Final Regs Reflect Partial Repeal of Nuclear Decommissioning Fund Qualification Requirements

 [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations relating to the qualification requirements of a nuclear decommissioning fund.

 Pursuant to former section 468A(e)(4)(C) of the Internal Revenue Code, current regulations require that nuclear decommissioning funds invest directly in permissible assets and permitted two or more such funds to combine assets for investment purposes. The Comprehensive National Energy Policy Act of 1992 repealed the investment restriction contained in section 468A(e)(4)(C). These final regulations amend the existing regulations to reflect the statutory change.

 DATES: These regulations are effective December 30, 1992.

 FOR FURTHER INFORMATION CONTACT: Peter C. Friedman of the Office of Assistant Chief Counsel (Passthroughs and Special Industries) at (202) 622-3110 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains amendments to the Income Tax Regulations (26 CFR part 1) to provide rules under section 468A of the Internal Revenue Code of 1986 (Code). Section 468A, relating to nuclear decommissioning costs, was added to the Code by section 91(c) of the Tax Reform Act of 1984 (Public Law 98-369, 98 Stat. 609). Section 1917 of the Comprehensive National Energy Policy Act of 1992 (Act) revised section 468A(e)(4) to eliminate the requirement that a nuclear decommissioning fund make investments only in "black lung" assets described in section 501(c)(21)(B)(ii) of the Code. Section 1917 also revised section 468A(e)(2) to reduce the rate of tax on nuclear decommissioning funds.

EXPLANATION OF PROVISIONS

 As a result of the repeal of the investment restrictions of section 468A(e) of the Code by section 1917 of the Act, these final regulations eliminate from the existing regulations the requirement that nuclear decommissioning funds invest in black lung assets, as well as the requirement that the funds invest directly in those assets. The Treasury Department and the Internal Revenue Service believe that Congress intended the changes made by section 1917 to shift oversight of the type of investments made by nuclear decommissioning funds to the public utility commissions. Nevertheless, when assets of a nuclear decommissioning fund are invested through an arrangement that adds an additional level of corporate tax, the schedule of ruling amounts for the fund is directly affected. These regulations, therefore, allow an electing taxpayer that invests through an unincorporated organization, within the meaning of section 301.7701-2, to request, in connection with the taxpayer's request for a schedule of ruling amounts, a ruling whether the organization is an association taxable as a corporation for federal tax purposes.

 The approach in these regulations reflects the Service's response to comments received on previously issued proposed regulations in light of the recent changes to section 468A(e) by the Act. The previous proposed rules permitted black lung assets of nuclear decommissioning funds to be combined for investment purposes if certain requirements were satisfied. See 55 FR 26460 (June 28, 1990) and 56 FR 41102 (August 19, 1991).

 Commentators raised two basic issues in connection with the proposed regulations. First, they requested additional guidance on the classification of master trust arrangements for the pooling of assets. Some commentators expressed the view that master trust arrangements do not constitute separate entities for tax purposes and others suggested that even if the arrangements are entities, they are not associations taxable as corporations. However, based on a sampling of master trust arrangements submitted by the commentators, the Service continues to be of the view that these types of arrangements, as currently drafted, are separate entities for tax purposes and are classified as associations taxable as corporations under sections 301.7701-2 and -3. The Service believes that certain modifications to these arrangements, such as those suggested in the comments received, would cause many of the arrangements to be classified as partnerships for tax purposes, notwithstanding that the arrangements are in the form of trusts. For example, depending on the specifics of a master trust arrangement and applicable local law, changes could be made to the agreement so that the arrangement would terminate at the will of any participant and, thus, would not have the corporate characteristic of continuity of life described in section 301.7701-2(b).

 To afford taxpayers time to modify existing pooling arrangements to avoid classification as an association taxable as a corporation, these regulations establish a transition period during which the Service will not challenge the classification of these arrangements. Under the final regulations, the Service will not challenge the classification of an unincorporated organization, established prior to January 1, 1993, through which the assets of a nuclear decommissioning fund are invested, for tax years beginning prior to January 1, 1995. One commentator requested that this transition period be extended to all tax years beginning before an electing taxpayer is required to request a revised schedule of ruling amounts under section 1.468A-3(i). The Service is of the view that this suggested transition period, which could extend for ten years, is too long and would unreasonably differentiate among electing taxpayers on the basis of the dates they received their most recent schedules of ruling amounts.

 Second, a number of commentators argued that rulings on the classification of pooling arrangements should not be required. The final regulations adopt this view by permitting, but not requiring, an electing taxpayer for a fund that invests through an unincorporated organization to request a ruling on the classification of that organization.

 These final regulations make a number of additional changes to the existing regulations to conform them to changes made to section 468A(e) by section 1917 of the Act. In addition, these regulations delete an obsolete reference to section 6154. The duty to pay estimated taxes for a fund, as well as the penalty for underpayment are subsumed in the existing reference to section 6655. Finally, the definition of "nuclear decommissioning fund" is clarified to eliminate ambiguities in terminology throughout the regulations.

