[Federal Register Volume 72, Number 175 (Tuesday, September 11, 2007)]
[Rules and Regulations]
[Pages 51703-51706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-17817]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9358]
RIN 1545-BC99


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 regulations.

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SUMMARY: This document contains final 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.

DATES: Effective Date: These regulations are effective September 11, 
2007.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.338-6(c)(5)(vi) and 1.1060-1(e)(1)(ii)(C)(4).

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

SUPPLEMENTARY INFORMATION:

Background

    On September 16, 2004, the IRS and Treasury Department issued a 
notice of

[[Page 51704]]

proposed rulemaking and temporary regulations in the Federal Register 
(69 FR 55740), modifying regulations under sections 338 and 1060 of the 
Internal Revenue Code (Code). The text of the temporary regulations was 
identical to the text of the proposed regulations.
    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 regime employs a residual method 
of allocation that divides assets into seven classes and allocates the 
consideration 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.
    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.
    In connection with the sale of a nuclear power plant, 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 plant 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 such funds may not be a fund described in section 468A. 
Such other funds are referred to as 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.
    The preamble to the proposed and temporary regulations concluded 
that the decommissioning liability will not satisfy the economic 
performance test until decommissioning occurs, and therefore that, 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.
    Generally under the residual method, the purchase price is 
allocated to the nonqualified fund's assets, which are typically Class 
I and 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 (that is, a depreciation deduction) for the decommissioning 
liability until economic performance occurs on decommissioning.
    To mitigate the tax effect of these decommissioning liabilities' 
not satisfying the statutory requirements for economic performance as 
to the purchaser, the temporary regulations added 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 
irrevocably 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 subsidiary corporation 
is 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 is treated as made for the hypothetical 
subsidiary corporation (regardless of whether the requirements for a 
section 338(h)(10) election are otherwise satisfied).
    The election converts the assets of the nonqualified fund from 
primarily Class I and Class II assets into stock of a hypothetical 
subsidiary corporation 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 the 
election is made, it is expected that a larger amount of the initial 
purchase price would be available to be allocated to the plant and 
other operating assets than if no such election had been made. However, 
in such a case, a much smaller amount of the initial purchase price 
would be available to be allocated to the assets of the nonqualified 
fund. Accordingly, a disposition of the nonqualified fund assets would 
likely result in current gain recognition.

Explanation of Provisions and Summary of Comments

    A number of comments on the proposed regulations were received, the 
most significant of which are discussed below. No public hearing was 
requested nor held.

Economic Performance Test

    The preamble to the proposed and temporary regulations discussed 
application of the economic performance test of section 461 to the 
assumption of decommissioning liabilities by the purchaser. Various 
commentators requested that, with respect to the purchaser of a nuclear 
power plant, the economic performance rules outlined in the proposed 
and temporary regulations be modified to provide that economic 
performance with respect to an assumed decommissioning liability be 
deemed to occur at the time of purchase rather than upon performance of 
the decommissioning activities. Specifically, commentators pointed out 
that the election in the proposed and temporary regulations will 
typically result in the purchaser holding the assets of the 
nonqualified fund with little or no tax basis, and subsequent 
investment reallocations undertaken during the course of portfolio 
management will result in gain recognition and a current tax liability. 
Further, the commentators noted that nonqualified trust agreements 
related to nuclear decommissioning obligations often require the 
trustees to remit to the purchasers, out of trust assets, the monies 
necessary to pay the purchasers' taxes resulting from the trusts' sales 
of assets. The commentators expressed concern that this requirement 
will result in fewer assets in the trust to be used to decommission the 
nuclear power plant because trustees will be required to either remit 
taxes from the fund or restrict changes in the fund's investment 
portfolio.
    The IRS and Treasury Department recognize that requiring the 
purchaser to satisfy the economic performance of a liability assumed in 
a purchase transaction can result in the deferral of the basis of the 
acquired assets in the hands of the purchaser. However, this result is 
not unique to the assumption of decommissioning liabilities and 
therefore, the economic performance concerns raised by commentators

[[Page 51705]]

extend beyond the scope of these regulations. The final regulations 
adopt the rules provided in the proposed and temporary regulations 
which are consistent with the application of economic performance rules 
of section 461 to liabilities assumed by a purchaser.

