Nuclear decommissioning fund transfer preserved qualified status

Plain-English summary

A seller planned to transfer ownership of a nuclear power plant and its qualified nuclear decommissioning fund to a purchaser as part of a transaction treated as an asset sale for federal tax purposes. Both sides represented that the transferor and transferee would satisfy the rules for qualifying interests, exclusive fund use, permitted contributions, and avoidance of self-dealing. Subject to regulatory approval, the IRS ruled that the transfer would not disqualify the fund and that the fund would continue satisfying section 468A. Neither the parties nor the fund would recognize gain or loss from the transfer, and the transferred assets would retain their existing tax basis.

Ruling snapshot

• Question: What are the section 468A consequences of transferring a qualified nuclear decommissioning fund with the related power plant?
• Outcome: approved, with continued qualification, nonrecognition, and carryover basis
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-5, 1.468A-6

Full text (IRS public release)

Internal Revenue Service                                  Department of the Treasury
                                                          Washington, DC 20224

Number: 201933008                                         Third Party Communication: None
Release Date: 8/16/2019                                   Date of Communication: Not Applicable
Index Number: 468A.00-00
                                                          Person To Contact:
--------------------                                      --------------------, ID No. ------------------
-------------------------------                           Telephone Number:
---------------------------                               ----------------------
---------------------------------                         Refer Reply To:
----------------------------                              CC:PSI:B06
                                                          PLR-133721-18
                                                          Date:
                                                          May 08, 2019
In Re: Transfer of Assets of a Qualified Fund
Under Section 468A




Legend

Date 1                              =   --------------------------
Seller Parent                       =   ----------------------------- --------------------------
Seller                              =    ----------------------------------------------------
                                        --------------------------
Unit Owner                          =    ----------------------------------------------------
                                        --------------------------
Seller Operator                     =   --------------------------------------------
Unit                                =   -----------------------------------------
Purchaser                           =   -----------------------------------------------------------
Purchaser Subsidiary                =   -------------------------
Purchaser DRE                       =   -----------------------------------------------------------
                                        --------------------------
Purchaser Operator                  =   -----------------------------------------------------------
Joint Venture                       =   ------------------------------------------------------------------------
State 1                             =   --------------
State 2                             =   ---------------------
State 3                             =   ----------
State 4                             =   --------------
State 5                             =   ----------------
Location                            =   ------------
Region                              =   -------------------
Date 2                              =   -------
Date 3                              =   ------- ------------
Date 4                              =   --------------------
Date 5                              =   ----------------------------
Date 6                              =   -------------------
PLR-133721-18                                    2

Date 7                       =      ----------------------------------------
a                            =      -- ------------------
b                            =      -- ------------------
c                            =      ----------------
d                            =      ----------
e                            =      -------------------
f                            =      -------------------
g                            =      -------------------

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

        This letter responds to your request for private letter ruling dated Date 1. You
requested rulings regarding the federal income tax consequences under Section 468A
of the Internal Revenue Code and Section 1.468A-6 of the Treasury Regulations
regarding the transfer of a qualified nuclear decommissioning reserve fund maintained
for the decommissioning of the Unit. The transfer of the qualified nuclear
decommissioning reserve fund is in conjunction with the transfer of the entity that owns
the Unit, Unit Owner, from Seller to Purchaser.

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

         Seller Parent is incorporated in State 1 and acts as the common parent of an
affiliated group of corporations filing a consolidated federal income tax return. Seller
Parent and its subsidiaries and affiliates operate on a calendar year basis and use the
accrual method of accounting.

         Seller is a wholly-owned indirect subsidiary of Seller Parent incorporated in State

1. Seller owns all of the equity of Unit Owner, a State 2 corporation which owns the
Unit, the associated nuclear decommissioning trust, and the nuclear decommissioning
liability for the Unit.

       Unit Owner owns Unit, which is located in State 2. The Unit is a ----------------------
nuclear power plant. Unit is operated by Seller Operator, a corporate affiliate of Unit
Owner, with offices located in State 4 and State 5. Electricity generated by the Unit is
sold to wholesale customers or into the Region power market.

