[Federal Register Volume 88, Number 118 (Wednesday, June 21, 2023)]
[Proposed Rules]
[Pages 40496-40526]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-12799]



[[Page 40495]]

Vol. 88

Wednesday,

No. 118

June 21, 2023

Part III





Department of the Treasury





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Internal Revenue Service





26 CFR Part 1





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Section 6418 Transfer of Certain Credits; Proposed Rule

  Federal Register / Vol. 88, No. 118 / Wednesday, June 21, 2023 / 
Proposed Rules  

[[Page 40496]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-101610-23]
RIN 1545-BQ64


Section 6418 Transfer of Certain Credits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations concerning the 
election under the Inflation Reduction Act of 2022 to transfer certain 
Federal income tax credits. The proposed regulations describe the 
proposed rules for the election to transfer eligible credits in a 
taxable year, including definitions and special rules applicable to 
partnerships and S corporations and regarding excessive credit transfer 
or recapture events. In addition, the proposed regulations describe 
rules related to an IRS pre-filing registration process that would be 
required. These proposed regulations affect eligible taxpayers that 
elect to transfer eligible credits in a taxable year and the transferee 
taxpayers to which eligible credits are transferred.

DATES: Written or electronic comments must be received by August 14, 
2023. The public hearing on these proposed regulations is scheduled to 
be held on August 23, 2023, at 10 a.m. ET. Requests to speak and 
outlines of topics to be discussed at the public hearing must be 
received by August 14, 2023. If no outlines are received by August 14, 
2023, the public hearing will be cancelled. Requests to attend the 
public hearing must be received by 5 p.m. ET on August 21, 2023. The 
public hearing will be made accessible to people with disabilities. 
Requests for special assistance during the hearing must be received by 
August 18, 2023.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS and 
REG-101610-23) by following the online instructions for submitting 
comments. Once submitted to the Federal eRulemaking Portal, comments 
cannot be edited or withdrawn. The Department of Treasury (Treasury 
Department) and the IRS will publish for public availability any 
comments submitted, whether electronically or on paper, to the IRS's 
public docket. Send paper submissions to: CC:PA:LPD:PR (REG-101610-23), 
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin 
Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, 
Jeremy Milton at (202) 317-5665 and James Holmes at (202) 317-5114 (not 
a toll-free number); concerning submissions of comments and requests 
for a public hearing, Vivian Hayes at (202) 317-6901 (not a toll-free 
number) or by email to [email protected] (preferred).

SUPPLEMENTARY INFORMATION: 

Background

    Section 6418 was added to the Internal Revenue Code (Code) on 
August 16, 2022, by section 13801(b) of Public Law 117-169, 136 Stat. 
1818, 2009, commonly referred to as the Inflation Reduction Act of 2022 
(IRA). Section 6418 allows ``eligible taxpayers'' to elect to transfer 
certain credits to unrelated taxpayers rather than using the credits 
against their Federal income tax liabilities. Section 6418 also 
provides special rules relating to partnerships and S corporations and 
directs the Secretary of the Treasury or her delegate (Secretary) to 
provide rules for making elections under section 6418 and to require 
information or registration necessary for purposes of preventing 
duplication, fraud, improper payments, or excessive payments under 
section 6418. Section 13801(g) of the IRA provides that section 6418 
applies to taxable years beginning after December 31, 2022. This 
document contains proposed regulations that would amend the Income Tax 
Regulations (26 CFR part 1) to implement the statutory provisions of 
section 6418.
    In the Rules and Regulations section of this issue of the Federal 
Register, the Treasury Department and the IRS are issuing temporary 
regulations under Sec.  1.6418-4T that implement the pre-filing 
registration process described in Sec.  1.6418-4 of the proposed 
regulations. The temporary regulations require eligible taxpayers that 
want to elect to transfer eligible credits under section 6418 to 
register with the IRS through an IRS electronic portal in advance of 
the eligible taxpayer filing the return on which the election under 
section 6418 is made.

I. Overview of Section 6418

    Section 6418(a) provides that, in the case of an eligible taxpayer 
that elects to transfer to an unrelated transferee taxpayer all (or any 
portion specified in the election) of an eligible credit determined 
with respect to the eligible taxpayer for any taxable year, the 
transferee taxpayer specified in such election (and not the eligible 
taxpayer) is treated as the taxpayer for purposes of the Code with 
respect to such credit (or such portion thereof). Under section 
6418(b), any amount of consideration paid by the transferee taxpayer to 
the eligible taxpayer for the transfer of such credit (or such portion 
thereof) is (1) required to be paid in cash, (2) not included in the 
eligible taxpayer's gross income, and (3) not allowed as a deduction to 
the transferee taxpayer under any provision of the Code.
    Section 6418(f)(2) defines the term ``eligible taxpayer'' to mean 
any taxpayer that is not described in section 6417(d)(1)(A).
    Section 6418(f)(1)(A) defines the term ``eligible credit'' to mean 
each of the following 11 credits:
    (1) So much of the credit for alternative fuel vehicle refueling 
property allowed under section 30C of the Code that, pursuant to 
section 30C(d)(1), is treated as a credit listed in section 38(b) of 
the Code (section 30C credit);
    (2) The renewable electricity production credit determined under 
section 45(a) of the Code (section 45 credit);
    (3) The credit for carbon oxide sequestration determined under 
section 45Q(a) of the Code (section 45Q credit);
    (4) The zero-emission nuclear power production credit determined 
under section 45U(a) of the Code (section 45U credit);
    (5) The clean hydrogen production credit determined under section 
45V(a) of the Code (section 45V credit);
    (6) The advanced manufacturing production credit determined under 
section 45X(a) of the Code (section 45X credit);
    (7) The clean electricity production credit determined under 
section 45Y(a) of the Code (section 45Y credit);
    (8) The clean fuel production credit determined under section 
45Z(a) of the Code (section 45Z credit);
    (9) The energy credit determined under section 48 of the Code 
(section 48 credit);
    (10) The qualifying advanced energy project credit determined under 
section 48C of the Code (section 48C credit); and
    (11) The clean electricity investment credit determined under 
section 48E of the Code (section 48E credit).
    Under section 6418(f)(1)(B), an election to transfer a section 45 
credit, section 45Q credit, section 45V credit,

[[Page 40497]]

or section 45Y credit is made separately with respect to each facility 
and for each taxable year during the credit period of the respective 
credit. Pursuant to section 6418(f)(1)(C) an eligible credit does not 
include any business credit carryforward or business credit carryback. 
Section 6418(g)(4) provides that an eligible taxpayer may not make an 
election to transfer credits for progress expenditures.
    Pursuant to section 6418(e)(1), an eligible taxpayer must make an 
election to transfer any portion of an eligible credit on its original 
tax return for the taxable year for which the credit is determined by 
the due date of such return (including extensions of time) but such an 
election cannot be made earlier than 180 days after the date of the 
enactment of section 6418 by section 13801(b) of the IRA (that is, in 
no event earlier than 180 days after August 16, 2022, which is February 
13, 2023). An eligible taxpayer may not revoke an election to transfer 
any portion of a credit. Pursuant to section 6418(d), a transferee 
taxpayer takes the transferred eligible credit into account in its 
first tax year ending with, or after, the eligible taxpayer's tax year 
with respect to which the transferred eligible credit was determined. 
Section 6418(e)(2) provides that a transferee taxpayer may not make any 
additional transfers of a transferred eligible credit under section 
6418.

II. Section 6418 Rules for Partnerships and S Corporations

    Pursuant to section 6418(c), in the case of a partnership or an S 
corporation that directly holds a facility or property for which an 
eligible credit is determined: the election to transfer an eligible 
credit is made at the entity level and no election by any partner or 
shareholder is allowed with respect to such facility or property; any 
amount received as consideration for a transferred eligible credit is 
treated as tax exempt income for purposes of sections 705 and 1366 of 
the Code; and a partner's distributive share of the tax exempt income 
is based on the partner's distributive share of the transferred 
eligible credit.

III. Special Rules

    Section 6418(g) provides special rules regarding the elective 
transfer of certain credits. Section 6418(g)(1) provides that, as a 
condition of, and prior to, any transfer of any portion of an eligible 
credit pursuant to section 6418(a), the Secretary may require such 
information (including, in such form or manner as is determined 
appropriate by the Secretary, such information returns) or registration 
as the Secretary deems necessary for purposes of preventing 
duplication, fraud, improper payments, or excessive payments under 
section 6418.
    Pursuant to section 6418(g)(2), if the Secretary determines that 
there is an excessive credit transfer to a transferee taxpayer, then 
the tax imposed on the transferee taxpayer by chapter 1 of the Code 
(chapter 1) (regardless of whether such entity would otherwise be 
subject to tax under chapter 1) is increased in the year of such 
determination by the amount of the excessive credit transfer plus 20 
percent of such excessive credit transfer. The additional amount of 20 
percent of the excessive credit transfer does not apply if the 
transferee taxpayer demonstrates to the satisfaction of the Secretary 
that the excessive credit transfer resulted from reasonable cause. An 
excessive credit transfer is defined in section 6418(g)(2)(C) as, with 
respect to a facility or property for which an election is made under 
section 6418(a) for any taxable year, an amount equal to the excess of 
(i) the amount of the eligible credit claimed by the transferee 
taxpayer with respect to such facility or property for such taxable 
year; over (ii) the amount of the eligible credit that, without 
application of section 6418, would be otherwise allowable under the 
Code with respect to such facility or property for such taxable year.
    Pursuant to section 6418(g)(3), if a section 48 credit, section 48C 
credit, or section 48E credit is transferred, the basis reduction rules 
of section 50(c) apply to the applicable investment credit property as 
if the transferred eligible credit was allowed to the eligible 
taxpayer. Further, if applicable investment credit property is disposed 
of, or otherwise ceases to be investment credit property with respect 
to the eligible taxpayer, before the close of the recapture period as 
described in section 50(a)(1), then certain notification requirements 
apply. The eligible taxpayer must notify the transferee taxpayer of a 
recapture event in such form and manner as the Secretary may provide. 
In addition, the transferee taxpayer must notify the eligible taxpayer 
of the recapture amount, if any, in such form and manner as the 
Secretary may provide.
    Section 6418(h) directs the Secretary to issue regulations or other 
guidance as may be necessary to carry out the purposes of section 6418, 
including guidance providing rules for determining a partner's 
distributive share of the tax exempt income described in section 
6418(c)(1).

IV. Notice 2022-50

    On October 24, 2022, the Treasury Department and the IRS published 
Notice 2022-50, 2022-43 I.R.B. 325, to, among other things, request 
feedback from the public at large on potential issues with respect to 
the transfer election provisions under section 6418 that may require 
guidance. Over 200 comment letters were received in response to Notice 
2022-50. Based in part on the feedback received, the Treasury 
Department and the IRS are issuing these proposed regulations regarding 
the transfer election provisions under section 6418. The major areas 
with respect to which public stakeholders provided letters are 
discussed in the following Explanation of Provisions.

Explanation of Provisions

I. Transfers of Eligible Credits

    Proposed Sec.  1.6418-1(a) would provide generally that an eligible 
taxpayer may make a transfer election under proposed Sec.  1.6418-2 to 
transfer any specified portion of an eligible credit determined with 
respect to any eligible credit property of such eligible taxpayer for 
any taxable year to a transferee taxpayer in accordance with section 
6418 of the Code and Sec. Sec.  1.6418-1 through 1.6418-5 (``the 
section 6418 regulations''). The remainder of proposed Sec.  1.6418-1 
would then provide definitions for terms used throughout the section 
6418 regulations, including definitions of eligible taxpayer, eligible 
credit, eligible credit property, paid in cash, specified credit 
portion, transferred specified credit portion, transfer election, 
transferee taxpayer, transferee partnership, transferee S corporation, 
transferor partnership, and transferor S corporation.
    Proposed Sec.  1.6418-1(b) would define the term ``eligible 
taxpayer'' to mean any taxpayer (as defined in section 7701(a)(14) of 
the Code), other than one described in section 6417(d)(1)(A) and 
proposed Sec.  1.6417-1(b). The term ``taxpayer'' in section 
7701(a)(14) means ``any person subject to any internal revenue tax'' 
and generally, includes entities that have a United States employment 
tax or excise tax obligation even if they do not have a United States 
income tax obligation.
    Proposed Sec.  1.6418-1(c) would define the term ``eligible 
credit'' consistent with section 6418(f)(1)(A), and include all 11 of 
the credits listed in such section. Further, the definition would 
include a rule that an eligible credit does not include any business 
credit carryforward or business credit carryback determined under 
section 39

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of the Code, which is consistent with section 6418(f)(1)(C). The 
regulations also would clarify that the entire amount of any eligible 
credit is separately determined with respect to each single eligible 
credit property of the eligible taxpayer and includes any bonus credit 
amounts (described in proposed Sec.  1.6418-2(c)(3)) determined with 
respect to that single eligible credit property.
    Consistent with the proposed rules described later in this 
Explanation of Provisions related to the manner of making the transfer 
election, proposed Sec.  1.6418-1(d) would generally define the term 
``eligible credit property'' as the unit of property of an eligible 
taxpayer with respect to which the amount of an eligible credit is 
determined. While the proposed regulations reference the statutory 
rules for each eligible credit to determine the appropriate unit of 
measurement for section 6418 registrations and election, the following 
additional information is relevant for each of the 11 eligible credits:
    (1) For the section 30C credit, a taxpayer would be required to 
register and make an election on a property-by-property basis. For this 
purpose, a property means a ``qualified alternative fuel vehicle 
refueling property'' as defined in section 30C(c).\1\
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    \1\ These proposed regulations under section 6418 do not impact 
the ability of tax-exempt entities to transfer a section 30C credit 
to the seller of the qualified alternative fuel vehicle refueling 
property under section 30C(e)(2).
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    (2) For the section 45 credit, a taxpayer would be required to 
register and make an election on a facility-by-facility basis. For this 
purpose, a facility means a ``qualified facility'' as defined in 
section 45(d).
    (3) For the section 45Q credit, a taxpayer would be required to 
register and make an election on the basis of a unit of carbon capture 
equipment. The regulations under Sec.  1.45Q-2(c)(3) state that all 
components that make up an independently functioning process train 
capable of capturing, processing, and preparing carbon oxide for 
transport (single process train) will be treated as a single ``unit of 
carbon capture equipment.''
    (4) For the section 45U credit, a taxpayer would be required to 
register and make an election on a facility-by-facility basis. For this 
purpose, a facility means a ``qualified nuclear power facility'' as 
defined in section 45U(b)(1).
    (5) For the section 45V credit, a taxpayer would be required to 
register and make an election on a facility-by-facility basis. For this 
purpose, a facility means a ``qualified clean hydrogen production 
facility'' as defined in section 45V(c)(3).
    (6) For the section 45X credit, a taxpayer would be required to 
register and make an election on a facility-by-facility basis. For this 
purpose, a facility means one that produces eligible components, as 
described in guidance under sections 48C and 45X.
    (7) For the section 45Y credit, a taxpayer would be required to 
register and make an election on a facility-by-facility basis. For this 
purpose, a facility means a ``qualified facility'' as defined in 
section 45Y(b)(1).
    (8) For the section 45Z credit, a taxpayer would be required to 
register and make an election on a facility-by-facility basis. For this 
purpose, a facility means a ``qualified facility'' as defined in 
section 45Z(d)(4).
    (9) For the section 48 credit, a taxpayer would be required to 
register and make an election on a property-by-property basis. For this 
purpose, a property means an energy property, which generally includes 
all components of property that are functionally interdependent (unless 
such equipment is an addition or modification to an energy property). 
See Notice 2018-59, 2018-28 I.R.B. 196. Components of property are 
functionally interdependent if the placing in service of each component 
is dependent upon the placing in service of each of the other 
components in order to generate electricity. Functionally-
interdependent components of property that can be operated and metered 
together and can begin producing electricity separately from other 
components of property within a larger energy project will be 
considered an energy property. See Id. (Section 7.01 of Notice 2018-59 
describes energy property generally and also cites Rev. Rul. 94-31, 
1994-1 C.B. 16.) Energy property is comprised of all components of 
property necessary to generate electricity up to the point of 
transmission or distribution. However, an eligible taxpayer would have 
the option, to the extent consistently applied for purposes of the pre-
filing registration requirements of proposed Sec.  1.6418-4 and the 
election requirements of proposed Sec. Sec.  1.6418-2 through 1.6418-3, 
to make the section 6418 registrations and election for an energy 
project, as defined in forthcoming guidance. See section 
48(a)(9)(A)(ii).
    (10) For the section 48C credit, a taxpayer would be required to 
register and make an election on a property-by-property basis. For this 
purpose, a property means an ``eligible property'' as defined in 
section 48C(c)(2).
    (11) For the section 48E credit, a taxpayer would be required to 
register and make an election on a facility-by-facility basis if the 
credit relates to a qualified investment with respect to a qualified 
facility. For this purpose, a facility means a ``qualified facility'' 
as defined in section 48E(b)(3). However, a taxpayer would be required 
to register and make an election with respect to the section 48E credit 
on a property-by-property basis if the credit relates to a qualified 
investment with respect to energy storage technology. For this purpose, 
a property means a unit of ``energy storage technology'' as defined in 
section 48E(c)(2).
    Proposed Sec.  1.6418-1(j) would define the term ``transfer 
election'' as an election under section 6418(a) of the Code to transfer 
to a transferee taxpayer a specified portion of an eligible credit 
determined with respect to an eligible credit property in accordance 
with the section 6418 regulations. This term would be consistent with 
the references in section 6418(a) to a taxpayer ``elect[ing] to 
transfer'' and transferring ``all (or any specified portion in the 
election)'' of an eligible credit.
    Also consistent with the language in section 6418(a) requiring the 
portion of the credit transferred to be specified, proposed Sec.  
1.6418-1(h) would define a ``specified credit portion'' to mean a 
proportionate share (including all) of an entire eligible credit 
determined with respect to an eligible credit property of the eligible 
taxpayer that is specified in a transfer election. A specified credit 
portion of an eligible credit would be required to reflect a 
proportionate share of each bonus credit amount that is taken into 
account in calculating the entire amount of the eligible credit 
determined with respect to a single eligible credit property. In 
defining this term, the Treasury Department and the IRS considered 
questions from stakeholders asking whether it is possible to transfer 
bonus credit amounts related to an eligible credit separately from the 
``base'' eligible credit determined with respect to the relevant 
eligible credit property. As section 6418 does not contemplate such a 
transfer, the proposed regulations would not permit this type of 
transfer. Thus, an eligible taxpayer would not be permitted to divide 
an eligible credit from a single eligible credit property into the 
portion from the qualified activity or investment credit property and 
one or more bonus amounts of the eligible credit. Instead, an eligible 
taxpayer would be permitted to transfer the entire eligible credit (or 
portion of the entire eligible credit, which would include a 
proportionate amount of any

[[Page 40499]]

component part of the entire eligible credit) determined with respect 
to a single eligible credit property.
    Proposed Sec.  1.6418-1(p) would define the term ``transferred 
specified credit portion'' to mean the specified credit portion that is 
transferred from an eligible taxpayer to a transferee taxpayer pursuant 
to a transfer election.
    Section 6418(b)(1) and proposed Sec.  1.6418-2(a)(4)(ii) 
(disallowing transfer elections for non-cash consideration) and 
proposed Sec.  1.6418-2(e)(1) (treatment of payments made in connection 
with a transfer election) would require that any amounts paid by a 
transferee taxpayer in connection with the transfer of a specified 
credit portion be paid in cash. Proposed Sec.  1.6418-1(f) would define 
``paid in cash'' as a payment made in United States dollars. The 
definition of ``paid in cash'' contemplates limiting the manner in 
which United States dollars may be transferred in connection with a 
transfer election to payments by cash, check, cashier's check, money 
order, wire transfer, ACH transfer, or other bank transfer of 
immediately available funds. The proposed regulations also would 
provide a safe harbor timing rule to allow for certainty as to the 
treatment of such payments of United States dollars made during a 
prescribed time period. The proposed regulations would provide that a 
payment does not violate the paid in cash requirement if the cash 
payment is made within the period beginning on the first day of the 
eligible taxpayer's taxable year during which a specified credit 
portion is determined and ending on the due date for completing a 
transfer election statement (as provided in proposed Sec.  1.6418-
2(b)(5)(iii)). The proposed regulations also address an issue raised by 
stakeholders regarding advanced commitments and would provide that a 
contractual commitment to purchase eligible credits in advance of the 
date a specified credit portion is transferred satisfies the paid in 
cash requirement, so long as all cash payments are made during the time 
period described in proposed Sec.  1.6418-1(f)(1)(ii).
    Proposed Sec.  1.6418-1(m) would define the term ``transferee 
taxpayer'' by incorporating the requirement in section 6418(a) that an 
eligible taxpayer only transfer eligible credits to a taxpayer that is 
not related (within the meaning of section 267(b) or 707(b)(1)) to the 
eligible taxpayer. Thus, the proposed regulations would define a 
transferee taxpayer as any taxpayer that is not related (within the 
meaning of section 267(b) or 707(b)(1) of the Code) to the eligible 
taxpayer making the transfer election to which the eligible taxpayer 
transfers a specified credit portion of an eligible credit. Further, 
consistent with the proposed definitions of transferee taxpayer and 
eligible taxpayer, proposed Sec.  1.6418-1(k), (l), (n), and (o) would 
define the terms ``transferee partnership,'' ``transferee S 
corporation,'' ``transferor partnership,'' and ``transferor S 
corporation,'' respectively.

