[Federal Register Volume 69, Number 179 (Thursday, September 16, 2004)]
[Rules and Regulations]
[Pages 55740-55743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-20914]



[[Page 55740]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9158]
RIN 1545-BD59


Treatment of Certain Nuclear Decommissioning Funds for Purposes 
of Allocating Purchase Price in Certain Deemed and Actual Asset 
Acquisitions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to the allocation of purchase price in certain deemed and 
actual asset acquisitions under sections 338 and 1060. These 
regulations affect sellers and purchasers of nuclear power plants or of 
the stock of corporations that own nuclear power plants. The text of 
the temporary regulations also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on September 15, 
2004.

FOR FURTHER INFORMATION CONTACT: Richard Starke at (202) 622-7790 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    Sections 338 and 1060 and the regulations thereunder provide a 
methodology by which the purchase or sales price in certain actual and 
deemed asset acquisitions is computed and allocated among the assets 
acquired or treated as acquired. The purchase price generally includes 
liabilities of the seller that are assumed by the purchaser. Those 
liabilities, however, must be treated as having been incurred by the 
purchaser. In order to be treated as having been incurred by the 
purchaser, in addition to other requirements, economic performance must 
have occurred with respect to the liability.
    Sections 338 and 1060 and the regulations promulgated thereunder 
employ a residual method of allocation under which assets are divided 
into seven classes and the consideration is allocated to each of the 
first six classes in turn, up to the fair market value of the assets in 
the class. The residual amount is allocated to assets in the last 
class. Accordingly, under the residual method of Sec.  1.338-6, the 
purchase or sales price is first allocated to Class I assets (cash and 
general deposit accounts other than certain certificates of deposit), 
then Class II assets (actively traded personal property, certificates 
of deposit, foreign currency, U.S. government securities, and publicly 
traded stock), then Class III assets (assets that the taxpayer marks to 
market at least annually and certain debt instruments), then Class IV 
assets (inventory), then Class V assets (assets that are not assets of 
another class), then Class VI assets (section 197 intangibles, except 
goodwill and going concern value), and then Class VII assets (goodwill 
and going concern value). The ordering of the nonresidual classes 
generally reflects a policy of allocating basis first to those assets 
that are susceptible to more accurate valuation or the cost of which is 
recovered most rapidly. See Notice of Proposed Rulemaking REG-107069-97 
[64 FR 43462, 43465, 43469; August 10, 1999, (1999-2 C.B. 346, 350, 
354)].
    In connection with the sale of a nuclear power station, the assets 
sold by the seller and purchased by the purchaser may include the 
plant, equipment, operating assets, and one or more funds holding 
assets that have been set aside for the purpose of satisfying the 
owner's responsibility to decommission the nuclear power station after 
the conclusion of its useful life (the decommissioning liability), and 
the purchaser may have agreed to satisfy the decommissioning liability. 
One or more of the funds may be funds described in section 468A 
(qualified funds). Contributions to qualified funds are limited by 
statute and regulations but give rise to a deduction in the year of 
contribution. The qualified fund, not the contributor, is treated as 
the owner of the assets of the fund and is taxed on the income earned 
on the fund's assets. The assets of qualified funds are not treated as 
sold or purchased in an actual or deemed sale of the assets of a 
corporation that owns a nuclear power plant. One or more of the funds, 
however, may be funds that are not described in section 468A 
(nonqualified funds). Contributions to nonqualified funds do not give 
rise to a deduction in the year of contribution. In addition, the 
assets of a nonqualified fund continue to be treated as assets of the 
contributor.
    Because the decommissioning liability will not satisfy the economic 
performance test until decommissioning occurs, as of the purchase date, 
it is not included in the purchase price that the purchaser allocates 
to the acquired assets. As a result, as of the purchase date, the 
purchase price to be allocated by the purchaser among the acquired 
assets may be significantly less than the fair market value of those 
assets. This situation will generally persist until economic 
performance with respect to the decommissioning liability is satisfied 
through decommissioning.
    Under the residual method, the purchase price is allocated to the 
nonqualified fund's assets, which are typically Class II assets, before 
it is allocated to the plant, equipment, and other operating assets, 
which are typically Class V assets. Because the purchase price does not 
reflect the decommissioning liability and is first allocated to the 
assets of the nonqualified fund, the purchase price allocated to the 
plant, equipment, and other operating assets may be less than their 
fair market value. To the extent the purchase price allocated to the 
plant, equipment, and other operating assets is less than their fair 
market value, the purchaser will not recover a tax benefit (i.e., a 
depreciation deduction) for the decommissioning liability until 
economic performance occurs on decommissioning. This result is 
appropriate given Congress's decision in enacting section 468A not to 
allow a plant operator a deduction prior to decommissioning for funds 
set aside in excess of those amounts set aside in qualified funds, and 
Congress's decision in enacting section 461(h) not to allow a deduction 
for costs that do not satisfy the economic performance test.
    A number of commentators have argued that economic performance 
occurs with respect to such decommissioning liabilities at the time of 
the purchase. These commentators have based their positions on section 
461(h)(2)(A)(ii) and Sec.  1.461-4(d)(5).
    The IRS and Treasury Department do not believe that this position 
is consistent with the rule and policies of section 461(h)(2). Under 
section 461(h)(2)(A)(ii), if a liability arises out of the providing of 
property to the taxpayer by another person, economic performance occurs 
as such person provides such property. Decommissioning liabilities are 
the same type of liabilities to both the seller and the purchaser and 
are fixed by the same circumstances, specifically acquiring a power 
plant and the license to operate it. The economic performance rules 
look at the nature of the liability and look to what the taxpayer is 
required to ``perform'' in order to satisfy the liability. To the 
purchaser, merely acquiring the power plant does not satisfy the 
decommissioning liabilities. Instead, the purchaser cannot be 
considered to satisfy the liabilities until

