25 April 2016 Service rules on transferring nuclear energy facilities In PLR 201616005, the Service made several rulings regarding the transfer of nuclear energy facilities and the associated nuclear decommissioning liabilities. Taxpayer is the common parent of an affiliated group of corporations, including Seller 1 and Seller 2. Seller 1 wholly owns Plant A-1 and Plant A-2, both of which are nuclear-powered electric generating plants. Seller 2 partially owns and otherwise leases Plant B, also a nuclear-powered electric generating plant. Seller 1 and Seller 2 maintain separate nuclear decommissioning trusts for each of these nuclear plants (the Plant A-1, Plant A-2 and Plant B Qualified Funds). Each trust is irrevocably committed to the decommissioning of the facility and includes a fund that meets the requirements of Section 468A. The proposed transaction involves Seller 1 and Seller 2 each transferring their assets and liabilities to Buyer in exchange for a member interest. Buyer is currently a subsidiary of Taxpayer, but it is not a member of the affiliated group because Taxpayer does not meet the ownership threshold, nor will it after the transaction. The liabilities (including the nuclear decommissioning liability) that are assumed by Buyer will exceed the basis of all of the property that Buyer receives by an amount at least equal to the nuclear decommissioning liability. The sellers will treat the proposed transfers of their assets and liabilities as taxable transactions. If the transaction is governed by Section 351, the sellers will recognize gain under Section 357(c). It Section 351 does not apply, they will recognize gain under Section 1001. Section 468A allows a deduction for amounts contributed to a qualified nuclear decommissioning reserve fund. Treasury Reg. Section 1.468A-6 outlines the rules applicable to the transfer of an interest in a nuclear power plant. Treasury Reg. Section 1.468A-6(c) states that, if a disposition satisfying the requirements of Treasury Reg. Section 1.468A-6(b) will have the following tax consequences at the time it occurs, neither the transferor, the transferor's qualified nuclear decommissioning fund, the transferee nor the transferee's qualified nuclear decommissioning fund will recognize gain or loss. Further, the basis of the assets of a qualified nuclear decommissioning fund that are transferred will not change. The Service ruled that none of the Qualified Funds will be disqualified by the transfer and each will continue to be treated as satisfying the requirements of Section 468A. Second, no party to the transactions will recognize income, deduction, gain or loss as a result of the transfers of the qualified funds. Third, the tax basis of the assets of the qualified funds will not be changed by the transfers. Fourth, the amount realized by the Sellers in the proposed transaction will include the nuclear decommissioning liabilities associated with the plants, but not including the portion of the nuclear decommissioning liabilities funded by the Qualified Funds on the date of the transfer. Fifth, the Sellers may treat their respective nuclear decommissioning liability, to the extent that it is included in amount realized, as satisfying economic performance. The IRS then turned to Section 1001, which states that a seller's amount realized from the sale of property includes the amount of liabilities from which the seller is discharged as a result of the sale if those liabilities are fixed and determinable for purposes of Section 461. Treasury regulations under Section 461 state that a liability is incurred and generally taken into account when 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. The Service stated that the amount of each seller's nuclear decommissioning liability that is assumed by Buyer in excess of the fair market value of the assets in the qualified funds on the date of the transfer will be included in each seller's amount realized and taken into account in computing taxable income in the year of the sale. The Service stated that the all-events test was satisfied when the Sellers obtained operating licenses, then obligating themselves to decommission the facilities in the future. Second, the liability can be determined with reasonable accuracy based on estimates from experts in the nuclear decommissioning industry that have been accepted by the Nuclear Regulatory Commission. This ruling is consistent with the IRS's long standing position on the sale or exchange of nuclear power plants that includes the transfer of decommissioning trusts that economic performance occurs with respect to the transferred decommissioning liability under Treas. Reg. 1.461-4(d)(5) (not including the qualified portion of such liabilities). This portion of the liability is included in the proceeds of the sale. Although this is not addressed in the letter ruling, nuclear decommissioning is a specified liability loss under Section 172(f)(1)(B)(i)(II). If the Seller group has a net operating loss in the year of the sale, the fact that the decommissioning liability is treated as being incurred means that a portion (or all) of the loss may be eligible for carry back under the Section 172(f) provisions. Also note that nuclear decommissioning costs are carried back to the tax period in which the plant was originally placed in service under Section 172(f)(3). This ruling deals with the Sellers and does not address the tax issues associated with the Buyer's allocation of purchase price. The IRS position, which the courts have upheld, is that economic performance has not occurred with respect to the buyer, even though it may have occurred with respect to the sellers.1 That means the acquisition of the plant and related decommissioning trust results in an odd allocation of purchase price on the acquisition date. There are regulations that may allow a taxpayer to mitigate some of the adverse consequence that can result (see Treas. Reg. 1.338-6(c)(5)), but it is clear that tax basis in the assumed decommissioning obligation is created as the acquirer satisfies the liability.
Document ID: 2016-0748 | |||||||||||||||||