II. Rules for Making Transfer Elections

    The rules in proposed Sec.  1.6418-2 would describe the general 
requirements for making a transfer election, including clarifying when 
a transfer election can be made in certain ownership situations, 
situations where no transfer election may be made, the manner and due 
date for the election, limitations related to a transfer election, the 
determination of an eligible credit, the treatment of payments related 
to a transfer of eligible credits, and the treatment of a transferred 
specified credit portion by a transferee taxpayer.
A. Transfer Elections in General
    Proposed Sec.  1.6418-2(a) would provide rules generally applicable 
to a transfer election. Consistent with the language in section 
6418(a), the proposed rules would provide that if a valid transfer 
election is made by an eligible taxpayer for any taxable year, the 
transferee taxpayer specified in such election (and not the eligible 
taxpayer) is treated as the taxpayer for purposes of the Code with 
respect to the specified credit portion.
    Proposed Sec.  1.6418-2(a)(2) would clarify the rule related to 
multiple transfer elections. Stakeholders requested clarification on 
whether an eligible taxpayer can make multiple elections to transfer an 
eligible credit to multiple transferees. Proposed Sec.  1.6418-2(a)(2) 
would provide that an eligible taxpayer may make multiple transfer 
elections to transfer one or more specified credit portion(s) to 
multiple transferee taxpayers, provided that the aggregate amount of 
specified credit portions transferred with respect to a single eligible 
credit property does not exceed the amount of the eligible credit 
determined with respect to the eligible credit property. In other 
words, section 6418 does not, and therefore these proposed regulations 
would not, limit the number of transfer elections or number of 
transferee taxpayers for which an eligible taxpayer can make a transfer 
election, unless the transfer of a specified credit portion would 
exceed the available eligible credit to be transferred.
    Proposed Sec.  1.6418-2(a)(3) would address when eligible taxpayers 
are permitted to make a transfer election in certain ownership 
situations. The situations addressed are based on requests from 
stakeholders for clarification. Rules are proposed for disregarded 
entities, undivided ownership interests, members of a consolidated 
group, and partnerships and S corporations. For a disregarded entity 
wholly owned (directly or indirectly) by an eligible taxpayer, the 
eligible taxpayer makes a transfer election. For undivided ownership 
interests, if eligible credit property is directly owned through an 
arrangement properly treated as a tenancy-in-common for Federal income 
tax purposes, or through an organization that has made a valid election 
under section 761(a) of the Code, each co-owner's or member's undivided 
ownership share of the eligible credit property will be treated for 
purposes of section 6418 as a separate eligible credit property owned 
by such co-owner or member, and each makes a separate transfer 
election. For members of a consolidated group, a member is required to 
make a transfer election. Finally, for a partnership or S corporation, 
with respect to any eligible credit property held directly by such 
partnership or S corporation, the partnership or S corporation makes a 
transfer election, not the partners or shareholders.
    Proposed Sec.  1.6418-2(a)(4) would describe three circumstances 
where no transfer election can be made.
    First, consistent with section 6418(g)(4), the proposed regulations 
preclude any election with respect to any amount of an eligible credit 
determined based on progress expenditures that is allowed pursuant to 
rules similar to the rules of section 46(c)(4) and (d) (as in effect on 
the day before the date of the enactment of the Revenue Reconciliation 
Act of 1990).
    Second, the proposed rules would preclude a transfer election when 
an eligible taxpayer receives any amount not paid in cash (as defined 
in Sec.  1.6418-1(f)) as consideration in connection with the transfer 
of a specified credit portion. Section 6418(b)(1) requires that ``any'' 
consideration paid in connection with a transfer be paid in cash. Thus, 
if any consideration is other than cash, the transfer election is 
disallowed.
    Third, no election is allowed when eligible credits are not 
determined with respect to an eligible taxpayer. As further explained 
later in this preamble, an eligible credit is determined with respect 
to an eligible taxpayer in cases where the eligible taxpayer owns the 
underlying eligible credit property or, if ownership is not required, 
otherwise

[[Page 40500]]

conducts the activities giving rise to the underlying eligible credit. 
As examples, the proposed regulations describe two situations where a 
credit is allowable to an eligible taxpayer, but the eligible taxpayer 
is not permitted to transfer the credit under section 6418. First, the 
proposed regulations provide that a section 45Q credit allowable to a 
person that disposes of qualified carbon oxide, utilizes qualified 
carbon oxide, or uses qualified carbon oxide as a tertiary injectant 
due to an election made under section 45Q(f)(3)(B) is not transferable 
under section 6418. Second, the proposed regulations provide that a 
section 48 credit allowable to a lessee of property under section 
50(d)(5) and an election under Sec.  1.48-4 is not transferable under 
section 6418. In both cases, the taxpayer is only allowed to claim the 
credit as a result of an election by another taxpayer, and does not own 
the eligible credit property to which the credit was determined. These 
situations can be contrasted with a sale-leaseback transaction under 
section 50(d)(4) where a purchaser/lessor of investment credit property 
owns the underlying property to which an eligible credit is determined. 
In that case, provided all of the rules are met, because the eligible 
credit is determined with respect to eligible credit property owned and 
treated as originally placed in service by the purchaser/lessor, the 
purchaser/lessor can elect to transfer eligible credits determined with 
respect to the property under section 6418.
B. Manner and Due Date of Making a Transfer Election
    Section 6418(a) allows an eligible taxpayer to transfer an eligible 
credit (or portion thereof) determined with respect to such taxpayer to 
a transferee taxpayer. Generally, section 6418 does not expressly 
provide for the relevant unit of measurement for an election to 
transfer eligible credits. Proposed Sec.  1.6418-2(b) would provide 
generally that an eligible taxpayer is required to make a transfer 
election to transfer a specified credit portion on the basis of a 
single eligible credit property. For example, an eligible taxpayer that 
determines eligible credits with respect to two eligible credit 
properties would need to make a separate transfer election with respect 
to any specified credit portion determined with respect to each 
eligible credit property. This approach would provide eligible 
taxpayers with flexibility in determining the credit to transfer and 
aligns with how an excessive credit transfer is defined in section 
6418(g)(2)(C).
    In requiring the election to be made on the basis of a single 
eligible credit property, the Treasury Department and the IRS request 
comments on two issues. First, whether more specific guidance with 
respect to any eligible credit property is needed to allow eligible 
taxpayers to make the election as required. If such guidance is needed, 
suggestions for further defining the relevant eligible credit property 
are requested. Second, whether to adopt a grouping rule that allows 
taxpayers to make an election with respect to certain groups of 
eligible credit properties. If such a rule is recommended, discussion 
of the eligible credits that a rule should apply to, the appropriate 
circumstances for grouping, as well as specific rules for determining a 
group with respect to an eligible credit is requested.
    Consistent with section 6418(f)(1)(B)(i), proposed Sec.  1.6418-
2(b)(2) would provide specific rules in the case of any section 45 
credit, section 45Q credit, section 45V credit, or section 45Y credit 
that is an eligible credit. The proposed rules would provide that a 
transfer election is made with respect to each eligible credit property 
for which an eligible credit is determined. Consistent with section 
6418(f)(1)(B)(ii), the proposed rules also would provide that a 
transfer election would be required to be made for each taxable year an 
eligible taxpayer elects to transfer a specified credit portion with 
respect to such eligible credit property during the 10-year period 
beginning on the date such eligible credit property was originally 
placed in service (or, in the case of a section 45Q credit, for each 
taxable year during the 12-year period beginning on the date the 
eligible credit property was originally placed in service).
    Proposed Sec.  1.6418-2(b)(3) would provide the manner of making a 
valid transfer election. Stakeholders asked for clarity regarding the 
manner of making a valid election and provided suggestions for how an 
election should be effectuated and potential information to be 
included. Proposed Sec.  1.6418-2(b)(3) outlines the requirements for 
making a transfer election for eligible taxpayers other than 
partnerships or S corporations (those rules are in proposed Sec.  
1.6418-3(d)). While described in more detail in the proposed 
regulations, to make a valid transfer election, an eligible taxpayer as 
part of filing a return (or a return for a short year within the 
meaning of section 443 of the Code (short year return)), generally 
would be required to include the following--(A) a properly completed 
relevant source credit form for the eligible credit; (B) a properly 
completed Form 3800, General Business Credit (or its successor), 
including reporting the registration number received during the 
required pre-filing registration (as described in proposed Sec.  
1.6418-4); (C) a schedule attached to the Form 3800 (or its successor) 
showing the amount of eligible credit transferred for each eligible 
credit property; (D) a transfer election statement as described later 
in this preamble; and (E) any other information related to the election 
specified in guidance (as defined in proposed Sec.  1.6418-1(e)).
    A transfer election statement is described in proposed Sec.  
1.6418-2(b)(5) and would be generally defined as a written document 
that describes the transfer of a specified credit portion between an 
eligible taxpayer and transferee taxpayer. Election statements are used 
in similar situations to a transfer election under section 6418 (for 
example, an election under section 50(d)(5) and Sec.  1.48-4, section 
45G, or section 45J all require a written document between the 
parties). A transfer election statement that is completed by both the 
eligible taxpayer and the transferee taxpayer would be necessary to 
allow the transferee taxpayer the opportunity to file a return without 
needing to wait for the eligible taxpayer to file. A transfer election 
statement, which is described in more detail in the proposed 
regulations, would be required to generally include (1) information 
related to the transferee taxpayer and the eligible taxpayer; (2) a 
statement that provides the necessary information and amounts to allow 
the transferee taxpayer to take into account the specified credit 
portion with respect to the eligible credit property; (3) a statement 
that the parties are not related (within the meaning of section 267(b) 
or 707(b)(1)); (4) a representation from the eligible taxpayer that it 
has complied with all relevant requirements to make a transfer 
election; (5) a statement from the eligible taxpayer and the transferee 
taxpayer acknowledging the notification of recapture requirements under 
section 6418(g)(3) and the section 6418 regulations (if applicable); 
and (6) a statement or representation from the eligible taxpayer that 
the eligible taxpayer has provided the required minimum documentation 
to the transferee taxpayer. Required minimum documentation is specified 
in proposed Sec.  1.6418-2(b)(3)(iv). Required minimum documentation 
would be the minimum documentation that the eligible taxpayer is 
required to provide to a transferee taxpayer, and is more fully 
described in the proposed regulations, but is generally documentation 
to validate the existence of the eligible credit property, any bonus 
credits amounts, and the

[[Page 40501]]

evidence of credit qualification. This requirement is consistent with a 
stakeholder suggestion that such information should be required to be 
provided by the eligible taxpayer. Proposed Sec.  1.6418-2(b)(5)(v) 
would specify that a transferee taxpayer, consistent with Sec.  1.6001-
1(e), would be required to retain the requirement minimum documentation 
provided by the eligible taxpayer so long as the contents thereof may 
become material in the administration of any internal revenue law.
    Proposed Sec.  1.6418-2(b)(5)(iii) would provide a rule on the 
timing of the transfer election statement. The proposed rule generally 
allows a transfer election statement to be completed any time after the 
eligible taxpayer and transferee taxpayer have sufficient information 
to prepare a transfer election statement. However, a transfer election 
statement cannot be completed for any taxable year after the earlier of 
(A) the filing of the eligible taxpayer's return for the taxable year 
for which the specified credit portion is determined with respect to 
the eligible taxpayer, or (B) the filing of the return of the 
transferee taxpayer for the year in which the specified credit portion 
is taken into account. This proposed rule is intended to provide 
flexibility but places an outer limit on the timing of the transfer 
election statement because both the eligible taxpayer and the 
transferee taxpayer would be required to include a transfer election 
statement as part of filing a return, and therefore, the transfer 
election statement would need to be completed before a return is filed 
by either party.
    Consistent with section 6418(e)(1), proposed Sec.  1.6418-2(b)(4) 
would provide that an election to transfer any specified credit portion 
would need to be made not later than the due date (including 
extensions) for the tax return for the taxable year for which the 
eligible credit is determined. The proposed regulations would also 
clarify that an election would need to be filed on an original return 
and may not be made or revised on an amended return or by filing a 
request for an administrative adjustment under section 6227 of the 
Code. An original return includes a superseding return filed on or 
before the due date (including extensions). The proposed regulations 
would also provide that there is no relief available under Sec. Sec.  
301.9100-1 through 301.9100-3 for a late transfer election.
C. Limitations on the Election
    Proposed Sec.  1.6418-2(c) would include rules that describe 
certain limitations with respect to making an election under section 
6418. First, consistent with section 6418(e)(1), the proposed 
regulations would provide that once made, an election to transfer an 
eligible credit is irrevocable. Second, consistent with section 
6418(e)(2), the proposed regulations would prohibit a transferee 
taxpayer of any specified credit portion from making a second transfer 
under section 6418 with respect to any amount of such transferred 
credit.
    Stakeholders asked whether a passthrough transferee taxpayer that 
allocates purchased eligible credits to its direct or indirect owners 
violates the no second transfer rule in section 6418(e)(2). An 
allocation of a transferred specified credit portion to a direct or 
indirect owner of a passthrough entity would not be considered a 
transfer under section 6418. As a result, an allocation of a 
transferred specified credit portion to a direct or indirect owner of a 
passthrough transferee taxpayer does not violate the no second transfer 
rule in section 6418(e)(2). However, certain rules would apply to 
allocations of a transferred specified credit portion from passthrough 
entities as further described in proposed Sec.  1.6418-3.
    Stakeholders also inquired whether eligible credits can be 
transferred through dealer arrangements. Any arrangement where the 
Federal income tax ownership of a specified credit portion transfers 
first, from an eligible taxpayer to a dealer or intermediary and then, 
ultimately, to a transferee taxpayer is in violation of the no second 
transfer rule in section 6418(e)(2). In contrast, an arrangement using 
a broker to match eligible taxpayers and transferee taxpayers should 
not violate the no second transfer rule, assuming the arrangement at no 
point transfers the Federal income tax ownership of a specified credit 
portion to the broker or any taxpayer other than the transferee 
taxpayer.
D. Determining the Eligible Credit
    Proposed Sec.  1.6418-2(d) would provide rules to clarify how to 
determine the amount of an eligible credit that is transferable. Any 
rules that relate to the determination of an eligible credit, such as 
rules in sections 49 and 50(b), would apply to the eligible taxpayer 
and therefore can limit the amount of transferable eligible credits 
determined with respect to a single eligible credit property owned by 
the eligible taxpayer. Section 6418(a) states that an eligible taxpayer 
can elect to transfer all (or any portion specified in the election) of 
an eligible credit determined with respect to such eligible taxpayer. 
The inclusion of the word ``determined'' is instructive, and the 
proposed regulations would draw a distinction between rules that impact 
the amount of credit determined or the credit base (and thus, the 
amount of eligible credit that can be transferred) versus rules that 
impact a taxpayer's ability to claim a particular eligible credit 
against its tax liability. Rules that impact the ability of a taxpayer 
to claim a particular eligible credit against its tax liability do not 
limit the amount of an eligible credit that an eligible taxpayer can 
transfer. Providing a limitation based on an eligible taxpayer's 
ability to claim an eligible credit would undercut one of the purposes 
of section 6418, which is to provide an alternative monetization 
mechanism to eligible taxpayers that would be unable to utilize credits 
in the current taxable year.
    As previously stated, section 49 generally impacts the amount of a 
credit determined with respect to an investment credit property that an 
eligible taxpayer can transfer. The proposed regulations would provide 
rules for the application of section 49 to a partnership or S 
corporation that is an eligible taxpayer and elects under section 6418 
to transfer an eligible credit (a transferor partnership or transferor 
S corporation). The proposed regulations would provide that any amount 
of eligible credit determined with respect to investment credit 
property held directly by a transferor partnership or transferor S 
corporation (or held directly by an entity disregarded as separate from 
such transferor partnership or transferor S corporation) is determined 
by the transferor partnership or transferor S corporation by taking 
into account the section 49 at-risk rules at the partner or shareholder 
level as of the close of the taxable year in which the investment 
credit property is placed in service. Thus, if the credit base of the 
investment credit property is limited to a partner or shareholder by 
section 49, then the amount of the eligible credit determined by the 
transferor partnership or transferor S corporation is also limited. The 
proposed regulations would provide that a transferor partnership or 
transferor S corporation that transfers any specified credit portion 
with respect to an investment credit property must request from each of 
its partners or shareholders, respectively, that is subject to section 
49, the amount of such partner's or shareholder's nonqualified 
nonrecourse financing with respect to the investment credit

