NO GAIN OR LOSS FROM TRANSFER OF QUALIFIED NUCLEAR DECOMMISSIONING FUND.

Index Number: 468A.00-00, 461.00-00, 1012.06-00, 1060.00-00

[2] The Taxpayer has represented the following facts and information relating to the ruling request:

[3] The Seller is a wholly-owned subsidiary of Parent and files, with Parent, a consolidated federal income tax return on a calendar-year basis using the accrual method of accounting. On c, Parent was acquired by Company. Seller owns and operates electric generation plants and a distribution network to carry power to industrial and retail customers. The Buyer will be engaged in the business of acquiring and operating nuclear power plants for the generation and sale of electric power.

[4] Seller is in the process of withdrawing from the electric power generation business and sold the Plant and related assets to the Buyer pursuant to an asset purchase agreement dated a. This sale took place on d. Seller transferred to Buyer the Plant and related assets, including nuclear decommissioning trusts in exchange for a cash payment and the assumption, by the Buyer, of the nuclear decommissioning and other Plant-related liabilities. Seller will purchase a percentage of the electricity generated by the Plant through b.

[5] Seller maintains a qualified nuclear decommissioning fund and a nonqualified decommissioning fund both of which are managed by the Trustee.

REQUESTED RULING #1: Seller will not recognize any gain or otherwise take into account any income attributable to the qualified nuclear decommissioning fund assets upon the sale to the Buyer.

[6] Section 468A(a) provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund (the qualified nuclear decommissioning fund). Section 468A(b) limits the annual deduction of the electing taxpayer to the lesser of the ruling amount or the amount of decommissioning costs included in the electing taxpayer's cost of service for ratemaking purposes for the taxable year.

[7] Section 468A(d) provides that the ruling amount means the amount determined by the Service to be necessary to (A) fund that portion of the nuclear decommissioning cost with respect to the nuclear power plant that bears the same ratio to the total nuclear decommissioning costs with respect to such nuclear power plant as the period for which the fund is in effect bears to the estimated useful life of the nuclear power plant, and (B) prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level funding.

[8] Section 468A(e)(2) provides that the rate of tax on the income of a qualified nuclear decommissioning fund is 20 percent. Section 468A(e)(4) provides, in pertinent part, that the assets in a qualified nuclear decommissioning fund shall be used exclusively for satisfying the liability of any taxpayer contributing to the qualified nuclear decommissioning fund.

[9] Section 1.468A-1(b)(1) of the Federal Income Tax Regulations provides that an eligible taxpayer is a taxpayer that possesses a qualifying interest in a nuclear power plant. Section 1.468A-1(b)(2) provides that a qualifying interest is a direct ownership interest or a leasehold interest meeting certain additional requirements. Section 1.468A-1(b)(4) provides, in part, that a nuclear power plant is any nuclear power reactor that is used predominantly in the trade or business of the furnishing or sale of electric energy, if the rates for such furnishing or sale have been established or approved by a public utility commission.

[10] 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. An electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant. Section 1.468A-5(c)(1)(i) provides that if, at any time during the taxable year, a nuclear decommissioning fund does not satisfy the requirements of section 1.468A-5(a), the Service may disqualify all or a portion of the fund as of the date that the fund does not satisfy the requirements. Section 1.468A-5(c)(3) provides that if a qualified nuclear decommissioning fund is disqualified, the fair market value (with certain adjustments) of the assets in the fund is deemed to be distributed to the electing taxpayer and included in that taxpayer's gross income for the taxable year.

[11] Section 1.468A-6 generally provides rules for the transfer of an interest in a nuclear power plant (and transfer of the qualified nuclear decommissioning fund) where after the transfer the transferee is an eligible taxpayer. Under section 1.468A-6(g), 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 section 468A.

[12] Under the specific facts herein, the Service will generally treat this sale, under section 1.468A-6(g), as a disposition qualifying under the general provisions of section 1.468A-6. This exercise of discretion will apply to the provisions of 1.468-6, except those outlined in 1.468A-6(e) with respect to the calculation of a schedule of ruling amounts subsequent to a sale. Thus, under section 1.468A-6 the Seller's fund will not be disqualified upon the sale when the fund withdrawal rights transfer to the Buyer.

[13] Section 1.468A-6(c)(1) provides that neither a seller of an interest in a nuclear power plant nor the seller's fund will recognize gain or loss or otherwise take any income or deduction into account by reason of a sale. Accordingly, the Seller will not recognize gain or loss or otherwise take into account any income or deduction upon the transfer of the qualified nuclear decommissioning fund to the Buyer as a result of the sale.

REQUESTED RULING #2: Seller's qualified nuclear decommissioning fund will not recognize gain or loss upon its transfer to the Buyer as a result of the sale.

[14] Section 1.468A-6(c)(1) provides that neither a seller of an interest in a nuclear power plant nor the seller's fund will recognize gain or loss or otherwise take any income or deduction into account by reason of a sale. Thus, Sellers qualified nuclear decommissioning fund will not recognize gain or loss upon its transfer to the Buyer as a result of the sale.

REQUESTED RULING #3: Seller's gain or loss on the sale of the plant and associated assets will be the difference between seller's basis in such assets (excluding the assets contained in the qualified nuclear decommissioning fund) and its amount realized.

[15] Section 1001(a) provides that a taxpayer's gain from the sale of property shall be the excess of the amount realized over the taxpayers adjusted basis provided in section 1011 for determining gain and that the taxpayer's loss from the sale of property shall be the excess of the taxpayer's adjusted basis provided in section 1011 for determining loss over the amount realized.