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it performs those services required to decommission the plant. See 
section 461(h)(2)(B) (providing that where the liability of the 
taxpayer requires the taxpayer to provide property or services, 
economic performance occurs as the taxpayer provides such property or 
service). Therefore, section 461(h)(2)(A)(ii) does not apply to treat 
economic performance as satisfied at the time of purchase.
    With respect to the application of Sec.  1.461-4(d)(5), that 
regulation provides that if, in connection with the sale or exchange of 
a trade or business by a taxpayer, the purchaser expressly assumes a 
liability arising out of the trade or business that the taxpayer (the 
seller) but for the economic performance requirement would have been 
entitled to incur as of the date of the sale, economic performance with 
respect to that liability occurs as the amount of the liability is 
properly included in the amount realized on the transaction by the 
taxpayer (the seller). The IRS and Treasury Department believe the 
``taxpayer'' described in Sec.  1.461-4(d)(5) is the seller, and the 
acceleration of economic performance is for the ``taxpayer.'' Section 
1.461-4(d)(5) does not address the treatment of the purchaser. This 
interpretation is consistent with the discussion of the preamble to 
that regulation. [TD 8408, 57 FR 12412-3, 12415-6 (April 10, 1992), 
(1992-1 C.B. 157, 160)].
    Nonetheless, the IRS and Treasury Department recognize the special 
circumstances related to the purchase and sale of nuclear power plants 
and transfer of nonqualified funds. The Nuclear Regulatory Commission 
requires, as one of several decommissioning alternatives available to 
nuclear power plant operators, that funds be established and maintained 
to fund decommissioning and related administrative expenditures and 
that the use of such set aside funds be primarily restricted to such 
uses. Thus, although the assets in nonqualified funds are relatively 
liquid, they are ones to which the purchaser's access is significantly 
limited.
    To mitigate the tax effect of these decommissioning liabilities' 
not satisfying the statutory requirements for economic performance as 
to the purchaser, these temporary regulations add Sec.  1.338-6T. That 
regulation provides that, for purposes of allocating purchase or sales 
price among the acquisition date assets of a target, a taxpayer may 
elect to treat a nonqualified fund as if such fund were an entity 
classified as a corporation the stock of which were among the 
acquisition date assets of the target and a Class V asset. In these 
cases, for allocation purposes, the hypothetical corporation will be 
treated as bearing the responsibility for decommissioning to the extent 
assets of the fund are expected to be used for that purpose. A section 
338(h)(10) election will be treated as made for the hypothetical 
corporation (regardless of whether the requirements for a section 
338(h)(10) election are otherwise satisfied).
    The election provided for in these temporary regulations converts 
the assets of the nonqualified fund from primarily Class I and Class II 
assets to the assets of a corporation the stock of which is a Class V 
asset and allows the present cost of the decommissioning liability 
funded by the nonqualified fund, which otherwise cannot be taken into 
account for income tax purposes, to be netted against the fund assets 
for the sole purpose of valuing the stock of the hypothetical 
subsidiary corporation. Therefore, if this election were made, it would 
be expected that the assets of the nonqualified fund would be allocated 
a much smaller amount of the initial purchase price than if no such 
election had been made, and the disposition of fund assets would result 
in gain. A larger amount of the initial purchase price, however, would 
be available for allocation to the plant and other operating assets.
    This election is available for applicable asset acquisitions and 
qualified stock purchases on or after September 15, 2004. The purchaser 
may make this election regardless of whether the seller or sellers also 
make the election. However, in the case of a deemed asset acquisition 
under section 338, if the target corporation is an S corporation, all 
of the S corporation shareholders, including those that do not sell 
their stock, must consent to the election for the election to be 
effective as to any S corporation shareholder. In the case of a deemed 
asset acquisition under section 338, the election is made by taking a 
position on an original or amended tax return for the taxable year of 
the qualified stock purchase that is consistent with having made the 
election. Such tax return, however, must be filed no later than the 
later of 30 days after the date on which the section 338 election is 
due or the day the original tax return for the taxable year of the 
qualified stock purchase is due (with extensions). The election is 
irrevocable. If the transaction is an applicable asset acquisition 
within the meaning of section 1060, the election is made by taking a 
position on the timely filed original return for the year of the 
applicable asset acquisition.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. These temporary 
regulations provide elective relief to certain purchasers of stock and 
assets by providing an alternative method for allocating basis among 
acquired assets. It is necessary to provide this relief immediately to 
remove an impediment to such transactions. Accordingly, good cause is 
found for dispensing with prior notice and comment pursuant to 5 U.S.C. 
553(b) and for dispensing with a delayed effective date pursuant to 5 
U.S.C. 553(d). For applicability of the Regulatory Flexibility Act (5 
U.S.C. chapter 6), see the notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register. The IRS and the Treasury Department request comments from 
small entities that believe they might be adversely affected by these 
regulations. Pursuant to section 7805(f) of the Code, these temporary 
regulations will be submitted to the Chief Counsel for the Advocacy of 
the Small Business Administration for comment on their impact.