The Deemed Section 338(h)(10) Election

    Several of the commentators urge that, if the IRS and Treasury 
Department decline to change the position on economic performance, then 
the final regulations should eliminate the particular result of the 
Sec.  1.338-6T(c)(5) election set forth in Sec.  1.338-6T(c)(5)(i)(E). 
That provision deems a section 338(h)(10) election to be made with 
respect to the hypothetical subsidiary corporation that results from 
making the Sec.  1.338-6T(c)(5) election. The deemed section 338(h)(10) 
election operates to eliminate any carryover of the historic basis in 
the assets in the nonqualified decommissioning fund from the seller to 
the buyer. The commentators maintain that, as a substitute for the 
Sec.  1.338-6T(c)(5) election, the parties to the transaction could 
preserve the historic basis in the assets in the nonqualified fund by 
having the seller incorporate the nonqualified fund in a new subsidiary 
with the subsidiary assuming the appropriate portion of the 
decommissioning obligation long before the sale of the nuclear power 
plant.
    However, simply eliminating the deemed section 338(h)(10) election 
that results from making the Sec.  1.338-6T(c)(5) election would not 
necessarily result in the same tax consequences to the parties as a 
transaction in which the seller incorporated the nonqualified fund in a 
new subsidiary prior to the sale of the nuclear power plant. The 
purchase of a subsidiary as opposed to an assumption of the 
decommissioning liability generally would result in tax accounting 
differences not only to the buyer but also the seller. Eliminating the 
deemed section 338(h)(10) election that results from making the Sec.  
1.338-6T(c)(5) election would have the effect of essentially 
accelerating economic performance with respect to an assumed nuclear 
decommissioning liability in a manner inconsistent with the economic 
performance rules of other assumed liabilities. Therefore, the final 
regulations adopt the deemed section 338(h)(10) election rule as 
provided in Sec.  1.338-6T(c)(5)(i)(E).
    Another group of commentators urge that the Sec.  1.338-6T(c)(5) 
election be made retroactively available prior to September 15, 2004. 
The allocation rules applicable under sections 338 and 1060 prior to 
September 15, 2004, however, were comprehensive, and the manner in 
which they operated was well known to participants in the nuclear power 
industry. Section 1.338-6T(c)(5) originally was proposed with a 
prospective effective date, and, while the members of the nuclear power 
industry at that time urged that Sec.  1.338-6T(c)(5) be made available 
retroactively, the IRS and Treasury Department declined to do so 
because transactions negotiated prior to September 15, 2004, would have 
been based on the rules of Sec.  1.338-6 without inclusion of Sec.  
1.338-6T(c)(5). Although the commentators state that the nuclear power 
industry is very competitive and that some purchasers who purchased 
nuclear power plants prior to September 15, 2004, might be at a 
disadvantage relative to those who purchased on or after September 15, 
2004, these final regulations are only applicable prospectively so as 
not to retroactively alter the tax consequences of prior transactions.
    Finally, one commentator notes that Sec.  1.338-6T(c)(5)(i)(D) 
treats the hypothetical subsidiary corporation as bearing 
responsibility for decommissioning only to the extent that assets of 
the fund are expected to be used for that purpose (the expected use 
standard). The commentator argues that proving the expected use of the 
nonqualified assets might be a contentious issue and prove difficult. 
The commentator proposes that, for purposes of clarity, the 
hypothetical subsidiary corporation should be treated as bearing the 
responsibility for decommissioning in an amount equal to the fair 
market value of the nonqualified fund assets at the time of the closing 
of the transaction (causing the stock of the hypothetical subsidiary 
corporation to be assigned a zero value). The commentator suggests that 
such an approach would eliminate the uncertainty contained in the 
expected use standard and ensure that no portion of the purchase price 
is allocated to the nonqualified assets.
    The IRS and Treasury Department believe, however, that the 
implementation of an approach that does not establish a connection 
between the fund assets and their expected use may lead to the over 
funding of nonqualified funds in certain circumstances and 
inappropriate allocations of basis. Accordingly, the final regulations 
retain the expected use standard.

