Tax News

CCH (cch.taxgroup.com) reports:

The Treasury has released final regulations regarding the allocation of purchase price in certain deemed and actual asset acquisitions under Code Secs. 338 and 1060. These regulations affect sellers and purchasers of nuclear power plants or of the stock of corporations that own nuclear power plants, and address the treatment of nuclear decommissioning funds.
Background
The deemed asset acquisition rules of Code Sec. 338 and the applicable asset acquisition rules of Code Sec. 1060 provide the rules used to compute and allocate the purchase or sales price among acquired assets in certain actual and deemed asset acquisitions. The purchase price generally includes liabilities of the seller that are assumed by the purchaser if the liabilities are treated as having been incurred by the purchaser, which, in turn, requires, at a minimum, that economic performance must have occurred with respect to the liability. Purchase price is allocated under a residual method that requires the price to be allocated in succession to one of a number of classes of assets up to the fair market value of the assets in each class, in an order that reflects a policy of allocating basis first to the assets that are susceptible to more accurate valuation or the cost of which is recovered most rapidly.
When a nuclear power plant station is sold, the assets may include the plant, equipment and other operating assets, also known as Class V assets under the residual method, and one or more nonqualified funds holding assets that have been set aside for the purpose of satisfying the owner's responsibility or liability to decommission the nuclear power station after the end of its useful life.
CCH Comment. Funds that are qualified under Code Sec. 468A are not treated as purchased or sold, since they are treated as assets of the qualified fund itself. Contributions to a qualified fund are limited in amount, but are immediately deductible.
In acquiring the nonqualified decommissioning fund assets, the purchaser usually also assumes the liability to decommission the station. However, a nuclear decommissioning liability will not satisfy the economic performance test until decommissioning occurs. Thus, as of the purchase date, the liability is not included in the purchase price that the purchaser allocates to the acquired assets. Consequently, to the extent that the purchase price allocated to the Class V assets is less than their fair market value, the purchaser will not recover a tax benefit, in the form of a deprecation deduction, for the decommissioning liability until economic performance occurs upon decommissioning.
Special Election
A special regulatory election has been provided for the purchaser in order to ameliorate the effect of the IRS's position that decommissioning liabilities do not satisfy the economic performance requirement as to the purchaser. 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 it were an entity classified as a corporation, the stock of which was 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. Furthermore, a Code Sec. 338(h)(10) election will be treated as made for the hypothetical corporation, even when the requirements for this election are not otherwise satisfied.
Making the Election
This irrevocable 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. If, however, the target corporation in a deemed asset acquisition is an S corporation, all of the S corporation shareholders must consent to the election. The election is made, in the case of a deemed asset acquisition, by taking a position consistent with the election on an original or amended tax return for the tax year of the qualified stock purchase. Such return must be filed no later than the later of: (1) 30 days after the date on which the Code Sec. 338 election is due; or (2) the due date (with extensions) for the original tax return for the tax year of the qualified stock purchase. If the transaction is an applicable asset acquisition, the election is made by taking a position on the timely filed original return for the year of the applicable asset acquisition.
Effect of Election
The election converts the assets of the nonqualified fund from primarily Class I and II assets to the assets of a corporation, the stock of which is a Class V asset. This allows the present costs of the decommissioning liability funded by the nonqualified fund, which cannot otherwise 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. Further, 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.
T.D. 9358, 2007FED ¶47,066
Other References:
Code Sec. 338
CCH Reference - 2007FED ¶16,275A
CCH Reference - 2007FED ¶16,281
Code Sec. 1060
CCH Reference - 2007FED ¶30,061
Tax Research Consultant
CCH Reference - TRC ACCTNG: 12,208
CCH Reference - TRC CCORP: 30,152.05
CCH Reference -TRC CCORP: 30,202.05
CCH Reference -TRC SALES: 33,052.10