[[Page 40502]]

property as of the close of the taxable year in which the property is 
placed in service. Additionally, the transferor partnership or 
transferor S corporation would attach to its tax return for the taxable 
year in which the property is placed in service, the amount of each 
partner's or shareholder's section 49 limitation with respect to any 
specified credit portion transferred with respect to the investment 
credit property. The Treasury Department and the IRS request comments 
as to whether (1) any information or reporting requirements are needed 
for transferor partnerships or transferor S corporations to apply these 
rules when determining the amount of an eligible credit that can be 
transferred or (2) any additional clarifications are needed regarding 
how the at-risk rules apply to the determination of an eligible credit 
by an eligible taxpayer.
E. Treatment of Payments Made in Connection With Transfer
    Proposed Sec.  1.6418-2(e) would include rules to clarify the 
treatment of payments made by a transferee taxpayer to an eligible 
taxpayer in connection with the transfer of an eligible credit. The 
proposed regulations relate to the rules provided in section 6418(b)(1) 
through (3) and include a rule clarifying when a payment is considered 
to be made in connection with a transfer election.
    Proposed Sec.  1.6418-2(e)(1) would provide that an amount paid by 
a transferee taxpayer to an eligible taxpayer is consideration for a 
transfer of a specified credit portion only if it is paid in cash (as 
defined in Sec.  1.6418-1(f)), directly relates to the specified credit 
portion, and is not described in Sec.  1.6418-5(a)(3) (describing 
payments related to an excessive credit transfer). These proposed rules 
would provide objective criteria for eligible taxpayers and transferee 
taxpayers that seek certainty as to the timing of payments and 
acceptable forms of payment. General tax rules apply to any payments 
made or received outside of the requirements described in proposed 
Sec.  1.6418-2(e)(1). Additionally, the requirements of proposed Sec.  
1.6418-2(e)(1) would not be satisfied where a specified credit portion 
is not ultimately transferred to a transferee taxpayer.
    Pursuant to section 6418(b), the proposed regulations also include 
rules that would clarify that amounts paid in connection with a 
transfer election by a transferee taxpayer are not includible in the 
gross income of an eligible taxpayer and are not deductible by the 
transferee taxpayer.
    In addition to these rules, the proposed regulations would include 
an anti-abuse provision. The intent of the anti-abuse provision is to 
disallow the election and transfer of an eligible credit under section 
6418, or otherwise recharacterize a transaction's income tax 
consequences, in circumstances where the parties to the transaction 
have engaged in the transaction or a series of transactions with the 
principal purpose of avoiding tax liability beyond the intent of 
section 6418. This could include transactions that are intended to 
decrease the eligible taxpayer's gross income or increase a transferee 
taxpayer's deductions. For example, a transaction where an eligible 
taxpayer undercharges or overcharges for services to a customer who is 
also purchasing credits from the eligible taxpayer as a transferee 
taxpayer may violate the anti-abuse rule. The proposed regulations 
include two examples to illustrate application of the anti-abuse rule.
    The proposed regulations do not address (1) the Federal income tax 
treatment of transaction costs, either for the eligible taxpayer or the 
transferee taxpayer, and (2) whether a transferee taxpayer is permitted 
to deduct a loss if the amount paid to an eligible taxpayer exceeds the 
amount of the eligible credit that the transferee taxpayer can 
ultimately claim. The Treasury Department and the IRS are currently 
developing rules on these general issues and seek comments as part of 
that process. Any comments should also consider the specific matters 
described in the following paragraphs.
    Generally, gain or loss is recognized on the sale or other 
disposition of property. See section 1001 of the Code. If a seller 
incurs costs to facilitate the sale of property, such costs are 
generally required to be capitalized and reduce the amount realized 
from the sale. See Sec.  1.263(a)-1(e). If a buyer incurs costs to 
facilitate the acquisition of property (for example, legal fees to 
draft the purchase agreement), such costs are generally required to be 
capitalized and included in the basis of property acquired. See, for 
example, Sec. Sec.  1.263(a)-2(f)(1) and 1.263(a)-4(b)(1)(v).
    It is a longstanding principle that courts should construe Federal 
tax laws in harmony with the legislative intent and seek to carry out 
the legislative purpose. Foster v. U.S., 303 U.S. 118 (1938). 
Furthermore, it is a well-established principle of statutory 
interpretation that a tax law should not be interpreted to allow the 
practical equivalent of a double benefit absent a clear declaration of 
intent by Congress (no double benefit principle). See generally U.S. v. 
Skelly Oil Co. 394 U.S. 678, 684 (1969); cf. Hillsboro Nat. Bank v. 
Commissioner, 460 U.S. 370 (1983). A double tax benefit could arise in 
situations of a double deduction, a deduction and a credit, a credit or 
a deduction from amounts that are excluded from gross income, or 
credits from expenditures made to generate other credits. Cf. Hintz v. 
Commissioner, 712 F2d 281 (7th Cir. 1983); section 265, Expenses and 
Interest Relating to Tax-Exempt Income; S/V Drilling Partners v. 
Commissioner, 114 T.C. 83 (2000).
    Section 6418 provides specific rules that explicitly or implicitly 
supersede certain general Federal income tax rules in whole or in part. 
Accordingly, the Treasury Department and the IRS must consider not only 
the application of specific provisions of section 6418 but also other 
applicable provisions of the Code when developing rules on the general 
issues described previously.
    With respect to an eligible taxpayer, section 6418(b)(2) provides 
that any consideration received from a transferee taxpayer for the 
transfer of an eligible credit (or portion thereof) is not includible 
in gross income of the eligible taxpayer. Section 6418(c)(1)(A) 
provides that in the case of any eligible credit determined with 
respect to any facility or property held directly by a partnership or S 
corporation, any amount received as consideration for the transfer of 
such credit is treated as tax exempt income for purposes of sections 
705 and 1366. In developing the rules applicable to transaction costs 
of an eligible taxpayer, it will be necessary to determine, among other 
things, whether (1) the no double benefit principle applies and, if so, 
how it should apply, and (2) the capitalization rules of section 263 
and the regulations thereunder apply and, if so, how they interact with 
the rules under section 6418(b)(2) and (c)(1)(A).
    With respect to a transferee taxpayer, as described herein, the 
proposed regulations would provide that there is no gross income to a 
transferee taxpayer when claiming an eligible credit if the amount paid 
for the eligible credit is less than the amount of the eligible credit 
transferred and claimed (transferee gross income exclusion rule). 
Similar to the development of rules for transaction costs of an 
eligible taxpayer, in developing the rules applicable to transaction 
costs of a transferee taxpayer, it will be necessary to determine, 
among other things, whether (1) the no double benefit principle applies 
and, if so, how it should apply, and (2) the capitalization rules of 
section 263 and the regulations thereunder apply and, if so, how they 
interact with the transferee gross income exclusion rule in the 
proposed regulations.

[[Page 40503]]

    Also, with respect to a transferee taxpayer, section 6418(b)(3) 
provides that any consideration paid to the eligible taxpayer for an 
eligible credit is not deductible under any provision of the Code. 
However, it is not clear whether the ``not deductible'' language in 
section 6418(b)(3) should be read to preclude capitalization of the 
consideration paid to the eligible taxpayer (for example, under section 
263). Therefore, it will be necessary for the Treasury Department and 
the IRS to determine whether the capitalization rules of section 263 
and the regulations thereunder apply to a transferee taxpayer and, if 
so, how they should apply. It will also be necessary to interpret the 
scope of section 6418(b)(3) and resolve whether it precludes a 
deduction for any amount of consideration paid that is otherwise 
deductible as a loss under section 165 (for example, where the amount 
of consideration paid exceeds the amount of the credit the transferee 
taxpayer can ultimately claim).
F. Transferee Taxpayer's Treatment of an Eligible Credit
    Proposed Sec.  1.6418-2(f) would provide rules describing the 
transferee taxpayer's treatment of a transferred specified credit 
portion. Stakeholders sought clarification of whether a transferee 
taxpayer has a choice of which year to take an eligible credit into 
account. Section 6418(d) provides that in the case of any eligible 
credit transferred to a transferee taxpayer pursuant to a transfer 
election, the eligible credit is taken into account in the first 
taxable year of the transferee taxpayer ending with, or after, the 
taxable year of the eligible taxpayer with respect to which the credit 
was determined. This language prescribes the specific year the 
transferee taxpayer takes the transferred eligible credit into account. 
Therefore, no clarification is needed. To the extent the taxable years 
of an eligible taxpayer and a transferee taxpayer end on the same date, 
the transferee taxpayer will take the specified credit portion into 
account in that taxable year. To the extent the taxable years of an 
eligible taxpayer and a transferee taxpayer end on different dates, the 
transferee taxpayer will take the specified credit portion into account 
in the transferee taxpayer's first taxable year that ends after the 
taxable year of the eligible taxpayer. Consistent with this rule, the 
transferee taxpayer may claim a specified credit portion on an amended 
return or, if applicable, a request for administrative adjustment. A 
transferee taxpayer may also take into account a specified credit 
portion that it has purchased, or intends to purchase, when calculating 
its estimated tax payments, though the transferee taxpayer remains 
liable for any additions to tax in accordance with sections 6654 and 
6655 to the extent the transferee taxpayer has an underpayment of 
estimated tax.
    Stakeholders also asked whether there are any income tax 
consequences to a transferee taxpayer if the amount paid for an 
eligible credit is less than the amount of the eligible credit 
transferred and claimed. As described earlier, the proposed regulations 
would clarify this issue by providing that there is no gross income to 
a transferee taxpayer when claiming an eligible credit if the amount 
paid for the eligible credit is less than the amount of the eligible 
credit transferred and claimed. Under section 6418(a), a transferee 
taxpayer is treated as the eligible taxpayer for other purposes of the 
Code with respect to a transferred eligible credit. An eligible 
taxpayer would not have gross income as a result of claiming an 
eligible credit. As such, a transferee taxpayer also should not have 
gross income as a result of claiming a transferred eligible credit.
    The proposed regulations would also describe the effect of the 
language in section 6418(a), which provides that the transferee 
taxpayer specified in an election (and not the eligible taxpayer) is 
treated as the taxpayer for purposes of the Code with respect to such 
credit (or such portion thereof). Consistent with an eligible credit 
being determined based on ownership of the underlying eligible credit 
property by an eligible taxpayer, or, if ownership is not required, 
based on conducting the activities giving rise to the eligible credit, 
the proposed regulations would provide that a transferee taxpayer does 
not also apply rules that relate to the determination of an eligible 
credit, such as rules in section 49 or 50(b) as described in proposed 
Sec.  1.6418-2(d)(1). However, a transferee taxpayer would apply rules 
that relate to the amount of a transferred eligible credit that is 
allowed to be claimed in the taxable year based on a transferee's 
particular circumstances, such as the rules in section 38 or 469.
    Consistent with applying credit utilization rules to transferee 
taxpayers, the proposed regulations would provide a rule that a 
transferred specified credit portion is treated as earned in connection 
with the conduct of a trade or business, and, if applicable, such 
transferred specified credit portion is subject to the passive activity 
limitation rules in section 469. However, a transferee taxpayer (or a 
direct or indirect owner of a transferee taxpayer that claims a 
transferred specified credit portion) that is subject to section 469 is 
not, as a result of a transfer election, considered to have owned an 
interest in the eligible taxpayer's business at the time the work was 
done (as required for material participation in Sec.  1.469-5(f)(1)) 
and cannot change the characterization of the transferee taxpayer's 
participation with respect to generation of the transferred specified 
credit portion by using any of the grouping rules in Sec.  1.469-4(c). 
This proposed rule would be consistent with the result that the 
transferee taxpayer does not apply rules that relate to the 
determination of an eligible credit because the transferee does not own 
the underlying eligible credit property to which the credit is 
determined or conduct the activity directly. Further, allowing a 
transferee taxpayer to try to change the characterization of an 
eligible credit based on grouping with its own activities under Sec.  
1.469-4(c) would conflict with the conclusion that the eligible credit 
has already been determined. In contrast, an eligible credit generated 
through the conduct of a trade or business does not lose such attribute 
through a transfer under section 6418 for purposes of determining 
whether a transferee taxpayer is allowed the credit. Likewise, a 
section 38 business credit does not become an individual (non-business) 
credit if transferred to an individual. If such attributes did not 
transfer under section 6418, eligible credits earned and used by 
eligible taxpayers would be subject to different limitations than 
transferred eligible credits used by transferee taxpayers. The impact 
of this rule for a transferee taxpayer that is subject to section 469 
is that such transferee taxpayer will be considered to earn eligible 
credits through the conduct of a trade or business related to the 
eligible credit but will not materially participate in such business 
for purposes of section 469. Thus, a transferee taxpayer subject to 
section 469 would be required to treat the credits making up the 
specified credit portion as passive activity credits (as defined in 
section 469(d)(2)) to the extent the specified credit portion exceeds 
passive tax liability. The Treasury Department and the IRS request 
comments on whether there are circumstances in which it would be 
appropriate to not apply the passive activity rules under section 469 
to a transferee taxpayer or to attribute the participation of an 
eligible taxpayer to a transferee taxpayer.
    Lastly, proposed Sec.  1.6418-2(f)(4) would provide rules for how a

[[Page 40504]]

transferee taxpayer can take into account a transferred specified 
credit portion. Section 6418(d) provides the taxable year that a 
transferee taxpayer takes a transferred eligible credit into account 
but does not provide further procedures applicable to a transferee 
taxpayer. In determining the proposed procedures, consideration was 
given to the requirements for any taxpayer when taking into account a 
general business credit, with additional information required that is 
necessary for tracking the transfer of specified credit portions. The 
proposed rules would provide that in order for a transferee taxpayer to 
take into account a specified credit portion, the transferee taxpayer 
would be required to include certain information as part of filing a 
return (or short year return). The proposed regulations would require 
(A) a properly completed Form 3800, General Business Credit (or its 
successor), taking into account a transferred eligible credit as a 
current general business credit, including all registration number(s) 
related to the transferred eligible credit; (B) the transfer election 
statement described earlier in this preamble attached to the return; 
and (C) any other information related to the transfer election 
specified in guidance.

III. Partnerships and S Corporations

A. Overview
    The proposed regulations would provide general rules related to 
transfers of eligible credits by transferor partnerships and transferor 
S corporations and purchases of eligible credits by transferee 
partnerships and transferee S corporations. As a preliminary matter, 
the proposed regulations would clarify that a partnership or an S 
corporation may qualify as an eligible taxpayer or a transferee 
taxpayer, assuming all other relevant requirements in section 6418 are 
met. The proposed regulations would also clarify that the language in 
section 6418(c) requiring an eligible credit property to be ``held 
directly'' by a transferor partnership or transferor S corporation 
allows for such eligible credit property to be owned by an entity 
disregarded as separate from the transferor partnership or transferor S 
corporation for Federal income tax purposes.
    In addition, the proposed regulations would clarify that any tax 
exempt income resulting from the receipt of consideration for the 
transfer of a specified credit portion by a transferor partnership or 
transferor S corporation is treated as arising from an investment 
activity and not from the conduct of a trade or business within the 
meaning of section 469(c)(1)(A). As a result, such tax exempt income is 
not treated as passive income to any partners or shareholders who do 
not materially participate within the meaning of section 469(c)(1)(B). 
Because a transfer of a specified credit portion does not involve the 
transfer of any assets used in a trade or business, it is more 
appropriate to treat any tax exempt income resulting from the transfer 
as arising from an investment activity.
B. Special Recapture Rules for Transferor Partnerships and S 
Corporations
    Stakeholders requested clarification on whether indirect 
disposition events result in recapture of transferred investment tax 
credits to a transferee taxpayer under section 6418(g)(3)(B). Section 
1.47-4(a)(2) provides that if an S corporation shareholder's interest 
in an S corporation is reduced as a result of certain events during the 
recapture period by a certain percentage of the shareholder's interest 
for the taxable year of the S corporation in which the investment 
credit property is placed in service, recapture can occur to such S 
corporation shareholder. Likewise, Sec.  1.47-6(a)(2) provides that if 
a partner's interest in the general profits of a partnership is reduced 
as a result of certain events during the recapture period by a certain 
percentage of the partner's interest in general profits for the taxable 
year of the partnership in which the investment credit property is 
placed in service, recapture can occur to such partner. As explained 
later in part V of this Explanation of Provisions, the proposed 
regulations would provide generally that if an applicable investment 
credit property is disposed of, or otherwise ceases to be investment 
credit property with respect to the eligible taxpayer, a transferee 
taxpayer bears the recapture tax associated with any transferred 
eligible investment tax credit transferred to such transferee taxpayer.
    The recapture events described in Sec. Sec.  1.47-4(a)(2) and 1.47-
6(a)(2) are applicable with respect to the specific shareholder or 
partner to which the recapture event occurs and not with respect to the 
transferor S corporation or transferor partnership. As a result, such 
recapture events should not result in recapture of a transferred 
eligible investment tax credit to a transferee taxpayer under section 
6418(g)(3)(B). Instead, the recapture tax liability resulting from the 
reduction of an S corporation shareholder's interest or a partner's 
interest in general profits should continue to result in recapture to 
the applicable disposing shareholder or partner. The proposed 
regulations would clarify that ``indirect'' dispositions under 
Sec. Sec.  1.47-4(a)(2) and 1.47-6(a)(2) do not result in recapture tax 
liability to a transferee taxpayer under section 6418. Instead, these 
rules continue to apply to a disposing partner or shareholder in a 
transferor partnership or transferor S corporation, respectively. Any 
recapture to a disposing partner is calculated based on the partner's 
share of the basis (or cost) of the section 38 property to which the 
eligible credits were determined in accordance with Sec.  1.46-3(f). 
Any recapture to a disposing shareholder is calculated based on the 
shareholder's pro rata share of the basis (or cost) of the section 38 
property to which the eligible credits were determined in accordance 
with Sec.  1.48-5.
    The Treasury Department and the IRS request comments on whether 
additional rules or clarifications are needed with respect to how the 
indirect disposition recapture rules under Sec. Sec.  1.47-6(a)(2) and 
1.47-4(a)(2) apply to partners or shareholders in transferor 
partnerships or transferor S corporations, respectively.
    As previously stated, the proposed regulations would provide that 
any amount of eligible credit determined with respect to investment 
credit property held directly by a partnership or S corporation would 
be required to be determined by the partnership or S corporation taking 
into account the section 49 at-risk rules at the partner or shareholder 
level as of the close of the taxable year in which the investment 
credit property is placed in service. The proposed regulations also 
would provide that any net increase in the amount of nonqualified 
nonrecourse financing during the recapture period for a partner or 
shareholder in a transferor partnership or transferor S corporation 
with respect to such partner's or shareholder's credit base for a 
transferred eligible investment tax credit does not result in recapture 
to a transferee taxpayer under section 6418(g)(3). Similar to the 
indirect disposition recapture rules described above, the recapture 
rules under section 49(b) for partners or shareholders in a transferor 
partnership or transferor S corporation apply with respect to a 
disposition or change in financing at the partner or shareholder level 
and not at the eligible taxpayer (i.e., the partnership or S 
corporation) level. As such, these rules would continue to apply to 
partners or shareholders in transferor partnerships or transferor S 
corporations that increase their nonqualified nonrecourse financing

