§ 468A, 4951, and 1001; Treas. Reg. § 1.468A-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201907005 Third Party Communication: None
Release Date: 2/15/2019 Date of Communication: Not Applicable
Index Number: 468A.05-08, 468A.05-07
Person To Contact:
--------------------- --------------------------, ID No. ----------------
---------------- -----------------
---------------------------------------------------- Telephone Number:
----------------------------------- ----------------------
---------------------------- Refer Reply To:
CC:PSI:B06
PLR-119283-18
Date:
November 08, 2018

Legend
Taxpayer/Seller = -----------------------------------------------------
--------------------------
X = ------------------------------------------------------------------------
--------------------------
Y = ------------------------------------------------------------------------
--------------------------
Parent = -------------------------------------
Buyer = ----------------------------------------------------------
Unit = ------------------------------------------------------
Site = ------------------------
Operator = --------------------------------------------
Trustee = -------------------------
State A = --------------
State B Commission = -----------------------------------------------
Year = -------
Date 1 = --------------------------
Date 2 = --------------------------
Date 3 = ------------------------
Date 4 = ------------------------
Date 5 = --------------------------
Date 6 = -------------------
a = ----------------
b = ----------------
c = --------------
Director = ------------------------------------------------

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

  This letter responds to your request for private letter ruling dated

June 8, 2018. You requested rulings regarding the tax consequences under section
PLR-119283-18 2

468A of the Internal Revenue Code 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 limited liability company organized under the laws of State A.

From its inception in Year through Date 1, Taxpayer was classified as an entity
disregarded from its sole owner, X. Effective Date 2, Taxpayer became a partnership
when Y acquired an equity interest in Taxpayer. X, Y, and Taxpayer are included in the
consolidated federal income tax return of Parent, which files its return on a calendar-
year basis using the accrual method of accounting.

    Taxpayer is the owner of the Unit. The Unit is located in Site and operated by

Operator, a corporate affiliate of Taxpayer. With respect to the Unit, Taxpayer is subject
to the jurisdiction of the Federal Energy Regulatory Commission (FERC), the State B
Commission, and the Nuclear Regulatory Commission (NRC). On Date 3, Taxpayer
provided a certification to the NRC that the Unit had permanently ceased operation and
that all nuclear fuel had been removed from the reactor. The Unit entered the
decommissioning phase on Date 4.

    Taxpayer owns and maintains the Nuclear Decommissioning Trust (NDT) that is

dedicated to the decommissioning of the Unit. The NDT currently holds assets in two
sub-trusts that are trusts under state law: one that satisfies the requirements for a
qualified decommissioning fund within the meaning of § 468A (the Qualified Fund) and
one that does not satisfy those requirements (the Non-Qualified Fund). As of Date 6,
the assets of the NDT had a fair market value of approximately $a held entirely in the
Qualified Fund.

   On Date 5, Taxpayer agreed to sell the Unit to Buyer (transaction referred to as

the Sale). Taxpayer previously requested and obtained a private letter ruling from the
Internal Revenue Service (Service) addressing this transaction. As a condition of the
Sale, Buyer has requested that it receive the assets of the NDT entirely in a Non-
Qualified Fund.

    Accordingly, prior to the target closing date of the Sale, Taxpayer will transfer all

of the assets held in the Qualified Fund to a Non-Qualified Fund in the NDT (the Fund
Transfer). On that date, the fair market value of the assets of the Qualified Fund are
expected to be approximately b (a reduced by c of tax imposed upon the gain on the
deemed disposition of the investment assets held by the Qualified Fund), to the Non-
Qualified Fund in the NDT (referred to as the Fund Transfer). The transferred assets
will remain within the NDT and at all times in the custody and control of the Trustee.
Taxpayer will include approximately b in gross income as a result of the Fund Transfer.
PLR-119283-18 3

Requested Rulings

1. The Qualified Fund will be disqualified in its entirety by reason of the Fund Transfer.

2. The disqualification of the Qualified Fund will be effective on the date of the Fund
   Transfer and the entire value of the Qualified Fund, reduced by any tax imposed
   upon the Qualified Fund, shall be deemed to be distributed to Taxpayer with the tax
   consequences described in Treasury Regulations § 1.468A-5(c)(3).