 Because of the changes made by the Act (with respect to the investment restrictions and the reduction in the tax rate), in order to accurately determine a schedule of ruling amounts the Service will, pursuant to section 1.468A-3(h)(2)(vi)(B)(8) and (h)(2)(ix)(C), ask all electing taxpayers who request a schedule of ruling amounts to provide information as to the types of investments made by the fund, the expected after-tax rate of return for each category of investment, and the methodology by which the after-tax rate of return was determined.

SPECIAL ANALYSIS

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, an initial Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, a copy of these regulations was submitted to the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Peter C. Friedman of the Office of Assistant Chief Counsel (Passthroughs and Special Industries), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, both on matters of substance and style.

LIST OF SUBJECTS 26 CFR 1.461-1 THROUGH 1.469-11T

 Accounting, Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8461

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR, part 1 is amended as follows:

PART 1 -- Income Tax; Taxable Years Beginning After December 31, 1953

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

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

Par. 2. Section 1.468A-0 is amended as follows:

1. The entry for section 1.468A-5(a)(3)(ii) is revised.

2. An entry for section 1.468A-8(b)(11) is added.

3. The added and revised provisions read as follows:

SECTION 1.468A-0 NUCLEAR DECOMMISSIONING COSTS; TABLE OF CONTENTS.

* * * * *

SECTION 1.468A-5 NUCLEAR DECOMMISSIONING FUND -- MISCELLANEOUS PROVISIONS.

(a) * * *

(3) * * *

(ii) Definition of administrative costs and expenses.

* * * * *

SECTION 1.468A-8 EFFECTIVE DATE AND TRANSITIONAL RULES.

* * * * *

(b) * * *

(11) Nuclear decommissioning fund qualification requirements.

Par. 3. Section 1.468A-1(b)(3) is revised to read as follows:

SECTION 1.468A-1 NUCLEAR DECOMMISSIONING COSTS; GENERAL RULES.

* * * * *

(b) * * *

(3) The terms "nuclear decommissioning fund" and "qualified nuclear decommissioning fund" mean a fund that satisfies the requirements of section 1.468A-5. The term "nonqualified decommissioning fund" means a fund that does not satisfy those requirements.

* * * * *

Par. 4. Section 1.468A-2(d)(2)(i) is amended by removing the reference "(a)(3)(ii)(A)" and adding "(a)(3)(ii)" in its place.

Par. 5. Section 1.468A-3 is amended as follows:

1. The third sentence of paragraph (a)(1) is amended by removing the reference "(a)(3)(ii)(A)" and adding "(a)(3)(ii)" in its place.

2. Paragraph (h)(1)(iii) is revised.

3. Paragraph (h)(2)(xii) is redesignated as (h)(2)(xv).

4. Paragraphs (h)(2)(xii) and (xiii) are reserved, and paragraph (xiv) is added.

5. Paragraph (i)(1)(ii) is redesignated (i)(1)(ii) (A).

6. Paragraph (i)(1)(ii)(B) is added and reserved.

7. The added and revised provisions read as follows:

SECTION 1.468A-3 RULING AMOUNT.

* * * * *

(h) * * *

(1) * * *

(iii) Except as provided by section 1.468A-5(a)(1)(iv) (relating to certain unincorporated organizations that may be taxable as corporations), a request for a schedule of ruling amounts must not contain a request for a ruling on any other issue, whether the issue involves section 468A or another section of the Internal Revenue Code.

* * * * *

(2) * * *

(xii) Reserved.

(xiii) Reserved.

(xiv) If the request for a schedule of ruling amounts contains a request, pursuant to section 1.468A-5(a)(1)(iv), that the Service rule whether an unincorporated organization through which the assets of the fund are invested is an association taxable as a corporation for federal tax purposes, a copy of the legal documents establishing or otherwise governing the organization.

* * * * *

(i) * * *

(1) * * *

(ii) * * *

(B) Reserved.

Par. 6. Section 1.468A-4 is amended as follows:

1. Paragraph (a) is revised.

2. Paragraph (b)(3) is revised.

3. Paragraph (c)(4) is revised.

4. Paragraph (d)(4) is removed.

5. Paragraphs (d)(5) and (d)(6) are redesignated as (d)(4) and (d)(5), respectively.

6. Newly designated paragraph (d)(5)(ii) is revised.

7. The revised provisions read as follows:

SECTION 1.468A-4 TREATMENT OF NUCLEAR DECOMMISSIONING FUND. -- (a) IN GENERAL. A nuclear decommissioning fund is subject to tax on all of its modified gross income (as defined in paragraph (b) of this section). The rate of tax is 22 percent for taxable years beginning in calendar year 1994 or 1995, 20 percent for taxable years beginning after December 31, 1995, and the highest rate of tax specified by section 11(b) for other years. This tax is in lieu of any other tax that may be imposed under subtitle A of the Internal Revenue Code on the income earned by the assets of the nuclear decommissioning fund.