[[Page 40505]]

amount during the recapture period. Any recapture to a disposing 
partner is calculated based on the partner's share of the basis (or 
cost) of the section 38 property to which the eligible credits were 
determined in accordance with Sec.  1.46-3(f). Any recapture to a 
disposing shareholder is calculated based on the shareholder's pro rata 
share of the basis (or cost) of the section 38 property to which the 
eligible credits were determined in accordance with Sec.  1.48-5.
    The Treasury Department and the IRS request comments on whether 
additional rules or clarifications are needed with respect to how the 
recapture rules under section 49(b) apply to partners or shareholders 
in transferor partnerships or transferor S corporations. As a 
clarification, recapture under section 49(b) applicable directly to an 
eligible taxpayer (for example, to an eligible taxpayer that is an 
individual) results in recapture to a transferee taxpayer under section 
6418(g)(3).
    The proposed regulations would also provide that any net decrease 
in the amount of nonqualified nonrecourse financing during the 
recapture period with respect to a partner's or shareholder's credit 
base for a transferred specified credit portion determined with respect 
to investment credit property does not result in additional eligible 
credit that can be transferred by the applicable partner, shareholder 
or transferor partnership or transferor S corporation. Instead, any net 
decrease in the amount of nonqualified nonrecourse financing and 
resulting increase in the credit base to a partner or shareholder 
results in additional investment tax credit that can be used by the 
applicable partner or shareholder. The Treasury Department and the IRS 
request comments on whether additional rules or clarifications are 
needed with respect to how decreases in nonqualified nonrecourse 
amounts under section 49(a)(2) that increase the credit base for which 
eligible credits have previously been transferred apply to partners or 
shareholders in a transferor partnership or transferor S corporation, 
respectively.
C. Rules Solely Applicable to Transferor and Transferee Partnerships
    The proposed regulations include special rules applicable to 
transferor and transferee partnerships and their direct and indirect 
partners. Section 6418(c)(1)(A) provides that any amount received as 
consideration for a transfer of eligible credits by a transferor 
partnership is treated as tax exempt income for purposes of section 
705. Section 6418(c)(1)(B) provides that a partner's distributive share 
of such tax exempt income is based on such partner's distributive share 
of the otherwise eligible credit for each taxable year. Stakeholders 
asked for clarity as to how this determination should be made.
    The proposed regulations would provide generally that a partner's 
distributive share of tax exempt income resulting from the receipt of 
cash by a transferor partnership for a transferred specified credit 
portion is based on the partner's proportionate distributive share of 
the otherwise eligible credit as determined under Sec. Sec.  1.46-3(f) 
and 1.704-1(b)(4)(ii). The proposed regulations further clarify that 
any tax exempt income resulting from the receipt of cash by a 
transferor partnership for a transferred specified credit portion is 
treated as received or accrued, including for purposes of section 705, 
as of the date the specified credit portion is determined with respect 
to the transferor partnership. In effect, this means that tax exempt 
income resulting from the receipt of cash by a transferor partnership 
in exchange for a transferred specified credit portion should be 
allocated to the same partners and in the same proportionate amount, as 
the specified credit portion would have been allocated if not 
transferred.
    The proposed regulations would provide a special rule for 
allocations of tax exempt income resulting from a transfer of a 
specified credit portion of less than all eligible credit(s) determined 
with respect to an eligible credit property held by a transferor 
partnership. This special rule permits tax exempt income resulting from 
the receipt of cash for a transfer of one or more specified credit 
portion(s) of less than all eligible credits from an eligible credit 
property to, generally, be allocated to those partners that desired to 
transfer their distributive share of the underlying credits. To take 
advantage of this special rule, a transferor partnership would first 
determine each partner's distributive share of the otherwise eligible 
credits determined with respect to such eligible credit property in 
accordance with Sec. Sec.  1.46-3(f) and 1.704-1(b)(4)(ii). This amount 
is referred to as a ``partner's eligible credit amount.'' Thereafter, 
the transferor partnership may determine, either in a manner described 
in the partnership agreement or as the partners may agree, the portion 
of each partner's eligible credit amount to be transferred and the 
portion of each partner's eligible credit amount to be retained and 
allocated to such partner. Following the transfer of the specified 
credit portion(s), the transferor partnership may allocate to each 
partner its agreed upon share of eligible credits, tax exempt income 
resulting from the receipt of consideration for the transferred 
specified credit portion(s), or both, as the case may be; provided 
that, the amount of eligible credits allocated to each partner may not 
exceed such partner's eligible credit amount and the amount of tax 
exempt income allocated to each partner would equal such partner's 
proportionate share of tax exempt income resulting from the 
transfer(s). Each partner's proportionate share of tax exempt income 
resulting from the transfer(s) is equal to the total tax exempt income 
resulting from the transfer(s) of the specified credit portion(s) 
multiplied by a fraction, (i) the numerator of which is a partner's 
total eligible credit amount minus the amount of eligible credits 
actually allocated to the partner with respect to the eligible credit 
property for the taxable year, and (ii) the denominator of which is the 
total amount of the specified credit portion(s) transferred by the 
partnership with respect to the eligible credit property for the 
taxable year. The proposed regulations provide examples of this rule.
    The Treasury Department and the IRS request comments on whether 
additional rules or clarifications are needed with respect to when 
allocations of tax exempt income and eligible credits under section 
6418 will be respected under section 704(b).
    The proposed regulations would clarify that a partnership that is 
an indirect or direct partner of a transferor partnership (an upper-
tier partnership) is not an eligible taxpayer with respect to an 
eligible credit allocated by a transferor partnership. The proposed 
regulations also would clarify that for any tax exempt income allocated 
to an upper-tier partnership as a result of the receipt of 
consideration for a transfer of a specified credit portion by a 
transferor partnership, the upper-tier partnership would determine its 
partners' distributive shares of the tax exempt income in proportion to 
the partners' distributive shares of the otherwise eligible credit. In 
effect, this means that the upper-tier partnership would allocate any 
tax exempt income resulting from a transfer of a specified credit 
portion by a lower-tier partnership among its partners as of the same 
time, and in the same proportionate amount, as the eligible credit 
would have been allocated if not transferred by the transferor 
partnership.
    Stakeholders asked for confirmation that cash payments received by 
a

[[Page 40506]]

transferor partnership as consideration for a transfer of eligible 
credits can be distributed in a manner different from the partners' 
distributive shares of the tax exempt income resulting from the receipt 
of the cash payment. A transferor partnership that receives a cash 
payment from a transfer of a specified credit portion is under no 
restriction on how it can use such cash payment (including on how it 
makes distributions to its partners). Such cash payment is treated in 
the same manner as the transferor partnership's other cash flows.
    The proposed regulations would provide rules for transferee 
partnerships and clarify that allocations of a transferred specified 
credit portion by a transferee partnership are not a violation of the 
no additional transfer rule in Sec.  1.6418-2(c)(2). The proposed 
regulations also would provide that cash payments by a transferee 
partnership for a transferred specified credit portion are treated as a 
section 705(a)(2)(B) expenditure. Each partner's distributive share of 
any transferred specified credit portion is based on such partner's 
distributive share of the section 705(a)(2)(B) expenditures used to 
fund the purchase of such transferred specified credit portion. Each 
partner's distributive share of the section 705(a)(2)(B) expenditures 
used to fund the purchase of any transferred specified credit portion 
is determined by the partnership agreement. Or, if the partnership 
agreement does not provide for the allocation of such nondeductible 
expenditures, then each partner's distributive share is based on the 
transferee partnership's general allocation of nondeductible 
expenditures.
    To prevent avoidance of the no additional transfer rule in proposed 
Sec.  1.6418-2(c)(2) through transfers of interests in transferee 
partnerships, the proposed regulations in proposed Sec.  1.6418-
3(b)(4)(iv) would provide that a transferred specified credit portion 
purchased by a transferee partnership is treated as an extraordinary 
item under Sec.  1.706-4(e) (including also a proposed addition to 
Sec.  1.706-4(e) confirming a transferred specified portion is an 
extraordinary item). The proposed regulations further provide that if 
the transferee partnership and eligible taxpayer have the same taxable 
years, such extraordinary item is deemed to occur on the date the 
transferee partnership first makes a cash payment to an eligible 
taxpayer for any transferred specified credit portion. If the 
transferee partnership and eligible taxpayer have different taxable 
years, the extraordinary item is deemed to occur on the later of the 
first date the transferee partnership takes the transferred specified 
credit portion into account under section 6418(d), or the first date 
that the transferee partnership made a cash payment to the eligible 
taxpayer for the transferred specified credit portion. For example, if 
an eligible taxpayer is a calendar year taxpayer and a transferee 
partnership is a fiscal year taxpayer with its tax year beginning on 
June 1st, and the transferee partnership makes its first cash payment 
before June 1st for a transferred specified credit portion determined 
with respect to the eligible taxpayer during year 1, then the 
transferred specified credit portion is deemed to occur to the 
transferee partnership on June 1st. However, if the transferee 
partnership makes its first cash payment at any point from June 1st to 
December 31st, the transferred specified credit portion is deemed to 
occur on the cash payment date. The Treasury Department and the IRS 
continue to study whether additional rules are required under section 
6418 to prevent avoidance of the no additional transfer rule through 
transfers of interests in transferee partnerships.
    Finally, for transferee partnerships, the proposed regulations 
would clarify that an upper-tier partnership that is a direct or 
indirect partner in a transferee partnership and that is allocated a 
transferred specified credit portion is not an eligible taxpayer with 
respect to such transferred specified credit portion. The upper-tier 
partnership would determine each partner's distributive share of the 
transferred specified credit portion in accordance with the same rules 
the transferee partnership determines its partners' distributive shares 
of the transferred specified credit portion.
    The Treasury Department and the IRS request comments on whether 
additional rules or clarifications are needed with respect to when 
allocations of a transferred specified credit portion will be respected 
under section 704(b). The Treasury Department and the IRS also request 
comments on whether additional rules or clarifications are needed with 
respect to transfers of partnership interests that are made after the 
transferring partner has contributed capital to a transferee 
partnership for the purpose of purchasing eligible credits, but before 
the transferee partnership has made any cash payments to an eligible 
taxpayer.
D. Rules Solely Applicable to Transferor and Transferee S Corporations
    The proposed regulations would include special rules applicable to 
transferor and transferee S corporations and their shareholders. 
Section 6418(c)(1)(A) provides that any amount received as 
consideration for a transfer of eligible credits by a transferor S 
corporation is treated as tax exempt income for purposes of section 
1366. The proposed regulations would provide that each shareholder 
would take into account such shareholder's pro rata share (as 
determined under section 1377(a) of the Code) of any tax exempt income 
resulting from the receipt of cash for the transfer of a specified 
credit portion by a transferor S corporation. The proposed regulations 
would further clarify that any tax exempt income resulting from the 
receipt of cash for the transfer of a specified credit portion by a 
transferor S corporation is treated as received or accrued, including 
for purposes of section 1366, as of the date the transferred specified 
credit portion is determined with respect to the transferor S 
corporation. In effect, this means that any tax exempt income resulting 
from the receipt of cash by a transferor S corporation for a 
transferred specified credit portion should be allocated to the same 
shareholders and in the same proportionate amount as the specified 
credit portion would have been allocated if not transferred.
    The proposed regulations would also provide rules for transferee S 
corporations and indicate that allocations of a transferred specified 
credit portion by a transferee S corporation are not a violation of the 
no additional transfer rule in Sec.  1.6418-2(d)(2).
    The proposed regulations would clarify that cash payments by a 
transferee S corporation for a transferred specified credit portion are 
treated as an expenditure under section 1367(a)(2)(D) of the Code since 
such payments are nondeductible. The proposed regulations would also 
provide rules for how shareholders of a transferee S corporation 
account for a transferred specified credit portion. Each shareholder of 
a transferee S corporation would take into account its pro rata share 
(as determined under section 1377(a)) of any transferred specified 
credit portion. If the transferee S corporation and eligible taxpayer 
have the same taxable years, the transfer of a specified credit portion 
is treated as occurring to a transferee S corporation during the 
transferee S corporation's permitted year (as defined under sections 
444 and 1378(b)) that the transferee S corporation first makes a cash 
payment as consideration to an eligible taxpayer for the transferred 
specified credit portion. If the transferee S corporation and eligible 
taxpayer have

[[Page 40507]]

different taxable years, then the transfer of a specified credit 
portion is treated as occurring to a transferee S corporation during 
the transferee S corporation's first permitted year (as defined under 
sections 444 and 1378(b)) ending with, or after, the taxable year of 
the eligible taxpayer to which the transferred specified credit portion 
was determined.
E. Elections for Transferor Partnerships and Transferor S Corporations
    Finally, the proposed regulations would provide specific rules 
relating to elections for transferor partnerships or transferor S 
corporations. Consistent with the rules for other eligible taxpayers, 
partnerships and S corporations would generally make a transfer 
election for a specified credit portion in the manner provided in 
proposed Sec.  1.6418-2(b)(1) through (3) described earlier in this 
preamble. The proposed regulations would also clarify that all 
documents required in Sec.  1.6418-2(b)(1) through (3) would need to be 
attached to the partnership or S corporation return for the taxable 
year during which the transferred specific credit portion was 
determined. For the transfer election to be valid, the return would 
need to be filed not later than the time prescribed by Sec. Sec.  
1.6031(a)-1(e) and 1.6037-1(b) (including extensions of time) for 
filing the return for such taxable year.

IV. Registration Under Section 6418(g)(1)

    Section 6418(g)(1) provides that as a condition of, and prior to, 
any transfer of any portion of an eligible credit under section 6418, 
the Secretary may require such information (including, in such form or 
manner as is determined appropriate by the Secretary, such information 
returns) or registration as the Secretary deems necessary for purposes 
of preventing duplication, fraud, improper payments, or excessive 
payments under this section.
    In general, consistent with section 6417, stakeholders requested 
additional information about this provision and requested that the 
regulations balance the need to prevent fraud and abuse with the burden 
on taxpayers. Stakeholders recommended a registration system that 
assigns a transfer number to an eligible taxpayer that can be used by 
transferee taxpayers to claim transferred credits and allows the IRS to 
track transfers of eligible credits. Stakeholders also recommended that 
information or registration requirements should be as consistent as 
possible across sections 48D(d)(1), 6417(d)(5), and 6418(g)(1). In 
order to meet the purpose of section 6418(g)(1), the Treasury 
Department and the IRS believe that it is necessary to establish a 
mandatory registration process that is in place before the end of the 
2023 calendar year, which is the first full taxable year during which a 
transfer election under section 6418 is available.
    Proposed Sec.  1.6418-4 generally provides rules requiring that 
eligible taxpayers register before filing the return on which a 
transfer election is made and provide information related to each 
eligible credit property for which the eligible taxpayer intends to 
transfer a specified credit portion. Proposed Sec.  1.6418-4(a), 
consistent with section 6418(g)(1), requires that, as a condition of, 
and prior to, making an election to transfer a specified credit 
portion, an eligible taxpayer satisfy the pre-filing registration 
requirements in proposed Sec.  1.6418-4(b). After the required pre-
filing registration process is successfully completed, an eligible 
taxpayer will receive a unique registration number from the IRS for 
each registered eligible credit property for which the eligible 
taxpayer intends to transfer a specified credit portion. The Treasury 
Department and the IRS intend for this pre-filling registration process 
to occur through an IRS electronic portal (unless otherwise allowed in 
guidance). An eligible taxpayer that does not obtain a registration 
number and report the registration number on its return with respect to 
an eligible credit property is ineligible to make a transfer election. 
However, completion of the pre-filing registration requirements and 
receipt of a registration number does not, by itself, mean the eligible 
taxpayer is eligible to transfer any specified credit portion 
determined with respect to the eligible credit property. The 
registration number also must be reported on the eligible taxpayer's 
return.
    Proposed Sec.  1.6418-4(b) provides the following pre-filing 
registration requirements.
    First, an eligible taxpayer must complete the pre-filing 
registration process electronically through an IRS electronic portal in 
accordance with the instructions provided therein, unless otherwise 
provided in guidance. If the election is by a member of a consolidated 
group, the member must complete the pre-filing registration process as 
a condition of, and prior to, making an elective payment election. See 
Sec.  1.1502-77 (providing rules regarding the status of the common 
parent as agent for its members).
    Second, an eligible taxpayer must satisfy the registration 
requirements and receive a registration number prior to making a 
transfer election for a specified credit portion on the eligible 
taxpayer's return for the taxable year at issue.
    Third, an eligible taxpayer is required to obtain a registration 
number for each eligible credit property with respect to which a 
transfer election of a specified credit portion is made.
    Finally, an eligible taxpayer must provide the specific information 
required to be provided as part of the pre-filing registration process. 
The provision of such information, which includes information about the 
taxpayer, about the eligible credits, and about the eligible credit 
property, will allow the IRS to prevent duplication, fraud, improper 
payments, or excessive transfers under section 6418. For example, 
verifying information about the taxpayer will allow the IRS to mitigate 
the risk of fraud or improper transfers. Information about eligible 
credit properties, including their address and coordinates (longitude 
and latitude), supporting documentation, beginning of construction 
date, and placed in service date will allow the IRS to mitigate the 
risk of duplication, fraud, and improper transfers for properties that 
are not eligible credit properties.
    Proposed Sec.  1.6418-4(c) provides rules related to the 
registration number that is obtained after the IRS has reviewed and 
approved the taxpayer's submitted information. First, these rules 
provide that a registration number is valid for an eligible taxpayer 
only for the taxable year for which it is obtained, and for a 
transferee taxpayer's taxable year in which the specified credit 
portion is taken into account. Second, proposed Sec.  1.6418-4(c) 
provides rules for the renewal of a registration number that has been 
previously obtained. The eligible taxpayer is required to renew the 
registration with respect to an eligible credit property each year in 
accordance with guidance, including attesting that all the facts are 
still correct or updating any facts. Third, the proposed regulations 
provide that, if facts change with respect to an eligible credit 
property for which a registration number has been previously obtained, 
an eligible taxpayer is required to amend the registration to reflect 
these new facts. Lastly, the proposed regulations provide that an 
eligible taxpayer is required to include the registration number of the 
eligible credit property on the eligible taxpayer's return for the 
taxable year, as provided in proposed Sec.  1.6418-2(b), for an 
election to be effective with respect to any eligible credit determined 
with respect to any eligible credit property. The IRS will treat a 
transfer election as ineffective with respect to an eligible credit 
determined with respect to an

[[Page 40508]]

eligible credit property for which the eligible taxpayer does not 
include a valid registration number on its return.
    A transferee taxpayer is also required to report the registration 
number received from an eligible taxpayer on its return for the taxable 
year that the transferee taxpayer takes the transferred eligible credit 
into account.