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. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations and pursuant to 5 
U.S.C. 553(d)(3) it has been determined that that a delayed effective 
date is unnecessary because this rule finalizes currently effective 
temporary rules regarding the treatment of certain nuclear 
decommissioning funds for purposes of allocating purchase price in 
certain acquisitions without substantive change. It is hereby certified 
that these regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that these regulations will affect sellers and purchasers of 
nuclear power plants or the stock of corporations that own nuclear 
power plants in qualified stock purchases, which tend to be larger 
businesses. Therefore, a regulatory flexibility analysis is not 
required. Pursuant to section 7805(f) of the Code, the notice of 
proposed rulemaking preceding these final regulations was submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

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
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by removing 
the entries for Sections 1.338-6T and 1.1060-1T.

    Authority: 26 U.S.C. 7805. * * *


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


Sec.  1.338-0  Outline of topics.

* * * * *


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

* * * * *

[[Page 51706]]

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

0
Par. 3. Paragraph (c)(5) of Sec.  1.338-6 is amended to read as 
follows:


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

* * * * *
    (c) * * *
    (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/applicability date. This paragraph (c)(5) applies to 
qualified stock purchases occurring on or after September 11, 2007. For 
qualified stock purchases occurring before September 11, 2007 and on or 
after September 15, 2004, see Sec.  1.338-6T as contained in 26 CFR 
Part 1 in effect on April 1, 2007. For qualified stock purchases 
occurring before September 15, 2004, see Sec.  1.338-6 as contained in 
26 CFR Part 1 in effect on April 1, 2004.


Sec.  1.338-6T  [Removed]

0
Par. 4. Section 1.338-6T is removed.

0
Par. 5. Section 1.1060-1 is amended by:
0
1. Revising in the Outline of Topics in paragraph (a)(3), the entry for 
paragraph (e)(1)(ii)(C).
0
2. Removing the last sentence of paragraph (c)(3) and adding four new 
sentences in its place.
0
3. Revising paragraph (e)(1)(ii)(C).
    The revisions read as follows:


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

    (a) * * *
    (3) * * *
* * * * *
    (e) * * *
    (1) * * *
    (ii) * * *
    (C) Election described in Sec.  1.338-6(c)(5).
* * * * *
    (c) * * *
    (3) Certain costs. * * * If an election described in Sec.  1.338-
6(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 11, 2007. 
For applicable asset acquisitions occurring before September 11, 2007, 
and on or after September 15, 2004, see Sec.  1.1060-1T as contained in 
26 CFR Part 1 in effect on April 1, 2007. For applicable asset 
acquisitions occurring before September 15, 2004, see Sec. Sec.  1.338-
6 and 1.1060-1 as contained in 26 CFR Part 1 in effect on April 1, 
2004.
* * * * *
    (e) * * *
    (1) * * *
    (ii) * * *
    (C) Election described in Sec.  1.338-6(c)(5)--(1) Availability. 
The election described in Sec.  1.338-6(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.  1.338-6(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 consistent with having made the election.
    (3) Irrevocability of election. The election described in Sec.  
1.338-6(c)(5) is irrevocable.
    (4) Effective/applicability date. This paragraph (e)(1)(ii)(C) 
applies to applicable asset acquisitions occurring on or after 
September 11, 2007. For applicable asset acquisitions occurring before 
September 11, 2007 and on or after September 15, 2004, see Sec.  
1.1060-1T as contained in 26 CFR Part 1 in effect on April 1, 2007. For 
applicable asset acquisitions occurring before September 15, 2004, see 
Sec. Sec.  1.338-6 and 1.1060-1 as contained in 26 CFR Part 1 in effect 
on April 1, 2004.
* * * * *


Sec.  1.1060-1T  [Removed]

0
Par. 6. Section 1.1060-1T is removed.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
    Dated: August 31, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E7-17817 Filed 9-10-07; 8:45 am]
BILLING CODE 4830-01-P