IRS will disqualify a nuclear decommissioning fund at the owner's request, triggering a taxable deemed distribution

Plain-English summary

A utility that owns part of a nuclear power plant set aside money to pay for eventually decommissioning the plant, splitting it between a "qualified" fund (which gets favorable tax treatment under section 468A) and a "nonqualified" fund. The utility asked the IRS to use its discretion to disqualify the entire qualified fund so the money could be moved into the nonqualified fund while staying inside the same trust. The IRS agreed it would disqualify the qualified fund once the assets are transferred, but explained the tax cost: under the regulations, a disqualified fund is treated as distributing its assets back to the owner, which is a taxable disposition under section 1001. So the utility must include the fair market value of the transferred assets in gross income (net of certain taxes already paid), and the nonqualified fund takes a fresh fair-market-value basis in those assets. This matters to nuclear plant owners weighing whether to unwind the special tax-advantaged fund: the IRS will let them, but the exit is a taxable event.

Ruling snapshot

• Question: Will the IRS exercise its discretion to disqualify a qualified nuclear decommissioning fund at the owner's request, and what are the tax consequences of moving the assets to the nonqualified fund?
• Outcome: approved (IRS will disqualify the fund on transfer; deemed distribution is taxable under section 1001)
• Key authorities: IRC §§ 468A, 1001; Treas. Reg. §§ 1.468A-1, 1.468A-5

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201909007                                              Third Party Communication: None
Release Date: 3/1/2019                                         Date of Communication: Not Applicable
Index Number: 468A.05-08
                                                               Person To Contact:
------------------------                                       --------------------, ID No. ------------------
--------------------------------------------------------       Telephone Number:
-------------------------------------------------              ----------------------
 ----------------------------------                            Refer Reply To:
                                                               CC:PSI:B06
                                                               PLR-125519-18
                                                               Date:
In Re: Request to disqualify qualified nuclear                 November 29, 2018
decommissioning fund




LEGEND

Taxpayer                   =        ---------------------------------------------------------------------------------
Parent                     =        --------------------------------------------------
Trustee                    =        ------------------
Plant                      =        ----------------------------------------
Date 1                     =        -----------------------
Date 2                     =        -------------------
State                      =        --------------
a                          =        ------------------
b                          =        ------
c                          =        ------
Location                   =        ---------------------------
e                          =        ----

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

This letter replies to a letter, dated Date 1, in which Taxpayer requests permission to
terminate its nuclear decommissioning qualified fund under § 468A of the Internal
Revenue Code (Code) and § 1.468A-5 of the Income Tax Regulations (Regulations).
The request is submitted in respect of Taxpayer’s qualified and nonqualified nuclear
decommissioning funds.

         The facts and representations submitted are summarized as follows:
PLR-125519-18                                             2

        Taxpayer is a U.S. tax-exempt corporation incorporated pursuant to the laws of
State. Taxpayer is a wholly-owned subsidiary of Parent, a tax-exempt instrumentality
that is a political subdivision of State.

    On Date 2, Taxpayer entered into a trust agreement with Trustee, pursuant to which
Taxpayer established both a qualified and nonqualified nuclear decommissioning fund
to hold monies for decommissioning the Plant, a nuclear generating facility near
Location. Taxpayer established a trust for the collective investment of both the qualified
and nonqualified nuclear decommissioning funds. Currently, approximately a dollars
are in the trust, of which b percent is in the nonqualified fund and c percent is in the
qualified fund. Taxpayer owns e percent of the Plant.

        The trust agreement included provisions regarding the termination of the qualified
fund and transfer of its assets. First, the trust agreement provides that the “assets of
the Qualified fund shall be used as authorized by Section 468A of the Code and the
regulations thereunder, and the provisions of the Trust relating to the Qualified Fund
shall not be amended so as to violate Section 468A or the regulations thereunder.”
Next, the trust agreement provides that the “applicable portion of the Qualified Fund
shall terminate upon its disqualification from the application of Section 468A of the
Code, whether pursuant to an administrative action on the part of the Internal Revenue
Service or the decision of any court of any competent jurisdiction.” Finally, the trust
agreement provides that, upon termination of any fund, the Trustee shall liquidate the
assets of the fund and distribute such assets to Taxpayer.

    Upon termination of the qualified fund, Taxpayer has represented that it will direct
the Trustee to transfer the qualified fund assets into the non-qualified fund, and retain all
such assets in the trust. In sum then, the assets would remain in the trust, but be
transferred from the qualified fund to the nonqualified fund within the trust.

   Currently, Taxpayer must submit annual status reports to the Nuclear Regulatory
Commission. Taxpayer’s funds for the Plant were sufficient as of -------, but Taxpayer
anticipates that the Nuclear Regulatory Commission will make changes to the minimum
decommissioning fund formula, which Taxpayer anticipates would increase the
minimum amount required in the future compared to the current formula.