V. Special Rules

    The proposed regulations would provide special rules relating to 
the determination of an excessive credit transfer, reasonable cause for 
a transferee taxpayer, the difference between an excessive credit 
transfer and recapture under section 50(a) or 45Q(f)(4), the mechanics 
for basis reduction and recapture notification, and rules for 
ineffective elections. The proposed regulations also would provide 
special rules relating to the carryback and carryforward of transferred 
eligible credits.
    The proposed regulations describe the rules related to an excessive 
credit transfer consistent with section 6418(g)(2)(A). Section 
6418(g)(2)(A) provides in the case of any specified credit portion that 
is transferred to a transferee taxpayer pursuant to section 6418(a) 
that the Secretary determines constitutes an excessive credit transfer, 
the tax imposed on the transferee taxpayer by chapter 1, regardless of 
whether such entity would otherwise be subject to chapter 1 tax, for 
the taxable year in which such determination is made will be increased 
by an amount equal to the sum of (i) the amount of such excessive 
credit transfer, plus (ii) an amount equal to 20 percent of such 
excessive credit transfer.
    Consistent with section 6418(g)(2)(B), the proposed regulations 
would provide that the 20 percent penalty related to an excessive 
credit transfer does not apply if the transferee taxpayer demonstrates 
to the satisfaction of the IRS that the excessive credit transfer 
resulted from reasonable cause. Under the proposed regulations, 
reasonable cause would be generally determined based on the relevant 
facts and circumstances of a transaction. The proposed regulations 
would further provide that the determination of reasonable cause 
includes an evaluation of a transferee taxpayer's efforts to determine 
that the amount of eligible credit transferred by the eligible taxpayer 
to the transferee taxpayer is not more than the eligible credit that 
was determined with respect to the eligible credit property for the 
taxable year in which the eligible credit was determined and has not 
been transferred to any other taxpayer. Further, based on a review of 
suggestions by stakeholders, the proposed regulations would provide a 
list of factors that a transferee taxpayer could show to demonstrate 
reasonable cause. The list of factors is not exhaustive and is also not 
intended as a list of required actions in all transfers. Instead, the 
list of factors, which includes a review of the eligible taxpayer's 
records with respect to the determination of the eligible credit 
(including documentation evidencing eligibility for bonus credit 
amounts), would be intended to provide more clarity with respect to 
reasonable cause in these circumstances for eligible taxpayers, 
transferee taxpayers and the IRS in administration of the provision.
    The proposed regulations also would define the term ``excessive 
credit transfer'' consistent with section 6418(g)(2)(C) to mean, with 
respect to an eligible credit property for which an election is made 
under proposed Sec.  1.6418-2 or Sec.  1.6418-3 for any taxable year, 
an amount equal to the excess of--(i) the amount of the specified 
credit portion claimed by the transferee taxpayer with respect to such 
eligible credit property for such taxable year; over (ii) the amount of 
the eligible credit that, without the application of section 6418, 
would be otherwise allowable under the Code with respect to such 
eligible credit property for such taxable year. In the second part of 
the definition of the term, the Treasury Department and the IRS are 
interpreting the phrase ``amount of such credit . . . which would be 
otherwise allowable'' with respect to such eligible credit property for 
the taxable year to have the same meaning as the amount of the eligible 
credit properly determined with respect to such eligible credit 
property for such taxable year in the hands of the eligible taxpayer. 
See Joint Committee on Taxation, Description Of Energy Tax Changes Made 
By Public Law 117-169, JCX-5-23, 98 (April 17, 2023).
    The proposed regulations would also provide a rule for determining 
an excessive credit transfer when there are multiple transferees. The 
proposed regulations would provide that all transferee taxpayers are 
considered one transferee for calculating whether there was an 
excessive credit transfer and the amount of the excessive credit 
transfer. If there was an excessive credit transfer, then the amount of 
excessive credit transferred to a specific transferee taxpayer is equal 
to the total excessive credit transferred multiplied by the 
transferee's portion of the total credit transferred to all 
transferees. This rule is applied on an eligible credit property basis.
    Finally, with respect to excessive credit transfers, the proposed 
regulations provide three examples to illustrate when there is no 
excessive credit transfer, when there is an excessive credit transfer, 
and when there is an excessive credit transfer as to multiple 
transferees.
    Stakeholders asked whether a recapture event under section 50(a) 
would be treated as an excessive credit transfer under section 
6418(g)(2). The excessive credit transfer rules operate separately from 
the recapture rules. The excessive credit transfer rules apply where 
the credit amount reported on the original credit source form by the 
eligible taxpayer and transferred to a transferee taxpayer was 
excessive. Recapture of a tax credit occurs when the original tax 
credit reported would have been correct without the occurrence of a 
subsequent recapture event. The proposed regulations therefore would 
provide a rule that recapture events under section 45Q(f)(4) or 50(a) 
do not result in an excessive credit transfer.
    Stakeholders asked for clarification whether the recapture tax 
under section 50(a) is imposed on the eligible taxpayer or the 
transferee taxpayer. Section 6418(g)(3)(B) provides that if, during any 
taxable year, the applicable investment credit property (as defined in 
section 50(a)(5)) is disposed of, or otherwise ceases to be investment 
credit property with respect to the eligible taxpayer, before the close 
of the recapture period (as described in section 50(a)(1))--(i) such 
eligible taxpayer must provide notice of such occurrence to the 
transferee taxpayer (in such form and manner as the Secretary 
prescribes), and (ii) the transferee taxpayer must provide notice of 
the recapture amount (as defined in section 50(c)(2)), if any, to the 
eligible taxpayer (in such form and manner as the Secretary 
prescribes). The proposed regulations include a rule that the recapture 
amount is calculated and taken into account by the transferee taxpayer. 
This interpretation is consistent with the statutory framework for 
recapture tax under section 50, which generally imposes recapture tax 
on the taxpayer who claimed the credit, regardless of whether such 
taxpayer owns the underlying property to which the credit is 
determined. This interpretation is also consistent with section 
6418(a), which treats the transferee taxpayer (and not the eligible 
taxpayer) as the taxpayer for purposes of the Code with respect to a 
specified credit portion, and with section 6418(g)(3)(B)(ii), which 
requires the transferee taxpayer to provide notice of

[[Page 40509]]

the recapture amount, if any, to the eligible taxpayer.
    Consistent with recapture tax liability being imposed on the 
transferee taxpayer, as a requested clarification, there is no 
prohibition under section 6418 for an eligible taxpayer and a 
transferee taxpayer to contract between themselves for indemnification 
of the transferee taxpayer in the event of a recapture event.
    The proposed regulations would also provide guidance on the 
notifications that are required by the eligible taxpayer and the 
transferee taxpayer after a recapture event, as described in section 
6418(g)(3)(B)(i) and (ii). The proposed regulations would provide that 
an eligible taxpayer would be required to provide notification of a 
recapture event to a transferee taxpayer, with such notification 
including all of the information necessary for the transferee taxpayer 
to calculate the recapture amount (as defined under section 50(c)(2)). 
This notification would need to be provided in a timely manner so that 
a transferee taxpayer can calculate the recapture amount by the due 
date of the transferee taxpayer's return (without extensions). Beyond 
these requirements, the parties can contract as to the form the notice 
must take and to any additional time periods for providing the notice, 
provided the terms of the contract do not otherwise conflict with the 
terms of the proposed regulations. The IRS would also be permitted to 
provide further information requirements or more specific time periods 
if required through instructions to forms or further guidance. The 
proposed regulations contain similar requirements as to the 
notification required by the transferee taxpayer of the recapture 
amount, with the difference being the type of information that is 
provided. Together, these notification rules seek to inform parties of 
the minimum information required in a notice and the outer limits on 
time periods, but still allow for parties to agree to other terms as 
needed.
    Section 6418(g)(3) does not specifically address recapture under 
section 45Q(f)(4). Instead, section 6418(g)(3) only addresses recapture 
under section 50(a), which occurs when an investment credit property 
for which an eligible credit was determined is disposed of, or 
otherwise ceases to be investment credit property with respect to the 
eligible taxpayer before the end of the recapture period. However, 
applying rules consistent with section 6418(g)(3) to eligible section 
45Q credits is appropriate. Section 45Q has similar requirements in 
that carbon oxide that has been sequestered, utilized, or used and to 
which a section 45Q credit has been determined is generally intended to 
remain sequestered, utilized or used for the entire recapture period. 
Addressing this issue is also consistent with the authority granted in 
section 6418(h) to issue regulations necessary to carry out the 
purposes of section 6418. As such, the proposed regulations would 
clarify that the rules under proposed Sec. Sec.  1.6418-5(d) and 1.45Q-
5 apply to a transferee taxpayer to the extent any eligible section 45Q 
is transferred under section 6418. The proposed regulations would also 
clarify that an eligible taxpayer would be required to provide notice 
to a transferee taxpayer of a recapture event, the amount of leaked 
qualified carbon oxide, the amount of qualified carbon oxide subject to 
recapture and the recapture amount in accordance with Sec.  1.45Q-5(c) 
through (e). Such notice would be required to be provided in a timely 
manner so that a transferee taxpayer can calculate the recapture amount 
by the due date of the transferee taxpayer's tax return (without 
extensions).
    The proposed regulations would also provide a clarification that an 
ineffective election is not considered an excessive credit transfer to 
the transferee taxpayer. An ineffective election to transfer an 
eligible credit means that no transfer has occurred for purposes of 
section 6418. This means that section 6418 would not apply to the 
transaction, and the tax consequences are determined under any other 
relevant provisions of the Code. For example, an ineffective election 
results if an eligible taxpayer tries to elect to transfer an eligible 
credit, but the eligible taxpayer did not complete or receive a 
registration number with respect to the eligible credit property to 
which the credit is determined or if an eligible taxpayer attempts to 
transfer an eligible credit to a related party.
    Stakeholders asked whether eligible credits are subject to new 
section 39(a)(4), regarding additional carryback and carryforward 
years. The proposed regulations would provide that a transferee 
taxpayer can use section 39(a)(4) to the extent an eligible credit is 
also listed in section 6417(b). Section 39(a)(4) generally allows a 3-
year carryback period (as opposed to a 1-year) in the case of any 
applicable credit (as defined in section 6417(b)). This issue has two 
parts, the first of which is broader than these proposed regulations. 
The first issue is whether the reference in section 39(a)(4) to 
applicable credit is only referring to an applicable credit determined 
by an applicable entity under section 6417(a), or, if the reference is 
only referring to the list of credits in section 6417(b). The proposed 
regulations would provide that the language in section 39(a)(4) is 
referring to the list of credits in section 6417(b). Regardless of the 
taxpayer determining the credit, if the credit is listed in section 
6417(b), then the credit is an applicable credit. The second issue is 
whether there is any prohibition against a transferee taxpayer using 
section 39(a)(4). No statutory language prohibits a transferee taxpayer 
from using the rule in section 39(a)(4) with respect to an eligible 
credit. All of the eligible credits would meet the definition in 
section 6417(b), although there are placed in service dates under 
section 6417(b)(2), (3), and (5) that may impact application of section 
39(a)(4), which must be taken into consideration.
    With respect to real estate investment trusts (REITs), stakeholders 
requested that the proposed regulations clarify that eligible credits 
that have not yet been transferred are treated as a real estate asset, 
cash, or cash item and thus, will not potentially cause a REIT to fail 
the asset test for REITs under section 856(c)(4). The proposed 
regulations do not directly adopt this comment; however, the Treasury 
Department and the IRS believe that the proposed regulations, 
particularly with respect to the paid in cash and timing of sale 
requirements, will assist REITs in managing issues with the REIT asset 
test. Further comments are requested with respect to whether the 
proposed regulations provide sufficient guidance to enable REITs to 
manage the potential REIT asset test issues.
    Stakeholders also requested that the proposed regulations clarify 
that the transfer of an eligible credit pursuant to section 6418 is not 
considered a dealer sale under the REIT prohibited transactions rules 
of section 857(b)(6). The proposed regulations do not include a rule 
addressing this question. The Treasury Department and the IRS do not 
believe that a prohibited transaction tax issue arises from the 
transfer of eligible tax credits. Section 6418 provides that the cash 
amount received as consideration for the transfer of an eligible credit 
from an eligible taxpayer to a transferee taxpayer is not includible in 
the eligible taxpayer's gross income. Section 857(b)(6) imposes a tax 
equal to 100% of the net income derived from a REIT's prohibited 
transactions. Since cash received by an eligible REIT as consideration 
for the transfer of an eligible tax credit would not be includible in 
any calculation of the eligible taxpayer's gross income, the 
transaction cannot result in any net

[[Page 40510]]

income and, consequently, there is no prohibited transaction tax issue 
regarding the transfer of an eligible credit.
    Stakeholders also requested confirmation that receipt of (or the 
right to receive) an eligible credit does not result in income to an 
eligible taxpayer that is also a REIT. Generally, Federal income tax 
rules do not treat as gross income a person's becoming entitled under 
the Code to a credit against Federal income tax. This general principle 
equally applies to an eligible taxpayer--including a REIT--becoming 
entitled to an eligible credit that it may transfer under section 6418. 
Accordingly, the proposed regulations do not include the requested rule 
specifically addressing REITs.
    Lastly, stakeholders sought confirmation that the sale of energy 
under sections 45 and 45Y is not a dealer sale under the REIT 
prohibited transactions rules of section 857(b)(6). The proposed 
regulations do not address this issue. However, in the preamble to TD 
9784 (81 FR 59849, 59856 (August 31, 2016)), the Treasury Department 
and the IRS noted that until additional guidance is published in the 
Internal Revenue Bulletin, in any taxable year in which (1) the 
quantity of excess electricity transferred to the utility company 
during the taxable year from energy producing distinct assets that 
serve an inherently permanent structure does not exceed (2) the 
quantity of electricity purchased from the utility company during the 
taxable year to serve the inherently permanent structure, the IRS will 
not treat any net income resulting from the transfer of such excess 
electricity as constituting net income derived from a prohibited 
transaction under section 857(b)(6). The Treasury Department and the 
IRS believe that any sale of electricity that is not within the scope 
of the statement in the 2016 preamble should be analyzed on a facts and 
circumstances basis to determine whether the sale is subject to the 
prohibited transaction rules of section 857(d)(6).

Proposed Applicability Dates

    These regulations are proposed to apply to taxable years ending on 
or after the date the final regulations are published in the Federal 
Register Taxpayers may rely on these proposed regulations for taxable 
years beginning after December 31, 2022, and before the date the final 
regulations are published in the Federal Register, provided the 
taxpayers follow the proposed regulations in their entirety and in a 
consistent manner.

Special Analyses

I. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (``PRA'') 
generally requires that a Federal agency obtain the approval of the 
Office of Management and Budget (OMB) before collecting information 
from the public, whether such collection of information is mandatory, 
voluntary, or required to obtain or retain a benefit. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection of information displays 
a valid control number.
    The collections of information in these proposed regulations 
contain reporting and recordkeeping requirements. The recordkeeping 
requirements mentioned within these proposed regulations are considered 
general tax records under Sec.  1.6001-1(e). These records are required 
for the IRS to validate that transferee taxpayers have met the 
regulatory requirements and are entitled to the transferred specified 
credit portions. For PRA purposes, general tax records are already 
approved by OMB under 1545-0074 for individuals and under 1545-0123 for 
business entities.
    These proposed regulations also mention reporting requirements 
related to making transfer elections as detailed in proposed Sec. Sec.  
1.6418-2 and 1.6418-3. These transfer elections will be made by 
eligible taxpayers as part of filing a return (such as the appropriate 
Form 1040, Form 1120, Form 1120-S, or Form 1065), including filling out 
the relevant source credit form and completing the Form 3800. The 
proposed regulation in proposed Sec.  1.6418-2(b)(5) describes third-
party disclosures, which require eligible taxpayers and transferee 
taxpayers to complete transfer election statements and also require 
eligible taxpayers to provide required minimum documentation to 
transferee taxpayers as part of making a transfer election. These forms 
and third-party disclosures are approved under 1545-0074 for 
individuals and 1545-0123 for business entities.
    These proposed regulations also describe recapture procedures as 
detailed in proposed Sec.  1.6418-5 that are required by section 
6418(g)(3). The reporting of a recapture event will still be required 
to be reported using Form 4255, Recapture of Investment Credit. This 
form is approved under 1545-0074 for individuals and 1545-0123 for 
business entities. The proposed regulation is not changing or creating 
new collection requirements not already approved by OMB.
    These proposed regulations mention the reporting requirement to 
complete pre-filing registration with IRS to be able to transfer 
eligible credits to a transferee taxpayer as detailed in proposed Sec.  
1.6418-4. For further information concerning the registration and where 
to submit comments on the collection of information and the accuracy of 
the estimated burden, and suggestions for reducing this burden, please 
refer to the preamble to the corresponding temporary regulations (T.D. 
9975) published in the Rules and Regulations section of this issue of 
the Federal Register. For burden estimates associated with the pre-
filing registration requirement as detailed in proposed Sec.  1.6418-4, 
see the preamble to the corresponding temporary regulations. This 
proposed regulation is not changing or creating new collection 
requirements beyond the requirements that are being reviewed and 
approved by OMB under the temporary regulations.

II. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Unless an agency determines that a proposal is not likely to 
have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires the agency to present an 
initial regulatory flexibility analysis (IRFA) of the proposed rule. 
The Treasury Department and the IRS have not determined whether the 
proposed rule, when finalized, will likely have a significant economic 
impact on a substantial number of small entities. This determination 
requires further study. However, because there is a possibility of 
significant economic impact on a substantial number of small entities, 
an IRFA is provided in these proposed regulations. The Treasury 
Department and the IRS invite comments on both the number of entities 
affected and the economic impact on small entities. Pursuant to section 
7805(f), this notice of proposed rulemaking has been submitted to the 
Chief Counsel of Advocacy of the Small Business Administration for 
comment on its impact on small business.
1. Need for and Objectives of the Rule
    The proposed regulations would provide guidance to taxpayers that

[[Page 40511]]

intend to make an election under section 6418 to transfer eligible 
credits. The proposed regulations would also provide guidance to 
transferee taxpayers as to the treatment of transferred eligible 
credits under section 6418. The proposed rules would include needed 
definitions, the time and manner to make a transfer election, and 
information about the pre-filing registration process, among other 
items. The Treasury Department and the IRS intend and expect that 
providing taxpayers guidance that allows them to effectively use 
section 6418 to transfer eligible credits will beneficially impact 
various industries, deliver benefits across the economy, and reduce 
economy wide greenhouse gas emissions.
    In particular, section 6418 allows eligible taxpayers to transfer 
an eligible credit (or portion thereof) to a transferee taxpayer. 
Allowing eligible taxpayers without sufficient Federal income tax 
liability to use a business tax credit to instead transfer the tax 
credit to a taxpayer that has sufficient tax liability to use the 
credit will increase the incentive for taxpayers to invest in clean 
energy projects that generate eligible credits. It will also increase 
the amount of cash available to such taxpayers, thereby reducing the 
amount of financing needed for clean energy projects.
2. Affected Small Entities
    The RFA directs agencies to provide a description of, and where 
feasible, an estimate of, the number of small entities that may be 
affected by the proposed rules, if adopted. The Small Business 
Administration's Office of Advocacy estimates in its 2023 Frequently 
Asked Questions that 99.9 percent of American businesses meet its 
definition of a small business. The applicability of these proposed 
regulations does not depend on the size of the business, as defined by 
the Small Business Administration. As described more fully in the 
preamble to this proposed regulation and in this IRFA, section 6418 and 
these proposed regulations may affect a variety of different entities 
across several different industries as there are 11 different eligible 
credits that may be transferred pursuant to a transfer election. 
Although there is uncertainty as to the exact number of small 
businesses within this group, the current estimated number of 
respondents to these proposed rules is 50,000 taxpayers as described in 
the Paperwork Reduction Act section of the preamble. The Treasury 
Department and the IRS expect to receive more information on the impact 
on small businesses through comments on this proposed rule and again 
when taxpayers start to make the transfer election using the guidance 
and procedures provided in these proposed regulations.
3. Impact of the Rules
    The proposed regulations provide rules for how taxpayers can take 
advantage of the section 6418 credit monetization regime. Taxpayers 
that elect to take advantage of transferability will have 
administrative costs related to reading and understanding the rules in 
addition to recordkeeping and reporting requirements because of the 
pre-filing registration and tax return requirements. The costs will 
vary across different-sized taxpayers and across the type of project(s) 
in which such taxpayers are engaged.
    The pre-filing registration process requires a taxpayer to register 
itself as intending to make a transfer election, to list all eligible 
credits it intends to transfer, and to list each eligible credit 
property that contributed to the determination of such credits. This 
process must be completed to receive a registration number for each 
eligible credit property with respect to which the eligible taxpayer 
intends to transfer an eligible credit. On filing the return, to make a 
valid transfer election, the eligible taxpayer and transferee taxpayer 
would be required to complete and attach a transfer election statement. 
The transfer election statement is generally a written document that 
describes the transfer of a specified credit portion between an 
eligible taxpayer and transferee taxpayer. Further, the eligible 
taxpayer is required to provide certain required minimum documentation 
to the transferee taxpayer, and the transferee taxpayer is required to 
retain the documentation for as long as it may be relevant. Many of the 
other requirements, such as completing the relevant source credit form 
and completing the Form 3800 would be required for any taxpayer that is 
claiming a general business credit, regardless of whether the taxpayer 
was transferring the credit under section 6418. Although the Treasury 
Department and the IRS do not have sufficient data to determine 
precisely the likely extent of the increased costs of compliance, the 
estimated burden of complying with the recordkeeping and reporting 
requirements are described in the Paperwork Reduction Act section of 
the preamble.
4. Alternatives Considered
    The Treasury Department and the IRS considered alternatives to the 
proposed regulations. The proposed regulations requirements of pre-
filing registration and the additional requirements to make a valid 
transfer election were designed to minimize burden while also 
minimizing the opportunity for duplication, fraud, improper payments, 
or excessive payments under section 6418. For example, in adopting 
these requirements, the Treasury Department and the IRS considered 
whether such information could be obtained strictly at filing of the 
relevant return. However, the Treasury Department and IRS decided that 
such an option would increase the opportunity for duplication, fraud, 
improper payments or excessive payments under section 6418. Section 
6418(g)(1) specifically authorizes the IRS to require such information 
or registration as the Secretary deems necessary for purposes of 
preventing duplication, fraud, improper payments, or excessive payments 
under section 6418 as a condition of, and prior to, any transfer of any 
portion of an eligible credit. As described in the preamble to these 
proposed regulations, these proposed rules carry out that Congressional 
intent as pre-filing registration allows for the IRS to verify certain 
information in a timely manner and then process the annual tax return 
of the eligible taxpayer and the transferee taxpayer with minimal 
delays. Having a distinction between eligible taxpayers that are small 
businesses versus others making a transfer election would create a 
scenario where a subset of taxpayers seeking to transfer eligible 
credits would not have been verified or received registration numbers, 
potentially delaying return processing for both eligible taxpayers and 
transferee taxpayers.
    Another example is the proposed requirement that eligible taxpayers 
and transferee taxpayers complete a transfer election statement. In 
determining to adopt this proposal, the Treasury Department and the IRS 
considered that such a statement would again minimize opportunity for 
fraud and decrease the chance of duplication but would also benefit a 
transferee taxpayer by allowing the filing of its return without having 
to wait for an eligible taxpayer to file in all cases. Further, the 
contents of the transfer election statement were intended to be 
available to eligible taxpayers, such that the size of the business 
should not impact greatly the time needed to prepare such statements. 
The Treasury Department and the IRS also considered whether any 
required documentation was needed to be provided by eligible taxpayers 
to transferee taxpayers, which the transferee taxpayers are then 
required to