3. The Fund Transfer will not constitute an act of self-dealing under § 468A and
   Treasury Regulations § 1.468A-5(b).

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 § 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.
PLR-119283-18 4

    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
make investments.

   According to § 1.468A-5(b)(1), except as otherwise provided in § 1.468A-5(b),

the excise taxes imposed by § 4951 apply to each act of self-dealing between a
disqualified person and a nuclear decommissioning fund.

    For purposes of § 4951 (and subject to the qualifications of § 4951(d)(2), not

here applicable), § 4951(d)(1)(E) defines the term "self-dealing" as any direct or indirect
transfer to, or use by or for the benefit of, a disqualified person of the income or assets
of a trust described in § 501(c)(21).

   For purposes of § 1.468A-5(b), § 1.468A-5(b)(2)(iii) defines the term “self-

dealing” as any act described in § 4951(d), except a withdrawal by the electing taxpayer
of amounts that have been treated as distributed under § 1.468A-5(c)(3).

    Pursuant to § 1.468A-5(c)(1)(i), 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 engage in an
act of self-dealing (as defined in § 1.468A-5(b)(2)).

   If all or any portion of a nuclear decommissioning fund is disqualified under

§ 1.468A-5(c)(1), 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(c)(3) provides that, if all or any portion of a qualified nuclear

decommissioning fund is disqualified under § 1.468A-5(c)(1), the portion of the qualified
nuclear decommissioning fund that is disqualified is treated as distributed to the electing
taxpayer on the date of the disqualification. Such a distribution shall be treated for
purposes of § 1001 as a disposition of property held by the qualified nuclear
PLR-119283-18 5

decommissioning fund. In addition, the electing taxpayer must include in gross income
for the taxable year that includes the date of disqualification an amount equal to the
product of the fair market value of the assets of the fund determined as of the date of
disqualification (reduced by certain amounts including any tax that is (1) imposed on the
income of the fund, (2) is attributable to income taken into account before the date of
the disqualification or as a result of the disqualification, and (3) has not been paid as of
the date of the disqualification) and the fraction of the qualified nuclear
decommissioning fund that was disqualified under § 1.468A-5(c)(1).

Requested Ruling 1

   Pursuant to the authority granted under § 1.468A-5(c)(1), the Service will

exercise its discretion to disqualify Taxpayer’s Nuclear Decommissioning Trust in its
entirety upon any transfer of assets from the Taxpayer’s Qualified Fund to Taxpayer’s
Non-Qualified Fund.

Requested Ruling 2

    In accordance with § 1.468A-5(c)(3) all assets held in Taxpayer’s Qualified Fund

will be deemed to be distributed to Taxpayer on the date of the Fund Transfer. The
deemed distribution of assets will be treated as a disposition under § 1001 from
Taxpayer’s Qualified Fund, and Taxpayer shall include in gross income for the tax year
that includes such distribution the amount of assets deemed distributed, net of taxes
paid by Taxpayer’s Qualified Fund upon such deemed distribution.

Requested Ruling 3

   The Fund Transfer is neither a payment of decommissioning costs, a payment of

administrative expenses, nor a permitted investment of assets under § 1.468A-
5(a)(3)(i). Thus, if the Fund Transfer would effect a disqualification of the Qualified
Fund under § 1.468A-5(c), which would be treated as a distribution to Taxpayer, then,
according to the definition provided by § 1.468A-5(b)(2)(iii), it will not constitute an act of
self-dealing under § 4951.

   Except as specifically determined above, no opinion is expressed or implied

concerning the Federal income tax consequences of the transaction described
above. In addition, this ruling concerns only the Federal income tax consequences of a
disqualification and we express no opinion on the permissibility of the disqualification
under any other statute, rule, or administrative decision. This ruling is specifically
conditioned on the approval of the transaction by a regulatory body having jurisdiction
over such transaction.
PLR-119283-18 6

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

of the Code provides it may not be used or cited as precedent. In accordance with the
power of attorney on file with this office, a copy of this letter is being sent to your
authorized representatives. We are also sending a copy of this letter ruling to the
Director.

                                        Sincerely,



                                        Peter C. Friedman
                                        Senior Technician Reviewer, Branch 6
                                        (Passthroughs & Special Industries)

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