       The operating license for the Unit is issued by the United States Nuclear
Regulatory Commission (“NRC”) and expires on Date 2. Unit Owner and Seller
Operator are both named on the license, with Unit Owner obligated to undertake the
decommissioning of the Unit, and Seller Operator charged with the safe operation of the
Unit, possession and handling of special nuclear material and compliance with the NRC
regulations.
PLR-133721-18                                           3

        The Unit is expected to cease production on Date 3 and all nuclear fuel will be
transferred from the reactor to wet storage in the spent fuel pool before Date 4. Once
certified to the NRC that the reactor has been defueled, the Unit will enter the
decommissioning phase of its life cycle, and the operating license will be amended by
the NRC to a status of “possession-only” license.

       Unit Owner maintains a master nuclear decommissioning trust that is dedicated
to the decommissioning of the Unit (the “Trust”). The agreement between Unit Owner
and the trustee regarding the purposes and operation of the trust authorizes the deposit
and holding of assets in two sub-trusts that are trusts under state law: one that meets
the requirements for a nuclear decommissioning reserve fund within the meaning of §
468A (“Qualified Fund”) and one that does not meet those requirements (“Non-qualified
Fund”). The assets of the Trust had a fair market value on Date 5 of a, net of accrued
income tax on net realized gains. The values of the assets of the Qualified Fund on
Date 5 were b, and assets valued at c were held in the Non-qualified Fund.

         Purchaser is a----- corporation with headquarters in State 3. Purchaser files its
federal income tax return on a calendar year basis using the accrual method of
accounting. Purchaser is an --------------------------company that, with its affiliates,
specializes in --------------------------------------------------------------------------------------------------
------------------.

      Purchaser Subsidiary is a ---------------------------------------------- of Purchaser.
Purchaser DRE is a wholly-owned subsidiary of Purchaser Subsidiary and is a State 1
disregarded limited liability company. Purchaser DRE’s sole member is Purchaser
Subsidiary.

         Purchaser seeks to acquire the Unit, and through its indirectly wholly-owned
affiliate, Purchaser Operator, operate or hold for decommissioning the Unit as licensed
by the NRC. Purchaser represents that it expects Purchaser Operator to engage with
Joint Venture, a U.S.-based joint venture of Purchaser and a Location corporation, to
perform the decommissioning of the Unit.

       Seller and Purchaser entered into an Equity Purchase and Sale Agreement,
dated Date 6 (“Purchase Agreement”) for the purchase by the Purchaser of all of the
equity of Unit Owner in a transaction that will be treated as the sale of assets for U.S.
federal income tax purposes (the “Transaction”). The Transaction is expected to close
in Date 7 (“Closing”). The terms of the Purchase Agreement require that on the date of
Closing, Seller will sell all membership interests in Unit Owner to Purchaser DRE in
consideration for d.

       Immediately prior to the Closing, Seller represents that Unit Owner will effectuate
a statutory conversion under State 2 law from its current status as a corporation to a
limited liability company (the “Conversion”). For federal income tax purposes, Seller
PLR-133721-18                                 4

represents that the Conversion is treated as Unit Owner liquidating into its sole parent,
Seller. As a result, the Unit and Trust, which includes the Qualified Fund, will be
transferred from Unit Owner to Seller for U.S. federal income tax purposes (“Conversion
Transfer”). Prior to the Conversion, Unit Owner is for U.S. federal income tax purposes
the owner of both the Unit and the Qualified Fund. Immediately after the Conversion,
Seller will be for U.S. federal income tax purposes the owner of both the Unit and the
Qualified Fund. Because of the Conversion, the assets of Unit Owner, including the
Unit and the Qualified Fund, will be deemed distributed to Seller in a deemed liquidation
for U.S. federal income tax purposes. Unit Owner represents that it will not elect to be
treated as an association taxable as a corporation under § 301.7701-3 and will not be
treated as separate from its owner, Seller. Subsequent to the Closing, Unit Owner
represents it will change its name.

       As of the Closing, the nuclear decommissioning liability associated with the Unit
is expected to be approximately e, and the Trust is expected to hold assets valued at
approximately f, of which g will reside in the Qualified Fund. The transfer of the Trust to
Purchaser (including the beneficial interests in the Trust and the Qualified Fund) shall
be referred to as the “Fund Transfer.”