[[Page 40512]]

keep for so long as the contents thereof may become material in the 
administration of any internal revenue law. Again, this requirement was 
considered consistent with the goal of minimizing fraud, as the 
information is generally documentation to validate the existence of the 
eligible credit property, any bonus credits amounts, and the evidence 
of credit qualification. Any size business generating an eligible 
credit should have access to such information. Further the 
recordkeeping duration is consistent with general recordkeeping rules 
under Sec.  1.6001-1(e). This proposed requirement also will benefit 
small businesses that are transferee taxpayers as it provides a 
mechanism to receive such information from the eligible taxpayer. 
Comments are requested on the requirements in the proposed regulations, 
including specifically, whether there are less burdensome alternatives 
that do not increase the risk of duplication, fraud, improper payments, 
or excessive payments under section 6418.
5. Duplicative, Overlapping, or Conflicting Federal Rules
    The proposed rule would not duplicate, overlap, or conflict with 
any relevant Federal rules. As discussed above, the proposed rule would 
merely provide procedures and definitions to allow taxpayers to take 
advantage of the ability to transfer eligible credits. The Treasury 
Department and the IRS invite input from interested members of the 
public about identifying and avoiding overlapping, duplicative, or 
conflicting requirements.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandate Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). These 
proposed regulations do not include any Federal mandate that may result 
in expenditures by state, local, or tribal governments, or by the 
private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These proposed regulations do not 
have federalism implications and do not impose substantial, direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive order.

VI. Executive Order 13175: Consultation and Coordination With Indian 
Tribal Governments

    Executive Order 13175 (Consultation and Coordination With Indian 
Tribal Governments) prohibits an agency from publishing any rule that 
has tribal implications if the rule either imposes substantial, direct 
compliance costs on Indian tribal governments, and is not required by 
statute, or preempts tribal law, unless the agency meets the 
consultation and funding requirements of section 5 of the Executive 
order. This proposed rule does not have substantial direct effects on 
one or more federally recognized Indian tribes and does not impose 
substantial direct compliance costs on Indian tribal governments within 
the meaning of the Executive order.

VII. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to comments that are submitted timely to 
the IRS as prescribed in the preamble under the ADDRESSES section. The 
Treasury Department and the IRS request comments on all aspects of the 
proposed regulations. Any electronic comments submitted, and any paper 
comments submitted, will be made available at https://www.regulations.gov or upon request.
    Announcement 2023-16, 2023-20 I.R.B. 854 (May 15, 2023), provides 
that public hearings will be conducted in person, although the IRS will 
continue to provide a telephonic option for individuals who wish to 
attend or testify at a hearing by telephone. Any telephonic hearing 
will be made accessible to people with disabilities.
    A public hearing has been scheduled for August 23, 2023, beginning 
at 10:00 a.m. ET, in the Auditorium at the Internal Revenue Building, 
1111 Constitution Avenue NW, Washington, DC, unless no outlines are 
received by August 14, 2023. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to comment by telephone at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed as 
well as the time to be devoted to each topic by August 14, 2023, as 
prescribed in the preamble under the ADDRESSES section.
    A period of ten minutes will be allocated to each person for making 
comments. After the deadline for receiving outlines has passed, the IRS 
will prepare an agenda containing the schedule of speakers. Copies of 
the agenda will be made available at https://www.regulations.gov, 
search IRS and REG-101610-23. Copies of the agenda will also be 
available by emailing a request to [email protected]. Please put 
``REG-101610-23 Agenda Request'' in the subject line of the email.
    Individuals who want to testify in person at the public hearing 
must send an email to [email protected] to have your name added to 
the building access list. The subject line of the email must contain 
the regulation number REG-101610-23 and the language TESTIFY In Person. 
For example, the subject line may say: Request to TESTIFY In Person at 
Hearing for REG-101610-23.
    Individuals who want to testify by telephone at the public hearing 
must send an email to [email protected] to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-101610-23 and the language 
TESTIFY Telephonically. For example, the subject line may say: Request 
to TESTIFY Telephonically at Hearing for REG-101610-23.
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to [email protected] to have 
your name added to the building access list. The subject line of the 
email must contain the regulation number REG-101610-23 and the language 
ATTEND In Person. For example, the subject line may say: Request to 
ATTEND Hearing In Person for REG-101610-23. Requests to attend the 
public hearing must be received by 5:00 p.m. EST on August 21,

[[Page 40513]]

2023. Individuals who want to attend the public hearing by telephone 
without testifying must also send an email to [email protected] to 
receive the telephone number and access code for the hearing. The 
subject line of the email must contain the regulation number REG-
101610-23 and the language ATTEND Hearing Telephonically. For example, 
the subject line may say: Request to ATTEND Hearing Telephonically for 
REG-101610-23. Requests to attend the public hearing must be received 
by 5:00 p.m. EST on August 21, 2023.
    Hearings will be made accessible to people with disabilities. To 
request special assistance during a hearing please contact the 
Publications and Regulations Branch of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
[email protected] (preferred) or by telephone at (202) 317-6901 
(not a toll-free number) at least August 18, 2023.

Statement of Availability of IRS Documents

    IRS notices and other guidance cited in this preamble are published 
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are 
available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at https://www.irs.gov.

Drafting Information

    The principal authors of these proposed regulations are James 
Holmes and Jeremy Milton, Office of the Associate Chief Counsel 
(Passthroughs and Special Industries), IRS. However, other personnel 
from the Treasury Department and the IRS participated in their 
development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order for Sec. Sec.  1.6418-0 through 1.6418-5 to 
read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Sections 1.6418-0 through 1.6418-5 also issued under 26 U.S.C. 
6418(g)(1) and (h).
* * * * *
0
Par. 2. Section 1.706-4 is amended as follows:
0
1. Redesignate paragraphs (e)(2)(ix) through (xi) as paragraphs 
(e)(2)(x) through (xii).
0
2. Add new paragraph (e)(2)(ix).
0
3. Revise the heading of paragraph (g).
0
4. Redesignate the text of paragraph (g) as paragraph (g)(1).
0
5. Add paragraph (g)(2).
    The addition and revisions read as follows:


Sec.  1.706-4  Determination of distributive share when a partner's 
interest varies.

* * * * *
    (e) * * *
    (2) * * *
    (ix) Any specified credit portion transferred pursuant to section 
6418 and Sec. Sec.  1.6418-1 through 1.6418-5;
* * * * *
    (g) Applicability date. * * *
    (2) Paragraph (e)(2)(ix) of this section applies to taxable years 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 3. Sections 1.6418-0 through 1.6418-5 are added to read as 
follows:
Sec.
* * * * *
1.6418-0 Table of contents.
1.6418-1 Transfer of eligible credits.
1.6418-2 Rules for making transfer elections.
1.6418-3 Additional rules for partnerships and S corporations.
1.6418-4 Additional information and registration.
1.6418-5 Special rules.
* * * * *


Sec.  1.6418-0  Table of contents.

    This section lists the captions contained in Sec. Sec.  1.6418-1 
through 1.6418-5.

Sec.  1.6418-1 Transfer of eligible credits.

    (a) Transfer of eligible credits.
    (b) Eligible taxpayer.
    (c) Eligible credit.
    (d) Eligible credit property.
    (e) Guidance.
    (f) Paid in cash.
    (g) Section 6418 regulations.
    (h) Specified credit portion.
    (i) Statutory references.
    (j) Transfer election.
    (k) Transferee partnership.
    (l) Transferee S corporation.
    (m) Transferee taxpayer.
    (n) Transferor partnership.
    (o) Transferor S corporation.
    (p) Transferred specified credit portion.
    (q) U.S. territory.
    (r) Applicability date.

Sec.  1.6418-2 Rules for making transfer elections.

    (a) Transfer election.
    (b) Manner and due date of making a transfer election.
    (c) Limitations after a transfer election is made.
    (d) Determining the eligible credit.
    (e) Treatment of payments made in connection with a transfer 
election.
    (f) Transferee taxpayer's treatment of eligible credit.
    (g) Applicability date.

Sec.  1.6418-3 Additional rules for partnerships and S corporations.

    (a) Rules applicable to both partnerships and S corporations.
    (b) Rules applicable to partnerships.
    (c) Rules applicable to S corporations.
    (d) Transfer election by a partnership or S corporation.
    (e) Examples.
    (f) Applicability date.

Sec.  1.6418-4 Additional information and registration.

    (a) Pre-filing registration and election.
    (b) Pre-filing registration requirements.
    (c) Registration number.
    (d) Applicability date.

Sec.  1.6418-5 Special rules.

    (a) Excessive credit transfer tax imposed.
    (b) Excessive credit transfer defined.
    (c) Basis reduction under section 50(c).
    (d) Notification and impact of recapture under section 50(a) or 
49(b).
    (e) Notification and impact of recapture under section 
45Q(f)(4).
    (f) Impact of an ineffective transfer election by an eligible 
taxpayer.
    (g) Carryback and carryforward.
    (h) Applicability date.


Sec.  1.6418-1  Transfer of eligible credits.

    (a) Transfer of eligible credits. An eligible taxpayer may make a 
transfer election under Sec.  1.6418-2(a) to transfer any specified 
portion of an eligible credit determined with respect to any eligible 
credit property of such eligible taxpayer for any taxable year to a 
transferee taxpayer in accordance with section 6418 of the Code and the 
section 6418 regulations (defined in paragraph (g) of this section). 
Paragraphs (b) through (q) of this section provide definitions. See 
Sec.  1.6418-2 for rules and procedures under which all transfer 
elections must be made, limitations to making transfer elections, the 
treatment of payments made in connection with transfer elections, and 
the treatment of eligible credits transferred to transferee taxpayers. 
See Sec.  1.6418-3 for special rules pertaining to transfer elections 
made by partnerships or S corporations. See Sec.  1.6418-4 for pre-
filing registration requirements and other information required to make 
any transfer election effective. See Sec.  1.6418-5 for special rules 
related to the imposition of tax on excessive credit transfers, basis 
reductions, required notifications and impacts of the recapture of 
transferred credits, and rules regarding carrybacks and carryforwards.
    (b) Eligible taxpayer. The term eligible taxpayer means any 
taxpayer (as defined in section 7701(a)(14) of the

[[Page 40514]]

Code), other than one described in section 6417(d)(1)(A) and Sec.  
1.6417-1(b).
    (c) Eligible credit--(1) In general. The term eligible credit is a 
credit described in paragraph (c)(2) of this section determined for a 
taxable year with respect to a single eligible credit property of an 
eligible taxpayer but does not include any business credit carryforward 
or business credit carryback determined under section 39 of the Code.
    (2) Separately determined credit amounts. The amount of any credit 
described in this paragraph (c)(2) is the entire amount of the credit 
separately determined with respect to each single eligible credit 
property of the eligible taxpayer and includes any bonus credit amounts 
described in paragraph (c)(3) of this section determined with respect 
to that single eligible credit property. The eligible credits described 
in this paragraph (c)(2) are:
    (i) Alternative fuel vehicle refueling property. So much of the 
credit for alternative fuel vehicle refueling property allowed under 
section 30C of the Code that, pursuant to section 30C(d)(1), is treated 
as a credit listed in section 38(b) of the Code (section 30C credit).
    (ii) Renewable electricity production. The renewable electricity 
production credit determined under section 45(a) of the Code (section 
45 credit).
    (iii) Carbon oxide sequestration. The credit for carbon oxide 
sequestration determined under section 45Q(a) of the Code (section 45Q 
credit).
    (iv) Zero-emission nuclear power production. The zero-emission 
nuclear power production credit determined under section 45U(a) of the 
Code (section 45U credit).
    (v) Clean hydrogen production. The clean hydrogen production credit 
determined under section 45V(a) of the Code (section 45V credit).
    (vi) Advanced manufacturing production. The advanced manufacturing 
production credit determined under section 45X(a) of the Code (section 
45X credit).
    (vii) Clean electricity production. The clean electricity 
production credit determined under section 45Y(a) of the Code (section 
45Y credit).
    (viii) Clean fuel production. The clean fuel production credit 
determined under section 45Z(a) of the Code (section 45Z credit).
    (ix) Energy. The energy credit determined under section 48 of the 
Code (section 48 credit).
    (x) Qualifying advance energy project. The qualifying advanced 
energy project credit determined under section 48C of the Code (section 
48C credit).
    (xi) Clean electricity. The clean electricity investment credit 
determined under section 48E of the Code (section 48E credit).
    (3) Bonus credit amounts. The bonus credit amounts described in 
this paragraph (c)(3) are:
    (i) In the case of a section 30C credit, the increased credit 
amounts for which the requirements under section 30C(g)(2)(A) and (3) 
are satisfied.
    (ii) In the case of a section 45 credit, the increased credit 
amounts for which the requirements under section 45(b)(7)(A)(8), (9), 
and (11) are satisfied.
    (iii) In the case of a section 45Q credit, the increased credit 
amounts for which the requirements under section 45Q(h)(3) and (4) are 
satisfied.
    (iv) In the case of a section 45U credit, the increased credit 
amount for which the requirements under section 45U(d)(2) are 
satisfied.
    (v) In the case of a section 45V credit, the increased credit 
amounts for which the requirements under section 45V(e)(3) and (4) are 
satisfied.
    (vi) In the case of a section 45Y credit, the increased credit 
amounts for which the requirements under section 45Y(g)(7), (9), (10), 
and (11) are satisfied.
    (vii) In the case of a section 45Z credit, the increased credit 
amounts for which the requirements under section 45Z(f)(6) and (7) are 
satisfied.
    (viii) In the case of a section 48 credit, the increased credit 
amounts for which the requirements under section 48(a)(10), (11), (12), 
(14), and (e) are satisfied.
    (ix) In the case of a section 48C credit, the increased credit 
amounts for which the requirements under section 48C(e)(5) and (6) are 
satisfied.
    (x) In the case of a section 48E credit, the increased credit 
amounts for which the requirements under section 48E(a)(3)(A), (B), 
(d)(3), (d)(4), and (h) are satisfied.
    (d) Eligible credit property. The term eligible credit property 
means each of the units of property of an eligible taxpayer described 
in paragraphs (d)(1) through (11) of this section with respect to which 
the amount of an eligible credit is determined:
    (1) In the case of a section 30C credit, a qualified alternative 
fuel vehicle refueling property described in section 30C(c).
    (2) In the case of a section 45 credit, a qualified facility 
described in section 45(d).
    (3) In the case of a section 45Q credit, a single process train of 
carbon capture equipment described in Sec.  1.45Q-2(c)(3).
    (4) In the case of a section 45U credit, a qualified nuclear power 
facility described in section 45U(b)(1).
    (5) In the case of a section 45V credit, a qualified clean hydrogen 
production facility described in section 45V(c)(3).
    (6) In the case of a section 45X credit, a facility that produces 
eligible components, as described in guidance under sections 48C and 
45X.
    (7) In the case of a section 45Y credit, a qualified facility 
described in section 45Y(b)(1).
    (8) In the case of a section 45Z credit, a qualified facility 
described in section 45Z(d)(4).
    (9)(i) In general. In the case of a section 48 credit and except as 
provided in paragraph (d)(9)(ii) of this section, an energy property 
described in section 48.
    (ii) Pre-filing registration and elections. At the option of an 
eligible taxpayer, and to the extent consistently applied for purposes 
of the pre-filing registration requirements of Sec.  1.6418-4 and the 
election requirements of Sec. Sec.  1.6418-2 through 1.6418-3, an 
energy project as described in section 48(a)(9)(A)(ii) and defined in 
guidance.
    (10) In the case of a section 48C credit, an eligible property 
described in section 48C(c)(2).
    (11) In the case of a section 48E credit, a qualified facility as 
defined in section 48E(b)(3) or, in the case of a section 48E credit 
relating to a qualified investment with respect to energy storage 
technology, an energy storage technology described in section 
48E(c)(2).
    (e) Guidance. The term guidance means guidance published in the 
Federal Register or Internal Revenue Bulletin, as well as 
administrative guidance such as forms, instructions, publications, or 
other guidance on the IRS.gov website. See Sec. Sec.  601.601 and 
601.602 of this chapter.
    (f) Paid in cash. The term paid in cash means a payment in United 
States dollars that--
    (1) Is made by cash, check, cashier's check, money order, wire 
transfer, automated clearing house (ACH) transfer, or other bank 
transfer of immediately available funds;
    (2) Is made within the period beginning on the first day of the 
eligible taxpayer's taxable year during which a specified credit 
portion is determined and ending on the due date for completing a 
transfer election statement (as provided in Sec.  1.6418-2(b)(5)(iii)); 
and
    (3) May include a transferee taxpayer's contractual commitment to 
purchase eligible credits with United States dollars in advance of the 
date a specified credit portion is transferred to such transferee 
taxpayer if all payments of United States dollars are made in a manner 
described in paragraph (f)(1) of

[[Page 40515]]

this section during the time period described in paragraph (f)(2) of 
this section.
    (g) Section 6418 regulations. The term section 6418 regulations 
means this section and Sec. Sec.  1.6418-2 through 1.6418-5.
    (h) Specified credit portion. The term specified credit portion 
means a proportionate share (including all) of an eligible credit 
determined with respect to a single eligible credit property of the 
eligible taxpayer that is specified in a transfer election. A specified 
credit portion of an eligible credit must reflect a proportionate share 
of each bonus credit amount that is taken into account in calculating 
the entire amount of eligible credit determined with respect to a 
single eligible credit property.
    (i) Statutory references--(1) Chapter 1. The term chapter 1 means 
chapter 1 of the Code.
    (2) Code. The term Code means the Internal Revenue Code.
    (3) Subchapter K. The term subchapter K means subchapter K of 
chapter 1.
    (4) Subtitle A. The term subtitle A means subtitle A of the Code.
    (j) Transfer election. The term transfer election means an election 
under section 6418(a) of the Code to transfer to a transferee taxpayer 
a specified portion of an eligible credit determined with respect to an 
eligible credit property in accordance with the section 6418 
regulations.
    (k) Transferee partnership. The term transferee partnership means a 
partnership for Federal income tax purposes that is a transferee 
taxpayer.
    (l) Transferee S corporation. The term transferee S corporation 
means an S corporation within the meaning of section 1361(a) that is a 
transferee taxpayer.
    (m) Transferee taxpayer. The term transferee taxpayer means any 
taxpayer that is not related (within the meaning of section 267(b) or 
707(b)(1) of the Code) to the eligible taxpayer making the transfer 
election to which an eligible taxpayer transfers a specified credit 
portion of an eligible credit.
    (n) Transferor partnership. The term transferor partnership means a 
partnership for Federal income tax purposes that is an eligible 
taxpayer that makes a transfer election.
    (o) Transferor S corporation. The term transferor S corporation 
means an S corporation within the meaning of section 1361(a) that is an 
eligible taxpayer that makes a transfer election.
    (p) Transferred specified credit portion. The term transferred 
specified credit portion means the specified credit portion that is 
transferred from an eligible taxpayer to a transferee taxpayer pursuant 
to a transfer election.
    (q) U.S. territory. The term U.S. territory means the Commonwealth 
of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, and the 
Commonwealth of the Northern Mariana Islands.
    (r) Applicability date. This section applies to taxable years 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].