Drafting Information

    The principal author of these regulations is Richard Starke, Office 
of the Associate Chief Counsel (Corporate).

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read, in part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.338-6T also issued under 26 U.S.C. 337(d), 338, and 
1502. * * *


0
Par. 2. Section 1.338-0 is amended by adding an entry in the list of 
captions for paragraph (c)(5) of Sec.  1.338-6 and Sec.  1.338-6T to 
read as follows:


Sec.  1.338-0  Outline of topics.

* * * * *


Sec.  1.338-6  Allocation of ADSP and AGUB among target assets.

* * * * *
    (c) * * *
    (5) Allocation to certain nuclear decommissioning funds. [Reserved]
* * * * *

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Sec.  1.338-6T  Allocation of ADSP and AGUB among target assets 
(temporary).

    (a) through (c)(4) [Reserved]
    (c)(5) Allocation to certain nuclear decommissioning funds.
    (d) [Reserved]

0
Par. 3. Section 1.338-6 is amended by adding paragraph (c)(5) to read 
as follows:


Sec.  1.338-6  Allocation of ADSP and AGUB among target assets.

* * * * *
    (c) * * *
    (5) Allocation to certain nuclear decommissioning funds. 
[Reserved]. For further guidance, see Sec.  1.338-6T.
* * * * *

0
Par. 4. Section 1.338-6T is added to read as follows:


Sec.  1.338-6T  Allocation of ADSP and AGUB among target assets 
(temporary).

    (a) through (c)(4) [Reserved]. For further guidance, see Sec.  
1.338-6(a) through (c)(4).
    (5) Allocation to certain nuclear decommissioning funds--(i) 
General rule. For purposes of allocating ADSP or AGUB among the 
acquisition date assets of a target (and for no other purpose), a 
taxpayer may elect to treat a nonqualified nuclear decommissioning fund 
(as defined in paragraph (c)(5)(ii) of this section) of the target as 
if--
    (A) Such fund were an entity classified as a corporation;
    (B) The stock of the corporation were among the acquisition date 
assets of the target and a Class V asset;
    (C) The corporation owned the assets of the fund;
    (D) The corporation bore the responsibility for decommissioning one 
or more nuclear power plants to the extent assets of the fund are 
expected to be used for that purpose; and
    (E) A section 338(h)(10) election were made for the corporation 
(regardless of whether the requirements for a section 338(h)(10) 
election are otherwise satisfied).
    (ii) Definition of nonqualified nuclear decommissioning fund. A 
nonqualified nuclear decommissioning fund means a trust, escrow 
account, Government fund or other type of agreement--
    (A) That is established in writing by the owner or licensee of a 
nuclear generating unit for the exclusive purpose of funding the 
decommissioning of one or more nuclear power plants;
    (B) That is described to the Nuclear Regulatory Commission in a 
report described in 10 CFR 50.75(b) as providing assurance that funds 
will be available for decommissioning;
    (C) That is not a Nuclear Decommissioning Reserve Fund, as 
described in section 468A;
    (D) That is maintained at all times in the United States; and
    (E) The assets of which are to be used only as permitted by 10 CFR 
50.82(a)(8).
    (iii) Availability of election. P may make the election described 
in this paragraph (c)(5) regardless of whether the selling consolidated 
group (or the selling affiliate or the S corporation shareholders) also 
makes the election. In addition, the selling consolidated group (or the 
selling affiliate or the S corporation shareholders) may make the 
election regardless of whether P also makes the election. If T is an S 
corporation, all of the S corporation shareholders, including those 
that do not sell their stock, must consent to the election for the 
election to be effective as to any S corporation shareholder.
    (iv) Time and manner of making election. The election described in 
this paragraph (c)(5) is made by taking a position on an original or 
amended tax return for the taxable year of the qualified stock purchase 
that is consistent with having made the election. Such tax return must 
be filed no later than the later of 30 days after the date on which the 
section 338 election is due or the day the original tax return for the 
taxable year of the qualified stock purchase is due (with extensions).
    (v) Irrevocability of election. An election made pursuant to this 
paragraph (c)(5) is irrevocable.
    (vi) Effective date. This paragraph (c)(5) applies to qualified 
stock purchases occurring on or after September 15, 2004.
    (d) [Reserved]. For further guidance, see Sec.  1.338-6(d).