        Seller Operator, on behalf of itself and Unit Owner, Purchaser, and Purchaser
Subsidiary represent that such entities will submit an application to the NRC for
approval of the indirect transfer of control of the License for the Unit from Seller to
Purchaser and the transfer of operational authority from Seller Operator to Purchaser
Operator (the “NRC Application”). The NRC Application will also seek approval of an
amendment to the License to reflect the change in from of Unit Owner from a State 2
corporation to a State 2 limited liability company, and the post-transfer name change of
the same entity. Upon the Closing of the Transaction, Unit Owner will be a disregarded
entity of Purchaser, and will be a licensee and will have all rights and obligations under
the NRC License for the Unit, and Purchaser Operator will conduct licensed activities at
the Unit. After Closing, neither Seller nor any of its affiliates will be a licensee or have
any authorized rights or obligations under the NRC License for the Unit. As part of the
NRC Application, Seller Operator, Unit Owner, Purchaser, and Purchaser Operator plan
to provide information in respect of the purposes for the Transaction necessitating the
License transfer and the technical financial qualifications of Unit Owner and Purchaser
Operator for being licensees under the License.

       Upon the Closing of the Transaction, Seller and Purchaser represent that the risk
and responsibility for decommissioning the site will be transferred to Purchaser. Unit
Owner will retain full responsibility for funding Purchaser Operator’s costs of
decommissioning the Unit. As part of the Transaction, Seller represents that Unit
Owner will retain full control and title to the asset of the Trust and Qualified Fund that
are intended to be sufficient to satisfy the expected decommissioning costs.
PLR-133721-18                                5


     Unit Owner and Seller, regarding their respective transfers, represent that
immediately before the relevant transfer, each entity:

        1. Will have a qualifying interest in the Unit within the meaning of § 1.468A-
         1(b)(2);
        2. Will have maintained its Qualified Fund as a trust under applicable state law
         for the exclusive purpose of providing funds for decommissioning;
        3. Will have maintained the Qualified Fund as a separate and the sole qualified
         fund for the Unit;
        4. Will not have made any contributions to the Qualified Fund other than those
         for which a deduction will be allowed under § 468A;
        5. The assets of the Qualified Fund will have been used exclusively to: (a)
         satisfy, in whole or in part, liability for decommissioning costs of the Unit; (b)
         pay administrative costs and other incidental expenses of the Qualified Fund;
         and (c) make investments, to the extent the assets of the Qualified Fund were
         not needed to satisfy the purposes of (a) and (b) above;
        6. The trust agreement for the Qualified Fund provides that the assets in the
         Qualified Fund must be used as authorized in § 468A and the regulations
         thereunder, including the prohibition against self-dealing, and that the
         agreement cannot be amended to violate such provisions; and
        7. The Qualified Fund did not engage in self-dealing.

       Seller and Purchaser, as transferees in respect of the Qualified Fund, represent
that immediately after each relevant transfer, each entity:

        1. Will have a qualifying interest in the Unit within the meaning of Treas. Reg. §
         1.468A-1(b)(2);
        2. Will maintain the Qualified Fund as a trust under applicable state law for the
         exclusive purpose of providing funds for decommissioning;
        3. Will maintain its Qualified Fund as a separate and the sole qualified fund for
         the Unit;
        4. Will not make any contributions to the Qualified Fund other than those for
         which a deduction is allowed under § 468A and the regulations thereunder;
        5. The assets of the Qualified Fund will be used exclusively to: (a) satisfy, in
         whole or in part, liability for decommissioning costs of the Unit; (b) pay
         administrative costs and other incidental expenses of the Qualified Fund; and
         (c) make investments, to the extent the assets of the Qualified Fund were not
         needed to satisfy the purposes of (a) and (b) above; and
        6. The trust agreement for the Qualified Fund will provide that the assets in the
         Qualified Fund must be used as authorized in § 468A and the regulations
         thereunder, including the prohibition against self-dealing, and that the
         agreement cannot be amended to violate such provisions.
PLR-133721-18                                6

Requested Rulings

       Subject to the approval from the NRC, Seller and Purchaser request the following
rulings, effective as of the Fund Transfer:

    1. The Qualified Fund will not be disqualified by reason of the Fund Transfer.
    2. Seller, Purchaser, and the Qualified Fund will not recognize gain or loss under §
      468A by reason of the Fund Transfer.
    3. After the Fund Transfer, the Qualified Fund will continue to be treated as
      satisfying the requirements of § 468A.
    4. Following the Fund Transfer, the tax basis in the Qualified Fund will be the same
      as the tax basis in those assets immediately before the Fund Transfer.