Sec.  1.6418-2  Rules for making transfer elections.

    (a) Transfer election--(1) In general. An eligible taxpayer can 
make a transfer election as provided in this section. If a valid 
transfer election is made by an eligible taxpayer for any taxable year, 
the transferee taxpayer specified in such election (and not the 
eligible taxpayer) is treated as the taxpayer for purposes of the Code 
with respect to the specified credit portion. This paragraph (a) 
provides rules on the number of transfers permitted, rules for 
determining the eligible taxpayer in certain ownership situations, and 
rules describing circumstances where no transfer election is allowed. 
Paragraph (b) of this section provides specific rules regarding the 
scope, manner, and timing of a transfer election. Paragraph (c) of this 
section provides rules regarding limitations applicable to transfer 
elections. Paragraph (d) of this section provides rules regarding an 
eligible taxpayer's determination of an eligible credit. Paragraph (e) 
of this section provides the treatment of payments in connection with a 
transfer election. Paragraph (f) of this section provides rules 
regarding a transferee taxpayer's treatment of an eligible credit 
following a transfer.
    (2) Multiple transfer elections permitted. An eligible taxpayer may 
make multiple transfer elections to transfer one or more specified 
credit portion(s) to multiple transferee taxpayers, provided that the 
aggregate amount of specified credit portions transferred with respect 
to any single eligible credit property does not exceed the amount of 
the eligible credit determined with respect to the eligible credit 
property.
    (3) Transfer election in certain ownership situations--(i) 
Disregarded entities. If an eligible taxpayer is the sole owner 
(directly or indirectly) of an entity that is disregarded as separate 
from such eligible taxpayer for Federal income tax purposes and such 
entity directly holds an eligible credit property, the eligible 
taxpayer may make a transfer election in the manner provided in this 
section with respect to any eligible credit determined with respect to 
such eligible credit property.
    (ii) Undivided ownership interests. If an eligible taxpayer is a 
co-owner of an eligible credit property through an arrangement properly 
treated as a tenancy-in-common for Federal income tax purposes, or 
through an organization that has made a valid election under section 
761(a) of the Code, then the eligible taxpayer's undivided ownership 
share of the eligible credit property will be treated for purposes of 
section 6418 as a separate eligible credit property owned by such 
eligible taxpayer, and the eligible taxpayer may make a transfer 
election in the manner provided in this section for any eligible 
credit(s) determined with respect to such eligible credit property.
    (iii) Members of a consolidated group. A member of a consolidated 
group is required to make a transfer election in the manner provided in 
this section to transfer any eligible credit determined with respect to 
the member. See Sec.  1.1502-77 (providing rules regarding the status 
of the common parent as agent for its members).
    (iv) Partnerships and S corporations. A partnership or S 
corporation that determines an eligible credit with respect to any 
eligible credit property held directly by such partnership or S 
corporation may make a transfer election in the manner provided in 
Sec.  1.6418-3(d) with respect to eligible credits determined with 
respect to such eligible credit property.
    (4) Circumstances where no transfer election can be made--(i) 
Prohibition on election or transfer with respect to progress 
expenditures. No transfer election can be made with respect to any 
amount of an eligible credit that is allowed for progress expenditures 
pursuant to rules similar to the rules of section 46(c)(4) and (d) (as 
in effect on the day before the enactment of the Revenue Reconciliation 
Act of 1990).
    (ii) No election allowed when non-cash consideration. No transfer 
election is allowed when an eligible taxpayer receives any 
consideration other than cash (as defined in Sec.  1.6418-1(f)) in 
connection with the transfer of a specified credit portion.
    (iii) No election allowed when eligible credits not determined with 
respect to taxpayer. No transfer election is allowed for eligible 
credits that are not determined with respect to an eligible taxpayer as 
described in paragraph (d) of this section. For example, a section 45Q 
credit allowable to an eligible taxpayer because of an election made 
under section 45Q(f)(3)(B), or a section 48 credit allowable to an 
eligible taxpayer because of an election made

[[Page 40516]]

under section 50(d)(5) and Sec.  1.48-4, although described in Sec.  
1.6418-1(c)(2), is not an eligible credit that can be transferred by 
the taxpayer because such credit is not determined with respect to the 
eligible taxpayer.
    (b) Manner and due date of making a transfer election--(1) In 
general. An eligible taxpayer must make a transfer election to transfer 
a specified credit portion of an eligible credit on the basis of a 
single eligible credit property. For example, an eligible taxpayer that 
determines eligible credits with respect to two eligible credit 
properties would need to make a separate transfer election with respect 
to any specified credit portion of the eligible credit determined with 
respect to each eligible credit property. Any transfer election must be 
consistent with the eligible taxpayer's pre-filing registration under 
Sec.  1.6418-4.
    (2) Specific rules for certain eligible credits. In the case of any 
section 45 credit, section 45Q credit, section 45V credit, or section 
45Y credit that is an eligible credit, the rules in paragraphs 
(b)(2)(i) and (ii) of this section apply.
    (i) Separate eligible credit property. A transfer election must be 
made separately with respect to each eligible credit property described 
in Sec.  1.6418-1(d)(2), (3), (5), and (7), as applicable, for which an 
eligible credit is determined.
    (ii) Time period. A transfer election must be made for each taxable 
year an eligible taxpayer elects to transfer specified credit portions 
with respect to such an eligible credit property during the 10-year 
period beginning on the date such eligible credit property was 
originally placed in service (or, in the case of a section 45Q credit, 
for each taxable year during the 12-year period beginning on the date 
the single process train of carbon capture equipment was originally 
placed in service).
    (3) Manner of making a valid transfer election. A transfer election 
is made by an eligible taxpayer on the basis of each specified credit 
portion with respect to a single eligible credit property that is 
transferred to a transferee taxpayer. To make a valid transfer 
election, an eligible taxpayer as part of filing a return (or a return 
for a short year within the meaning of section 443 of the Code (short 
year return)), must include the following--
    (i) A properly completed relevant source credit form for the 
eligible credit (such as Form 7207, Advanced Manufacturing Production 
Credit, if making a transfer election for a section 45X credit) for the 
taxable year that the eligible credit was determined;
    (ii) A properly completed Form 3800, General Business Credit (or 
its successor), including reductions necessary because of the 
transferred eligible credit as required by the form and instructions 
and the registration number received during the required pre-filing 
registration (as described in Sec.  1.6418-4) related to the eligible 
credit property with respect to which a transferred eligible credit was 
determined;
    (iii) A schedule attached to the Form 3800 (or its successor) 
showing the amount of eligible credit transferred for each eligible 
credit property (such as for a section 45X election, the relevant lines 
that include the eligible credit property reported on Form 7207), 
except as otherwise provided in guidance;
    (iv) A transfer election statement as described in paragraph (b)(5) 
of this section; and
    (v) Any other information related to the election specified in 
guidance.
    (4) Due date and original return requirement of a transfer 
election. A transfer election by an eligible taxpayer with respect to a 
specified portion of an eligible credit must be made on an original 
return not later than the due date (including extensions of time) for 
the original return of the eligible taxpayer for the taxable year for 
which the eligible credit is determined. No transfer election may be 
made or revised on an amended return or by filing an administrative 
adjustment request under section 6227 of the Code. There is no late-
election relief available under Sec. Sec.  301.9100-1 through 301.9100-
3 of this chapter for a transfer election that is not timely filed.
    (5) Transfer election statement--(i) In general. A transfer 
election statement is a written document that describes the transfer of 
a specified credit portion between an eligible taxpayer and transferee 
taxpayer. An eligible taxpayer and transferee taxpayer must each attach 
a transfer election statement to their respective return as required 
under paragraphs (b)(3)(iv) and (f)(4)(ii) of this section, unless 
otherwise provided in guidance. An eligible taxpayer and transferee 
taxpayer can use any document (such as a purchase and sale agreement) 
that meets the conditions in paragraph (b)(5)(ii) of this section but 
must label the document a ``Transfer Election Statement'' when 
attaching to a return. The information required in paragraph (b)(5)(ii) 
of this section does not otherwise limit any other information that the 
eligible taxpayer and transferee taxpayer may agree to provide in 
connection with the transfer of any specified credit portion. The 
statement must be signed under penalties of perjury by an individual 
with authority to legally bind the eligible taxpayer. The statement 
must also include the written consent of an individual with authority 
to legally bind the transferee taxpayer.
    (ii) Information required in transfer election statement. A 
transfer election statement must, at a minimum, include each of the 
following:
    (A) Name, address, and taxpayer identification number of the 
transferee taxpayer and the eligible taxpayer. If the transferee 
taxpayer or eligible taxpayer is a member of a consolidated group (as 
defined in Sec.  1.1502-1), then only include information for the group 
member that is the transferee taxpayer or eligible taxpayer (if 
different from the return filer).
    (B) A statement that provides the necessary information and amounts 
to allow the transferee taxpayer to take into account the specified 
credit portion with respect to the eligible credit property, 
including--
    (1) A description of the eligible credit (for example, advanced 
manufacturing production credit for a section 45X transfer election), 
the total amount of the credit determined with respect to the eligible 
credit property, and the amount of the specified credit portion;
    (2) The taxable year of the eligible taxpayer and the first taxable 
year in which the specified credit portion will be taken into account 
by the transferee taxpayer;
    (3) The amount(s) of the cash consideration and date(s) on which 
paid by the transferee taxpayer; and
    (4) The registration number related to the eligible credit 
property.
    (C) Attestation that the eligible taxpayer (or any member of its 
consolidated group) is not related to the transferee taxpayer (or any 
member of its consolidated group) within the meaning of section 267(b) 
or 707(b)(1)).
    (D) A statement or representation from the eligible taxpayer that 
it has or will comply with all requirements of section 6418, the 
section 6418 regulations, and the provisions of the Code applicable to 
the eligible credit, including, for example, any requirements for bonus 
credit amounts described in Sec.  1.6418-1(c)(3) (if applicable).
    (E) A statement or representation from the eligible taxpayer and 
the transferee taxpayer acknowledging the notification of recapture 
requirements under section 6418(g)(3) and the section 6418 regulations 
(if applicable).
    (F) A statement or representation from the eligible taxpayer that 
the eligible taxpayer has provided the required minimum documentation 
(as described in paragraph (b)(5)(iv) of this section) to the 
transferee taxpayer.

[[Page 40517]]

    (iii) Timing of transfer election statement. A transfer election 
statement can be completed at any time after the eligible taxpayer and 
transferee taxpayer have sufficient information to meet the 
requirements of paragraph (b)(5)(ii) of this section, but the transfer 
election statement cannot be completed for any year after the earlier 
of:
    (A) The filing of the eligible taxpayer's return for the taxable 
year for which the specified credit portion is determined with respect 
to the eligible taxpayer; or
    (B) The filing of the return of the transferee taxpayer for the 
year in which the specified credit portion is taken into account.
    (iv) Required minimum documentation. Required minimum documentation 
is the minimum documentation that the eligible taxpayer is required to 
provide to a transferee taxpayer. This documentation consists of--
    (A) Information that validates the existence of the eligible credit 
property, which could include evidence prepared by a third party (such 
as a county board or other governmental entity, a utility, or an 
insurance provider);
    (B) If applicable, documentation substantiating that the eligible 
taxpayer has satisfied the requirements to include any bonus credit 
amounts (as defined in Sec.  1.6418-1(c)(3)) in the eligible credit 
that was part of the transferred specified credit portion; and
    (C) Evidence of the eligible taxpayer's qualifying costs in the 
case of a transfer of an eligible credit that is part of the investment 
credit or the amount of qualifying production activities and sales 
amounts, as relevant, in the case of a transfer of an eligible credit 
that is a production credit.
    (v) Transferee recordkeeping requirement. Consistent with Sec.  
1.6001-1(e), the transferee taxpayer must retain the required minimum 
documentation provided by the eligible taxpayer as long as the contents 
thereof may become material in the administration of any internal 
revenue law.
    (c) Limitations after a transfer election is made--(1) Irrevocable. 
A transfer election with respect to a specified credit portion is 
irrevocable.
    (2) No additional transfers. A specified credit portion may only be 
transferred pursuant to a transfer election once. A transferee taxpayer 
may not make a transfer election of any specified credit portion 
transferred to the transferee taxpayer.
    (d) Determining the eligible credit--(1) In general. An eligible 
taxpayer may only transfer eligible credits determined with respect to 
the eligible taxpayer (paragraph (a)(4) of this section disallows 
transfer elections in other situations). For an eligible credit to be 
determined with respect to an eligible taxpayer, the eligible taxpayer 
must own the underlying eligible credit property or, if ownership is 
not required, otherwise conduct the activities giving rise to the 
underlying eligible credit. All rules that relate to the determination 
of the eligible credit, such as the rules in sections 49 and 50(b) of 
the Code, apply to the eligible taxpayer and therefore can limit the 
amount of eligible credit determined with respect to an eligible credit 
property that can be transferred. Rules relating to the amount of an 
eligible credit that is allowed to be claimed by an eligible taxpayer, 
such as the rules in section 38(c) or 469 of the Code, do not limit the 
eligible credit determined, but do apply to a transferee taxpayer as 
described in paragraph (f)(3) of this section.
    (2) Application of section 49 at-risk rules to determination of 
eligible credits for partnerships and S corporations. Any amount of 
eligible credit determined with respect to investment credit property 
held directly by a transferor partnership or transferor S corporation 
that is eligible credit property (eligible investment credit property) 
must be determined by the partnership or S corporation taking into 
account the section 49 at-risk rules at the partner or shareholder 
level as of the close of the taxable year in which the eligible 
investment credit property is placed in service. Thus, if the credit 
base of an eligible investment credit property is limited to a partner 
or S corporation shareholder by section 49, then the amount of the 
eligible credit determined by the transferor partnership or transferor 
S corporation is also limited. A transferor partnership or transferor S 
corporation that transfers any specified credit portion with respect to 
an eligible investment credit property must request from each of its 
partners or shareholders, respectively, that is subject to section 49, 
the amount of such partner's or shareholder's nonqualified nonrecourse 
financing with respect to the eligible investment credit property as of 
the close of the taxable year in which the property is placed in 
service. Additionally, the transferor partnership or transferor S 
corporation must attach to its tax return for the taxable year in which 
the eligible investment credit property is placed in service, the 
amount of each partner's or shareholder's section 49 limitation with 
respect to any specified credit portion transferred with respect to the 
eligible investment credit property. Changes to at-risk amounts under 
section 49 for partners or S corporation shareholders after the close 
of the taxable year in which the eligible investment credit property is 
placed in service do not impact the eligible credit determined by the 
transferor partnership or transferor S corporation, but do impact the 
partner(s) or S corporation shareholder(s) as described in Sec.  
1.6418-3(a)(6)(ii).
    (e) Treatment of payments made in connection with a transfer 
election--(1) In general. An amount paid by a transferee taxpayer to an 
eligible taxpayer is in connection with a transfer election with 
respect to a specified credit portion only if it is paid in cash (as 
defined in Sec.  1.6418-1(f)), directly relates to the specified credit 
portion, and is not described in Sec.  1.6418-5(a)(3) (describing 
payments related to an excessive credit transfer).
    (2) Not includible in gross income. Any amount paid to an eligible 
taxpayer that is described in paragraph (e)(1) of this section is not 
includible in the gross income of the eligible taxpayer.
    (3) Not deductible. No deduction is allowed under any provision of 
the Code with respect to any amount paid by a transferee taxpayer that 
is described in paragraph (e)(1) of this section.
    (4) Anti-abuse rule--(i) In general. A transfer election of any 
specified credit portion, and therefore the transfer of that specified 
credit portion to a transferee taxpayer, may be disallowed, or the 
Federal income tax consequences of any transaction(s) effecting such a 
transfer may be recharacterized, in circumstances where the parties to 
the transaction have engaged in the transaction or a series of 
transactions with the principal purpose of avoiding any Federal tax 
liability beyond the intent of section 6418. An amount of cash paid by 
a transferee taxpayer will not be considered as paid in connection with 
the transfer of a specified credit portion under paragraph (e)(1) of 
this section if a principal purpose of a transaction or series of 
transactions is to allow an eligible taxpayer to avoid gross income. 
Conversely, an amount of cash paid by a transferee taxpayer will be 
considered paid in connection with the transfer of a specified credit 
portion under paragraph (e)(1) of this section if a principal purpose 
of a transaction or series of transactions is to increase a Federal 
income tax deduction of a transferee taxpayer.
    (ii) Example 1. Taxpayer A, an eligible taxpayer, generates $100 of 
an eligible credit with respect to an eligible credit property in the 
course of its trade or business. Taxpayer A also provides