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PLR-125519-18                                             3

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   The Taxpayer requests the IRS exercise its discretion to disqualify Taxpayer’s
qualified nuclear decommissioning fund for the Plant in accordance with § 468A of the
Code and § 1.468A-5 of the Regulations. Subsequently, as a result of the requested
disqualification, Taxpayer will transfer all of its assets from the qualified nuclear
decommissioning fund into the nonqualified nuclear decommissioning fund.

                                              Law and Analysis

        Section 1.468A-1(b)(3) provides that a “qualified nuclear decommissioning fund”
is a fund that satisfies the requirements of § 1.468A-5, and a “nonqualified nuclear
decommissioning fund” is a fund that does not satisfy those requirements.

       Section 1.468A-5(a)(2) provides that 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 § 468(a) and § 1.468A-2(a).

       Section 1.468A-5(c)(1) provides that, except as otherwise provided in § 1.468A-
5(c)(2), if at any time during a taxable year of a nuclear decommissioning fund, the
nuclear decommissioning fund does not satisfy the requirements of § 1.468A-5(a), the
Internal Revenue Service may, in its discretion, disqualify all or any portion of the fund
as of the date that the fund does not satisfy the requirements of § 1.468A-5(a), or as of
any subsequent date.

       Section 1.468A-5(c)(3) provides that, if all or any portion of a nuclear
decommissioning fund is disqualified under § 1.468A-5(c)(1), the portion of the nuclear
decommissioning fund that is disqualified is treated as distributed to the electing
taxpayer on the date of disqualification. Such a distribution shall be treated for
purposes of section 1001 as a disposition of property held by the nuclear
decommissioning fund. Section 1001(a) provides that the gain from the sale or other
disposition of property is the excess of the amount realized from the disposition over the
adjusted basis of the property. Amount realized is generally the amount of cash and
other property received by a taxpayer for the property.

        In addition, § 1.468A-5(c)(3) provides that 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 distributable assets of the nuclear
decommissioning fund determined as of the date of the disqualification (reduced by
certain amounts including any tax that is imposed on the income of the fund, is
attributable to income taken into account before the date of the disqualification or as a
result of the disqualification, and has not been paid as of the date of the disqualification)
PLR-125519-18                                4

multiplied by the fraction of the nuclear decommissioning fund that was disqualified
under § 1.468A-5(c)(1).

        Section 1.468A-5(c)(4) provides that contributions made to a disqualified fund
after the date of disqualification are not deductible under § 468A(a) and § 1.468A-2(a).

      Taxpayer requests that, pursuant to § 468A and § 1.468A-5 of the Regulations,
the IRS exercise its discretion to disqualify Taxpayer’s qualified nuclear
decommissioning fund for the Plant.

       Based on the Taxpayer’s representation that the Parent Board has approved the
transfer of asset from the qualified to the non-qualified decommissioning fund, the
Service will, upon transfer of the assets from the qualified to the non-qualified
decommissioning fund, exercise its discretion under the authority of § 1.468A-5(c)(1) to
disqualify Taxpayer’s qualified nuclear decommissioning fund in its entirety.

        Pursuant to § 1.468A-5(c)(3), Taxpayer’s qualified nuclear decommissioning fund
will be treated as disposing of its assets via a deemed distributed to Taxpayer’s
nonqualified nuclear decommissioning fund for purposes of section 1001 on the date of
the disqualification. Accordingly, the assets of Taxpayer’s qualified nuclear
decommissioning funds transferred to its nonqualified decommissioning funds will be
deemed to be distributed on the date of the transfer and be included in Taxpayer’s
gross income, net of taxes paid upon such deemed distribution.

        Because the entire qualified nuclear decommissioning fund is being disqualified,
we conclude that in determining the amount of gain or loss to Taxpayer from the
transfer of assets from its qualified nuclear decommissioning fund to its nonqualified
nuclear decommissioning fund under § 1001(a), Taxpayer must include in gross income
the fair market value of the assets as of the date of qualified nuclear decommissioning
fund’s disqualification and deemed transfer of the assets. See § 1.468A-5(c)(1), (3);
see also § 1.468A-4(c)(2). Taxpayer’s nonqualified nuclear decommissioning fund will
take a fair market value basis in the assets deemed distributed.

         Except as specifically determined above, no opinion is expressed or implied
concerning the Federal income tax consequences of the transaction described above.
This ruling concerned only the Federal income tax consequences of the disqualification
of the qualified nuclear decommissioning fund 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 asset transfer by
-----------------------------------------.

      The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalties of perjury statement executed
PLR-125519-18                                5

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 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, we are sending copies of this letter to
Taxpayer’s 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 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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