0
Par. 5. Section 1.1060-1 is amended in paragraph (a)(3) to add an entry 
to reflect the addition of paragraph (e)(1)(ii)(C); by adding a 
sentence to the end of paragraph (c)(3); and by adding paragraph 
(e)(1)(ii)(C) to read as follows:


Sec.  1.1060-1  Special allocation rules for certain asset 
acquisitions.

    (a) * * *
    (3) * * *
* * * * *
    (e) Reporting requirements.
    (1) Applicable asset acquisitions.
* * * * *
    (ii) Time and manner of reporting.
* * * * *
    (C) Election described in Sec.  1.338-6T(c)(5).
* * * * *
    (c) * * *
    (3) * * * For further guidance, see Sec.  1.1060-1T.
* * * * *
    (e) * * *
    (1) * * *
    (ii) * * *
    (C) Allocation to certain nuclear decommissioning funds. 
[Reserved]. For further guidance, see Sec.  1.338-6T.
* * * * *
0
Par. 6. Section 1.1060-1T is added to read as follows:


Sec.  1.1060-1T  Special allocation rules for certain asset 
acquisitions (temporary).

    (a) through (c)(2) [Reserved]. For further guidance, see Sec.  
1.1060-1(a) through (c)(2).
    (c)(3) Certain costs. The seller and purchaser each adjusts the 
amount allocated to an individual asset to take into account the 
specific identifiable costs incurred in transferring that asset in 
connection with the applicable asset acquisition (e.g., real estate 
transfer costs or security interest perfection costs). Costs so 
allocated increase, or decrease, as appropriate, the total 
consideration that is allocated under the residual method. No 
adjustment is made to the amount allocated to an individual asset for 
general costs associated with the applicable asset acquisition as a 
whole or with groups of assets included therein (e.g., non-specific 
appraisal fees or accounting fees). These latter amounts are taken into 
account only indirectly through their effect on the total consideration 
to be allocated. If an election described in Sec.  1.338-6T(c)(5) is 
made with respect to an applicable asset acquisition, any allocation of 
costs pursuant to this paragraph (c)(3) shall be made as if such 
election had not been made. The preceding sentence applies to 
applicable asset acquisitions occurring on or after September 15, 2004.
    (c)(4) through (e)(1)(ii)(B) [Reserved]. For further guidance, see 
Sec.  1.1060-1(c)(4) through (e)(1)(ii)(B).
    (e)(1)(ii)(C) Election described in Sec.  1.338-6T(c)(5)--(1) 
Availability. The election described in Sec.  1.338-6T(c)(5) is 
available in respect of an applicable asset acquisition provided that 
the requirements of that section are satisfied. Such election may be 
made by the seller, regardless of whether the purchaser also makes the 
election, and may be made by the purchaser, regardless of whether the 
seller also makes the election.
    (2) Time and manner of making election. The election described in 
Sec.  1.338-6T(c)(5) is made by taking a position on a timely filed 
original tax return for the taxable year of the applicable asset 
acquisition that is

[[Page 55743]]

consistent with having made the election.
    (3) Irrevocability of election. The election described in Sec.  
1.338-6T(c)(5) is irrevocable.
    (4) Effective date. This paragraph (e)(1)(ii)(C) applies to 
applicable asset acquisitions occurring on or after September 15, 2004.
    (e)(2) [Reserved]. For further guidance, see Sec.  1.1060-1(e)(2).

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: September 8, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-20914 Filed 9-15-04; 8:45 am]
BILLING CODE 4830-01-U