(b) * * *

(3) A deduction is allowed for the amount of an otherwise deductible loss that is sustained by the nuclear decommissioning fund in connection with the sale, exchange or worthlessness of any investment. A loss is otherwise deductible for purposes of this paragraph (b)(3) if such loss would be deductible by a corporation under section 165(f) or (g) and sections 1211(a) and 1212(a).

* * * * *

(c) * * *

(4) OTHER CORPORATE TAXES INAPPLICABLE. Although the modified gross income of a nuclear decommissioning fund is subject to tax at the rate specified by section 468A(e)(2) and paragraph (a) of this section, a nuclear decommissioning fund is not subject to the other taxes imposed on corporations under subtitle A of the Internal Revenue Code. For example, a nuclear decommissioning fund is not subject to the alternative minimum tax imposed by section 55, the accumulated earnings tax imposed by section 531, the personal holding company tax imposed by section 541, and the alternative tax imposed on a corporation under section 1201(a).

(d) * * *

(5) * * *

(ii) The taxable income with respect to which the nuclear decommissioning fund's status as a "large corporation" is measured is "modified gross income" (as defined by paragraph (b) of this section).

Par. 7. Section 1.468A-5 is amended as follows:

1. Paragraph (a)(1)(i)(B) is revised.

2. Paragraph (a)(1)(iii) is removed.

3. Paragraph (a)(1)(v) is redesignated as (a)(1)(iii)

4. Paragraph (a)(1)(iv) is revised.

5. Paragraph (a)(3)(i)(C) is revised.

6. Paragraph (a)(3)(ii) is revised.

7. The added and revised provisions read as follows:

SECTION 1.468A-5 NUCLEAR DECOMMISSIONING FUND QUALIFICATION REQUIREMENTS; PROHIBITIONS AGAINST SELF-DEALING; DISQUALIFICATION OF NUCLEAR DECOMMISSIONING FUND; TERMINATION OF FUND UPON SUBSTANTIAL COMPLETION OF DECOMMISSIONING.

(a) * * *

(1) * * *

(i) * * *

(B) One or more funds that are to be used for the decommissioning of a nuclear power plant and that do not qualify as nuclear decommissioning funds under this paragraph (a) can be established and maintained pursuant to a trust agreement that governs one or more nuclear decommissioning funds.

* * * * *

(iv) If assets of a nuclear decommissioning fund are (or will be) invested through an unincorporated organization, within the meaning of section 301.7701-2 of this chapter, the Internal Revenue Service will rule, if requested, whether the organization is an association taxable as a corporation for federal tax purposes. A request for such a ruling may be made by the electing taxpayer as part of its request for a schedule of ruling amounts.

* * * * *

(3) * * *

(i) * * *

(C) To the extent that the assets of the nuclear decommissioning fund are not currently required for the purposes described in paragraph (a)(3)(i)(A) or (B) of this section, to make investments.

(ii) DEFINITION OF ADMINISTRATIVE COSTS AND EXPENSES. For purposes of paragraph (a)(3)(i) of this section, the term "administrative costs and other incidental expenses of a nuclear decommissioning fund" means all ordinary and necessary expenses incurred in connection with the operation of the nuclear decommissioning fund. Such term includes the tax imposed by section 468A(e)(2) and paragraph (a) of section 1.468A-4, any State or local tax imposed on the income or the assets of the fund, legal expenses, accounting expenses, actuarial expenses and trustee expenses. Such term does not include decommissioning costs. Such term also does not include the excise tax imposed on the trustee or other disqualified person under section 4951 or the reimbursement of any expenses incurred in connection with the assertion of such tax unless such expenses are considered reasonable and necessary under section 4951(d)(2)(C) and it is determined that the trustee or other disqualified person is not liable for the excise tax.

* * * * *

Par. 8. Section 1.468A-8 is amended by adding paragraph (b)(11) to read as follows:

SECTION 1.468A-8 EFFECTIVE DATE AND TRANSITIONAL RULES.

* * * * *

(b) * * *

(11) NUCLEAR DECOMMISSIONING FUND QUALIFICATION REQUIREMENTS.

For tax years beginning prior to January 1, 1995, the Service will not assert that an unincorporated organization referred to in section 1.468A-5(a)(1)(iv), established prior to January 1, 1993, through which the assets of a nuclear decommissioning fund are invested, is an association taxable as a corporation for federal tax purposes.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 9. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 10. Section 602.101(c) is amended by revising the entries for section 1.468A-3 and section 1.468A-8 to read as follows:

SECTION 602.101 OMB CONTROL NUMBERS.

* * * * *

(c) * * *

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