[16] Section 1060(a) provides that in the case of any applicable asset acquisition, for purposes of determining the transferee's basis and the gain or loss of the transferor, the consideration received for the assets shall be allocated in the same manner as amounts are allocated under section 338(b)(5). See section 1.1060-1T. Under section 1060(c), an applicable asset acquisition means any transfer of assets which constitute a trade or business, and with respect to which the transferee's basis is determined wholly by reference to the consideration paid for such assets.

[17] Accordingly, on the sale of the Plant and Taxpayer's interests in the assets in the decommissioning trust funds (other than those assets in the qualified nuclear decommissioning fund), Taxpayer's gain or loss on each transferred asset will be the difference between the basis of the asset and the amount realized with respect to that asset, taking into account the allocation of consideration pursuant to section 1060 and the corresponding regulations.

REQUESTED RULING #4: Seller's amount realized on the sale of the Plant and associated assets will include the cash received from the Buyer and the amount of the liabilities assumed by the Buyer, including the liability to decommission the plant (reduced by the amount of such liability to be funded by the qualified nuclear decommissioning fund) to the extent such liabilities are taken into account for federal income tax purposes.

[18] Section 1001(b) provides that a seller's amount realized from the sale of property is the sum of any money received plus the fair market value of the property (other than money) received.

[19] Section 1.1001-2(a)(1) provides 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. This may include debt and non-debt liabilities. See Fisher Co. v. Commissioner, 84 T.C. 1319, 1345-47 (1985) (assumption of lessee's repair liability was part of amount realized on sale of leasehold). As an owner and operator of a nuclear plant, Taxpayer is required by law to provide for eventual decommissioning. See 10 CFR sections 50.33, 50.75.

[20] Because the transfer of the qualified nuclear decommissioning fund by Taxpayer to Buyer will not be a taxable transfer, the amount of the liabilities assumed by Buyer that are included in Taxpayer's amount realized will not include the portion of the liability to decommission the Plant attributable to the qualified nuclear decommissioning fund on the date of the transfer.

[21] Accordingly, Taxpayer's amount realized from the sale of the Plant and the assets in the decommissioning trust funds will include the cash received from Buyer and the assumed liabilities, to the extent these liabilities are taken into account for federal income tax purposes. This would include the amount of the decommissioning liability assumed by Buyer, not including the portion of the liability to decommission Plant attributable to the qualified nuclear decommissioning fund on the date of the transfer.

REQUESTED RULING #5: The Seller's basis in the assets will be its adjusted basis in such assets.

[22] Section 1001(a) provides that a taxpayer's gain from the sale of property shall be the excess of the amount realized over the taxpayer's adjusted basis provided in section 1011 for determining gain and that the taxpayer's loss from the sale of property shall be the excess of the taxpayer's adjusted basis provided in section 1011 for determining loss over the amount realized.

[23] Section 1011 provides that the adjusted basis for determining the gain or loss from the sale or other disposition of property is the basis of the property as adjusted by section 1016.

[24] Accordingly, for purposes of determining gain or loss on the transaction, Taxpayer's bases in the Plant and the assets in the decommissioning funds associated with the Plant (not including the assets in the qualified nuclear decommissioning fund) will be its adjusted bases in those assets.

REQUESTED RULING #6: Seller will be entitled to a deduction equal to the total of any amounts treated as realized by the Seller, or otherwise recognized as income by the Seller, as a result of the Buyer's assumption of the liability to decommission the Plant.

[25] 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.

[26] Section 461(h) makes clear that generally the all events test is not treated as having been met any earlier than the taxable year in which economic performance has occurred with respect to a liability. See also section 1.461-(4)(a)(1).

[27] 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) provides that economic performance occurs with respect to such service liabilities as the taxpayer incurs costs in connection with the satisfaction of the liability.

[28] Section 1.461-4(d)(5) provides an exception to the general economic performance rule for services where the taxpayer sells 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 the liability occurs as the amount of the liability is properly included in the amount realized on the sale by the taxpayer.

[29] 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. Here, the Seller clearly has the obligation to decommission the Plant. The fact of the obligation arose many years ago, at the time the Seller obtained its license to operate the Plant. See 10 C.F.R. sections 50.33 and 72.30, requiring the operator of a nuclear power plant to decommission it. Moreover, Congress recognized the existence of the decommissioning liability when, in 1984, it enacted section 461(h) and section 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).

[30] The second prong of the all events test requires the amount of the liability to be reasonably determinable. See section 1.461-1(a)(2)(ii). This prong is also satisfied. In the instant case, the amount of the Seller's decommissioning liability has been determined by experts in the nuclear decommissioning industry. Their calculations have been reviewed and accepted by both the Nuclear Regulatory Commission (NRC), which is charged with ensuring that sufficient funds are available to decommission the Plant, and the Commissions. In addition, there is also support in the Code for finding that the amount of the decommissioning liability is reasonably determinable at the time of 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 the utility to a deduction under section 468A, it is reasonable to conclude that the costs must also be sufficiently determinable to satisfy the second prong of the all events test.

[31] Given that the two prongs of the all events test are satisfied, economic performance with respect to the decommissioning liability occurs as of the date of the sale to the extent the liability is included in the Seller's amount realized. At that time, the Seller will be entitled to a deduction for the amount of its decommissioning liability associated with the Plant expressly assumed by the Buyer and included in the Seller's amount realized.

[32] Accordingly, to summarize the conclusions set forth above, we reach the following conclusions in response to the Taxpayers' requested rulings:

     1. The Seller will not recognize gain or loss or otherwise take

[34] In accordance with the powers of attorney, we are sending a copy of this ruling to your authorized representative. We are also sending a copy of this letter ruling to the District Director of District.

                                   Sincerely,