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”
or a “Qualified Fund”).

       Section 468A(c) provides that any amount distributed or deemed distributed from
a Qualified Fund, other than for purposes of paying costs described in § 468A(e)(4)(B),
during any taxable year is includible in the gross income of the taxpayer for that year.

       Section 468A(c)(1)(B) authorizes the Treasury Department to prescribe
regulations regarding the disposition of an interest in a nuclear power plant and the tax
treatment of the transfer of the assets of the related qualified 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 468A(e)(2) provides that the rate of tax on the income of a Qualified
Fund is twenty (20) percent. Section 468A(e)(4) provides, in pertinent part, that the
assets in a Qualified Fund shall be used exclusively for satisfying the liability of any
person contributing to the Qualified Fund for the decommissioning of a nuclear power
plant or unit thereof.

       Section 468A(e)(5) provides that, for purposes of § 4951, a Qualified Fund is
treated in the same manner as a trust described in § 501(c)(21).

      Section 468A(e)(6) provides that the United States Secretary of the Treasury
may disqualify a Qualified Fund that violates any provision of the §§ 468A or 4951.
PLR-133721-18                                7

      Section 468A(e)(7) provides that a taxpayer shall terminate the Qualified Fund
upon substantial completion of the decommissioning of the related nuclear power plant.

      Section 1.468A-1(b)(1) defines the term “eligible taxpayer” as a taxpayer that
possesses a qualifying interest in a nuclear power plant.

        Section 1.468A-1(b)(2) provides that a “qualifying interest” means: (A) a direct
ownership interest; and (B) a leasehold interest in any portion of a nuclear power plant if
the holder of the leasehold interest is primarily liable under Federal or state law for
decommissioning such portion of the power plant, and no other person establishes a
qualified fund with respect to such portion of the nuclear power plant.

       Section 1.468A-1(b)(3) proves that a “direct ownership interest” of a nuclear
power plant does not include ownership of stock of a corporation that owns a nuclear
power plant or ownership of an interest in a partnership that owns a nuclear power
plant.

        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-1(b)(5) provides that a nuclear power plant is any nuclear power
reactor that is used predominantly in the trade or business of the burnishing or sale of
electric energy.

       Section 1.468-1(b)(6) provides that decommissioning costs mean all otherwise
deductible expenses to be incurred in connection with entombment, decontamination,
removal, and disposal of the structure, systems, and components of a nuclear power
plant that has permanently cease the production of electric energy. Decommissioning
costs also include costs incurred in connection with the construction, operation, and
ultimate decommissioning of a unit used solely to store spent nuclear fuel generated by
the nuclear plant, pending acceptance by the government for permanent storage or
disposal.

       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)(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
PLR-133721-18                                8

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)(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-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.

        Section 1.468A-5(c)(1)(i) provides that, 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
engages in an act of self-dealing (as defined in § 1.468A-5(b)(2)).

      Section 1.468A-6 provides rules applicable to the transfer of all or a portion of a
taxpayer’s qualifying interest in a nuclear power plant (and transfer of the qualified
nuclear decommissioning fund), including a plant that has permanently ceased to
produce electricity, 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; and

              (2) Immediately after the disposition—
PLR-133721-18                                  9

                     (i) The transferee maintains a qualified nuclear decommissioning
                     fund with respect to the interest acquired; and
                     (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 nuclear power 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 plant) 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 § 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 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 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
PLR-133721-18                                10

             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
             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 § 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.

Conclusions

       Based on the information submitted by Seller and Purchaser, we reach the
following conclusions:

1) The Qualified Fund will not be disqualified by reason of the Fund Transfer.
2) Seller, Purchaser, and/or the Qualified Fund will not recognize gain or loss under §
   468A by reason of the transfer of the Qualified Fund.
3) After the Fund Transfer, the Qualified Fund will continue to be treated as satisfying
   the requirements of § 468A.
4) Following the Fund Transfer, the tax basis in the Qualified Fund will be the same as
   the tax basis in those assets immediately before the Fund Transfer.


        Except as specifically determined above, no opinion is expressed or implied
concerning the Federal income tax consequences of the transaction described
above. The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalties of perjury statement executed
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 specifically conditioned on the approval of the transaction by a regulatory body
having jurisdiction over such transaction.
PLR-133721-18                                   11


       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 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 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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