Td 9158

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Federal Register / Vol. 69, No. 179 / Thursday, September 16, 2004 / Rules and Regulations

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
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
AGENCY:

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

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class. Accordingly, under the residual
method of § 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

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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 § 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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Federal Register / Vol. 69, No. 179 / Thursday, September 16, 2004 / Rules and Regulations
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
§ 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 § 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 § 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

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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.

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55741

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

§ 1.338–0

*

*

Outline of topics.

*

*

*

§ 1.338–6 Allocation of ADSP and AGUB
among target assets.

*

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

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Federal Register / Vol. 69, No. 179 / Thursday, September 16, 2004 / Rules and Regulations

§ 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]
■ Par. 3. Section 1.338–6 is amended by
adding paragraph (c)(5) to read as
follows:
§ 1.338–6 Allocation of ADSP and AGUB
among target assets.

*

*
*
*
*
(c) * * *
(5) Allocation to certain nuclear
decommissioning funds. [Reserved]. For
further guidance, see § 1.338–6T.
*
*
*
*
*
■ Par. 4. Section 1.338–6T is added to
read as follows:
§ 1.338–6T Allocation of ADSP and AGUB
among target assets (temporary).

(a) through (c)(4) [Reserved]. For
further guidance, see § 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;

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(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 § 1.338–6(d).
■ 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:
§ 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 § 1.338–
6T(c)(5).
*
*
*
*
*
(c) * * *

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(3) * * * For further guidance, see
§ 1.1060–1T.
*
*
*
*
*
(e) * * *
(1) * * *
(ii) * * *
(C) Allocation to certain nuclear
decommissioning funds. [Reserved]. For
further guidance, see § 1.338–6T.
*
*
*
*
*
■ Par. 6. Section 1.1060–1T is added to
read as follows:
§ 1.1060–1T Special allocation rules for
certain asset acquisitions (temporary).

(a) through (c)(2) [Reserved]. For
further guidance, see § 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 § 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 § 1.1060–
1(c)(4) through (e)(1)(ii)(B).
(e)(1)(ii)(C) Election described in
§ 1.338–6T(c)(5)—(1) Availability. The
election described in § 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
§ 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

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Federal Register / Vol. 69, No. 179 / Thursday, September 16, 2004 / Rules and Regulations
consistent with having made the
election.
(3) Irrevocability of election. The
election described in § 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 § 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

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 20, 25, 31, 40, 41, 44,
53, 55, 156, and 301
[TD 9156]
RIN 1545–BB00

Place for Filing
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

SUMMARY: This document contains final
regulations that update obsolete
references in the existing regulations
under section 6091 of the Internal
Revenue Code (Code) regarding the
place for filing hand-carried returns and
other documents. These final
regulations reflect changes in the
organizational structure of the IRS but
do not make substantive changes to
taxpayers’ current ability to hand carry
returns to a local IRS office.
DATES: These final regulations are
effective September 16, 2004.
FOR FURTHER INFORMATION CONTACT:
Emly B. Berndt of the Office of the
Associate Chief Counsel (Procedure and
Administration), Administrative
Provisions and Judicial Practice, (202)
622–4940 (not a toll-free number).
SUPPLEMENTARY INFORMATION:

Background and Explanation of
Provisions
This document contains final
regulations that amend 26 CFR parts 1,
20, 25, 31, 40, 41, 44, 53, 55, 156, and
301 with respect to the place for filing
returns and other documents under
section 6091 of the Code. These final
regulations reflect the changes in the

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IRS organizational structure following
the Internal Revenue Service
Restructuring and Reform Act of 1998
(112 Stat. 685). These final regulations
specify where the IRS now accepts
hand-carried returns in a manner
consistent with the instructions in
Notice 2003–19 (2003–1 C.B. 703) and
do not make any substantive changes to
a taxpayer’s ability to hand carry returns
to a local IRS office.
These final regulations remove the
examples under § 1.6091–4(a)(4), which
are obsolete due to various amendments
to the Code, and add an example in
their place that illustrates the
application of the rules in § 1.6091–
4(a)(2) and (3) to a current provision of
the Code. These final regulations also
include one citation correction in
sect; 1.6091–1(b). In certain cases, these
final regulations cross reference
regulations that contain references to
obsolete IRS offices or titles. Taxpayers
in those cases should continue to follow
any updated instructions in other
published guidance. See, e.g., Notice
2003–19.
Special Analyses
It has been determined that these final
regulations are not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
has been determined that section 553(b)
of the administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
final regulations for two reasons. First,
these final regulations reflect changes in
the organizational structure of the IRS
and are rules concerning agency
organization, procedure, or practice that
are exempted from the notice and
comment requirement of 5 U.S.C. 553.
Second, for good cause, Treasury and
the IRS have determined that notice and
public procedure are impracticable,
unnecessary, and contrary to the public
interest because these final regulations
do not make substantive changes to
taxpayers’ current ability to hand carry
returns to a local IRS office. Instead,
these final regulations replace obsolete
references to IRS organizations and
titles with updated references that are
sufficiently flexible to take into account
future changes to IRS structure or
operations. In addition, these final
regulations reflect existing instructions
given to taxpayers with respect to the
hand-carrying of returns. Because no
notice of proposed rulemaking is
required, the provisions of the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply. Pursuant to
section 7805(f) of the Code, these final
regulations were submitted four weeks
prior to filing with the Office of the

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55743

Federal Register to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small business.
Drafting Information
The principal authors of these final
regulations are Ann M. Kramer and
Emly B. Berndt of the Office of the
Associate Chief Counsel (Procedure and
Administration), Administrative
Provisions and Judicial Practice
Division.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 20
Estate taxes, Reporting and
recordkeeping requirements.
26 CFR Part 25
Gift taxes, Reporting and
recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes,
Penalties, Pensions, Railroad retirement,
Reporting and recordkeeping
requirements, Social security,
Unemployment compensation.
26 CFR Part 40
Excise taxes, Reporting and
recordkeeping requirements.
26 CFR Part 41
Excise taxes, Motor vehicles,
Reporting and recordkeeping
requirements.
26 CFR Part 44
Excise taxes, Gambling, Reporting and
recordkeeping requirements.
26 CFR Part 53
Excise taxes, Foundations,
Investments, Lobbying, Reporting and
recordkeeping requirements.
26 CFR Part 55
Excise taxes, Investments, Reporting
and recordkeeping requirements.
26 CFR Part 156
Excise tax on greenmail, Reporting
and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
Amendments to the Regulations
Accordingly, 26 CFR parts 1, 20, 25,
31, 40, 41, 44, 53, 55, 156, and 301 are
to be amended as follows:

■

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