[[Page 40518]]

services to customers. Taxpayer A offers Customer B, a transferee 
taxpayer that cannot deduct the cost of the services, the opportunity 
to be transferred $100 of eligible credit for $100 while receiving 
Taxpayer A's services for free. Taxpayer A normally charges $20 for the 
same services without the purchase of the eligible credit, and the 
average transfer price of the eligible credit between unrelated parties 
is $80 paid in cash for $100 of the eligible credit. Taxpayer A is 
engaged in a transaction where it is undercharging for services to 
Customer B to avoid recognizing $20 of gross income. This transaction 
is subject to recharacterization under the anti-abuse rule in paragraph 
(e)(4) of this section, and Taxpayer A will be treated as transferring 
$100 of the eligible credit for $80, and have $20 of gross income from 
the services provided to Customer B.
    (iii) Example 2. Taxpayer C, an eligible taxpayer, generates $100 
of an eligible credit with respect to an eligible credit property in 
the course of its trade or business. Taxpayer C also sells property to 
customers. Taxpayer C offers Customer D, a transferee taxpayer that can 
deduct the purchase of property, the opportunity to receive the $100 of 
eligible credit for $20 while purchasing Taxpayer C's property for $80. 
Taxpayer C normally charges $20 for the same property without the 
transfer of the eligible credit, and the average transfer price of the 
eligible credit between unrelated parties is $80 paid in cash for $100 
of the eligible credit. Taxpayer C is willing to accept the higher 
price for the property because Taxpayer C has a net operating loss 
carryover to offset any taxable income from the transaction. This 
transaction is subject to recharacterization under the anti-abuse rule 
under paragraph (e)(4) of this section, and Taxpayer C will be treated 
as selling the property for $20 and transferring $100 of the eligible 
credit for $80, and Customer D will have a $20 deduction related to the 
purchase of the property instead of $80.
    (f) Transferee taxpayer's treatment of eligible credit--(1) Taxable 
year in which credit taken into account. In the case of any specified 
credit portion transferred to a transferee taxpayer pursuant to a 
transfer election under this section, the transferee taxpayer takes the 
specified credit portion into account in the transferee taxpayer's 
first taxable year ending with or ending after the taxable year of the 
eligible taxpayer with respect to which the eligible credit was 
determined. Thus, to the extent the taxable years of an eligible 
taxpayer and a transferee taxpayer end on the same date, the transferee 
taxpayer will take the specified credit portion into account in that 
taxable year. To the extent the taxable years of an eligible taxpayer 
and a transferee taxpayer end on different dates, the transferee 
taxpayer will take the specified credit portion into account in the 
transferee taxpayer's first taxable year that ends after the taxable 
year of the eligible taxpayer.
    (2) No gross income for a transferee taxpayer when claiming a 
transferred specified credit portion. A transferee taxpayer does not 
have gross income when claiming a transferred specified credit portion 
even if the amount of cash paid to the eligible taxpayer was less than 
the amount of the transferred specified credit portion, assuming all 
other requirements of section 6418 are met. For example, a transferee 
taxpayer who paid $9X for $10X of a specified credit portion that the 
transferee taxpayer then claims on its return does not result in the 
$1X difference being included in the gross income of the transferee 
taxpayer.
    (3) Transferee treated as the eligible taxpayer--(i) In general. A 
transferee taxpayer (and not the eligible taxpayer) is treated as the 
taxpayer for purposes of the Code with respect to the transferred 
specified credit portion. An eligible taxpayer must apply the rules 
necessary to determine the amount of an eligible credit prior to making 
the transfer election for a specified credit portion, and therefore a 
transferee taxpayer does not re-apply rules that relate to a 
determination of an eligible credit, such as the rules in section 49 or 
50(b). However, a transferee taxpayer must apply rules that relate to 
computing the amount of the specified credit portion that is allowed to 
be claimed in the taxable year by the transferee taxpayer, such as the 
rules in section 38 or 469, as applicable.
    (ii) Application of section 469. A specified credit portion 
transferred to a transferee taxpayer is treated as determined in 
connection with the conduct of a trade or business and, if applicable, 
such transferred specified credit portion is subject to the rules in 
section 469. In applying section 469, a transferee taxpayer is not 
considered to own an interest in the eligible taxpayer's trade or 
business at the time the work was done (as required for material 
participation under Sec.  1.469-5(f)(1)) and cannot change the 
characterization of the transferee taxpayer's participation (or lack 
thereof) in the eligible taxpayer's trade or business by using any of 
the grouping rules under Sec.  1.469-4(c).
    (4) Transferee taxpayer requirements to take into account a 
transferred specified credit portion. In order for a transferee 
taxpayer to take into account in a taxable year (as described in 
paragraph (f)(1) of this section) a specified credit portion that was 
transferred by an eligible taxpayer, as part of filing a return (or 
short year return), an amended return, or a request for an 
administrative adjustment under section 6227 of the Code, the 
transferee taxpayer must include the following--
    (i) A properly completed Form 3800, General Business Credit (or its 
successor), to take into account the transferred specified credit 
portion as a current general business credit, and including all 
registration number(s) related to the transferred specified credit 
portion;
    (ii) The transfer election statement described in paragraph (b)(5) 
of this section attached to the return; and
    (iii) Any other information related to the transfer election 
specified in guidance.
    (g) Applicability date. This section applies to taxable years 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].


Sec.  1.6418-3  Additional rules for partnerships and S corporations.

    (a) Rules applicable to both partnerships and S corporations--(1) 
Partnerships and S corporations as eligible taxpayers and transferee 
taxpayers. Under section 6418, a partnership or an S corporation may 
qualify as a transferor partnership or a transferor S corporation and 
may elect to make a transfer election to transfer a specified credit 
portion to a transferee taxpayer. A partnership or S corporation may 
also qualify as a transferee partnership or a transferee S corporation. 
This section provides rules applicable to transferor partnerships and 
transferor S corporations and transferee partnerships and transferee S 
corporations. Paragraph (b) of this section provides rules applicable 
solely to partnerships. Paragraph (c) of this section provides rules 
applicable solely to S corporations. Paragraph (d) of this section 
provides guidelines for the manner and due date for which a partnership 
or S corporation makes an election under section 6418(a). Paragraph (e) 
of this section contains examples illustrating the operation of the 
provisions of this section. Except as provided in this section, the 
general rules under section 6418 and the section 6418 regulations apply 
to partnerships and S corporations.
    (2) Treatment of cash received for a specified credit portion. In 
the case of any specified credit portion determined with respect to any 
eligible credit property held directly by a partnership

[[Page 40519]]

or S corporation, if such partnership or S corporation makes a transfer 
election with respect to such specified credit portion--
    (i) Any amount of cash payment received as consideration for the 
transferred specified credit portion will be treated as tax exempt 
income for purposes of sections 705 and 1366 of the Code; and
    (ii) A partner's distributive share of such tax exempt income will 
be as described in paragraphs (b)(1) and (2) of this section.
    (3) No partner or shareholder level transfers. In the case of an 
eligible credit property held directly by a partnership or S 
corporation, no transfer election by any partner or S corporation 
shareholder is allowed under Sec.  1.6418-2 or this section with 
respect to any specified credit portion determined with respect to such 
eligible credit property.
    (4) Disregarded entity ownership. In the case of an eligible credit 
property held directly by an entity disregarded as separate from a 
partnership or S corporation for Federal income tax purposes, such 
eligible credit property will be treated as held directly by the 
partnership or S corporation for purposes of making a transfer 
election.
    (5) Treatment of tax exempt income. Tax exempt income resulting 
from the receipt of consideration for the transfer of a specified 
credit portion by a transferor partnership or transferor S corporation 
is treated as arising from an investment activity and not from the 
conduct of a trade or business within the meaning of section 
469(c)(1)(A). As such, any tax exempt income is not treated as passive 
income to any direct or indirect partners or shareholders who do not 
materially participate within the meaning of section 469(c)(1)(B).
    (6) Certain recapture events not requiring notice--(i) Indirect 
dispositions under section 50--(A) Treatment of transferor partnership 
or transferor S corporation and transferee taxpayer. For purposes of 
section 6418(g)(3)(B) only, the disposition of a partner's interest 
under Sec.  1.47-6(a)(2) or an S corporation shareholder's interest 
under Sec.  1.47-4(a)(2) in an eligible taxpayer that is treated as a 
transferor partnership or transferor S corporation is disregarded. As 
such, provided the investment credit property that is eligible credit 
property owned by the transferor partnership or transferor S 
corporation is not disposed of, and continues to be investment credit 
property with respect to such transferor partnership or transferor S 
corporation, a transferor partnership or transferor S corporation 
should not provide notice to a transferee taxpayer of an interest 
disposition by the partner or shareholder because the disposition does 
not result in recapture under section 6418(g)(3)(B) to which the 
transferee taxpayer is liable, and thus, the transferee taxpayer does 
not have to calculate a recapture amount.
    (B) Treatment of partner or shareholder. A partner or S corporation 
shareholder that has disposed of an interest in a transferor 
partnership or transferor S corporation is subject to the rules 
relating to such disposition under Sec.  1.47-6(a)(2) or Sec.  1.47-
4(a)(2), respectively. Any recapture to a disposing partner is 
calculated based on the partner's share of the basis (or cost) of the 
section 38 property to which the specified credit portion was 
determined in accordance with Sec.  1.46-3(f). Any recapture to a 
disposing shareholder is calculated based on the shareholder's pro rata 
share of the basis (or cost) of the section 38 property to which the 
specified credit portion was determined in accordance with Sec.  1.48-
5.
    (ii) Changes in at-risk amounts under section 49--(A) Treatment of 
transferor partnership or transferor S corporation and transferee 
taxpayer. For purposes of section 6418 only, a change in the 
nonqualified nonrecourse financing (as defined in section 49(a)(1)(D)) 
amount of any partner or shareholder of a transferor partnership or 
transferor S corporation, respectively, after the close of the taxable 
year in which the investment credit property is placed in service and 
the specified credit portion is determined, is disregarded. A 
transferor partnership or transferor S corporation should not provide 
notice to a transferee taxpayer of the change because the change does 
not cause recapture under section 6418(g)(3)(B) to which the transferee 
taxpayer is liable, and thus, the transferee taxpayer does not have to 
calculate a recapture amount.
    (B) Treatment of partner or shareholder. A partner or shareholder 
in a transferor partnership or transferor S corporation, respectively, 
must apply the rules under section 49 at the partner or shareholder 
level if there is a change in nonqualified nonrecourse financing with 
respect to the partner or shareholder after the close of the taxable 
year in which the investment credit property is placed in service and 
the specified credit portion is determined. If there is an increase in 
nonqualified nonrecourse financing to a partner, any adjustment under 
the rules of section 49(b) is calculated based on the partner's share 
of the basis (or cost) of the section 38 property to which the 
specified credit portion was determined in accordance with Sec.  1.46-
3(f). If there is an increase in nonqualified nonrecourse financing to 
a shareholder, any adjustment under the rules of section 49(b) is 
calculated based on the shareholder's pro rata share of the basis (or 
cost) of the section 38 property to which the specified credit portion 
was determined in accordance with Sec.  1.48-5. If there is a decrease 
in nonqualified nonrecourse financing, any increase in the credit base 
is taken into account by the partner or shareholder as provided under 
section 49, and any resulting credit is not eligible for transfer under 
section 6418.
    (b) Rules applicable to partnerships--(1) Allocations of tax exempt 
income amounts generally. A transferor partnership must generally 
determine a partner's distributive share of any tax exempt income 
resulting from the receipt of consideration for the transfer based on 
such partner's proportionate distributive share of the eligible credit 
that would otherwise have been allocated to such partner absent the 
transfer of the specified credit portion (otherwise eligible credit). A 
partner's distributive share of an otherwise eligible credit is 
determined under Sec. Sec.  1.46-3(f) and 1.704-1(b)(4)(ii). Tax exempt 
income resulting from the receipt of consideration for the transfer of 
a specified credit portion by a transferor partnership is treated as 
received or accrued, including for purposes of section 705 of the Code, 
as of the date the specified credit portion is determined with respect 
to the transferor partnership (such as, for investment credit property, 
the date the property is placed in service).
    (2) Special rule for allocations of tax exempt income amounts and 
eligible credits for an election to transfer less than all eligible 
credits determined with respect to an eligible credit property. In the 
event a transferor partnership elects to transfer one or more specified 
credit portions of less than all eligible credits determined with 
respect to an eligible credit property held directly by the 
partnership, the partnership may allocate any tax exempt income 
resulting from the receipt of consideration for the specified credit 
portion(s) in accordance with the rules in this paragraph (b)(2).
    (i) First, the partnership must determine each partner's 
distributive share of the otherwise eligible credits with respect to 
such eligible credit property in accordance with paragraph (b)(1) of 
this section (partner's eligible credit amount).
    (ii) Thereafter, the transferor partnership may determine, in any 
manner described in the partnership

[[Page 40520]]

agreement, or as the partners may agree, the portion of each partner's 
eligible credit amount to be transferred, and the portion of each 
partner's eligible credit amount to be retained and allocated to such 
partner. The partnership may allocate to each partner its agreed upon 
share of eligible credits, tax exempt income resulting from the receipt 
of consideration for the specified credit portion(s), or both, as the 
case may be, provided that--
    (A) The amount of eligible credits allocated to each partner may 
not exceed such partner's eligible credit amount; and
    (B) Each partner is allocated its proportionate share of tax exempt 
income resulting from the transfer(s).
    (iii) Each partner's proportionate share of tax exempt income 
resulting from the transfer(s) is equal to the total amount of tax 
exempt income resulting from the transfer(s) of the specified credit 
portion(s) by the partnership multiplied by a fraction--
    (A) The numerator of which is such partner's eligible credit amount 
minus the amount of eligible credits actually allocated to such partner 
with respect to the eligible credit property for the taxable year; and
    (B) The denominator of which is the specified credit portion(s) 
transferred by the partnership with respect to the eligible credit 
property for the taxable year.
    (3) Transferor partnerships in tiered structures. If a partnership 
(upper-tier partnership) is a direct or indirect partner of a 
transferor partnership and directly or indirectly receives--
    (i) An allocation of an eligible credit, the upper-tier partnership 
is not an eligible taxpayer under section 6418 with respect to any 
eligible credit allocated by a transferor partnership; or
    (ii) An allocation of tax exempt income resulting from the receipt 
of consideration for the transfer of a specified credit portion by a 
transferor partnership, the upper-tier partnership must determine its 
partners' distributive shares of such tax exempt income in proportion 
to the partners' distributive shares of the otherwise eligible credit 
as provided in paragraph (b)(1) of this section.
    (4) Partnership as a transferee taxpayer--(i) Eligibility under 
section 6418. A partnership may qualify as a transferee partnership to 
the extent it is not related (within the meaning of section 267(b) or 
707(b)(1)) to an eligible taxpayer. A transferee partnership is subject 
to the no additional transfer rule in Sec.  1.6418-2(c)(2), however, an 
allocation of a transferred specified credit portion to a direct or 
indirect partner of a transferee partnership under section 704(b) is 
not a transfer for purposes of section 6418.
    (ii) Treatment of a cash payment for a transferred specified credit 
portion. A cash payment by a transferee partnership as consideration 
for a transferred specified credit portion is treated as an expenditure 
described in section 705(a)(2)(B).
    (iii) Allocations of transferred specified credit portions. A 
transferee partnership must determine each partner's distributive share 
of any transferred specified credit portion based on such partner's 
distributive share of the nondeductible expenses for the taxable year 
used to fund the purchase of such transferred specified credit portion. 
Each partner's distributive share of the nondeductible expenses used to 
fund the purchase of any transferred specified credit portion is 
determined by the partnership agreement, or, if the partnership 
agreement does not provide for the allocation of nondeductible expenses 
paid pursuant to section 6418, then the allocation of the specified 
credit portion is based on the transferee partnership's general 
allocation of nondeductible expenses.
    (iv) Transferred specified credit portion treated as an 
extraordinary item. A transferred specified credit portion is treated 
as an extraordinary item and must be allocated among the partners of a 
transferee partnership as of the time the transfer of the specified 
credit portion to the transferee partnership is treated as occurring in 
accordance with this paragraph (b)(4)(iv) and Sec.  1.706-4(e)(1) and 
(e)(2)(ix). If the transferee partnership and eligible taxpayer have 
the same taxable years, the transfer of a specified credit portion to a 
transferee partnership is treated as occurring on the first date that 
the transferee partnership makes a cash payment to the eligible 
taxpayer as consideration for the specified credit portion. If the 
transferee partnership and eligible taxpayer have different taxable 
years, the transfer of a specified credit portion to a transferee 
partnership is treated as occurring on the later of--
    (A) The first date of the taxable year that the transferee 
partnership takes the specified credit portion into account under 
section 6418(d); or
    (B) The first date that the transferee partnership makes a cash 
payment to the eligible taxpayer for the specified credit portion.
    (v) Transferee partnerships in tiered structures. If an upper-tier 
partnership is a direct or indirect partner of a transferee partnership 
and directly or indirectly receives an allocation of a transferred 
specified credit portion, the upper-tier partnership is not an eligible 
taxpayer under section 6418 with respect to the transferred specified 
credit portion. The upper-tier partnership must determine each 
partner's distributive share of the transferred specified credit 
portion in accordance with paragraphs (b)(4)(iii) and (iv) of this 
section and must report the credits to its partners in accordance with 
guidance.
    (c) Rules applicable to S corporations--(1) Pro rata shares of tax 
exempt income amounts. Each shareholder of a transferor S corporation 
must take into account such shareholder's pro rata share (as determined 
under section 1377(a) of the Code) of any tax exempt income resulting 
from the receipt of consideration for the transfer. Tax exempt income 
resulting from the receipt of consideration for the transfer of a 
specified credit portion by a transferor S corporation is treated as 
received or accrued, including for purposes of section 1366, as of the 
date the specified credit portion is determined with respect to the 
transferor S corporation (such as, for investment credit property, the 
date the property is placed in service).
    (2) S corporation as a transferee taxpayer--(i) Eligibility under 
section 6418. An S corporation may qualify as a transferee taxpayer to 
the extent it is not related (within the meaning of section 267(b) or 
707(b)(1)) to an eligible taxpayer (transferee S corporation). A 
transferee S corporation is subject to the no additional transfer rule 
in Sec.  1.6418-2(c)(2), however, an allocation of a transferred 
specified credit portion to a direct or indirect shareholder of a 
transferee S corporation is not a transfer for purposes of section 
6418.
    (ii) Treatment of a cash payment for a transferred specified credit 
portion. A cash payment by a transferee S corporation as consideration 
for a transferred specified credit portion is treated as an expenditure 
described in section 1367(a)(2)(D) of the Code.
    (iii) Pro rata shares of transferred specified credit portions. 
Each shareholder of a transferee S corporation must take into account 
such shareholder's pro rata share (as determined under section 1377(a)) 
of any transferred specified credit portion. If the transferee S 
corporation and eligible taxpayer have the same taxable years, the 
transfer of a specified credit portion is treated as occurring to a 
transferee S corporation during the transferee S corporation's 
permitted year (as defined under sections 444 and 1378(b)) that the 
transferee S

[[Page 40521]]

corporation first makes a cash payment as consideration to the eligible 
taxpayer for the specified credit portion. If the transferee S 
corporation and eligible taxpayer have different taxable years, then 
the transfer of a specified credit portion is treated as occurring to a 
transferee S corporation during the transferee S corporation's first 
permitted year (as defined under sections 444 and 1378(b)) ending with 
or after, the taxable year of the eligible taxpayer to which the 
transferred specified credit portion was determined.
    (d) Transfer election by a partnership or S corporation--(1) In 
general. A partnership or S corporation may make a transfer election to 
transfer a specified credit portion under section 6418 if it files an 
election in accordance with the rules set forth in this paragraph (d). 
A transfer election is made on the basis of an eligible credit property 
and only applies to the specified credit portion identified in the 
transfer election by such partnership or S corporation in the taxable 
year for which the election is made.
    (2) Manner and due date of making a transfer election. A transfer 
election for a specified credit portion must be made in the manner 
provided in Sec.  1.6418-2(b)(1) through (3). All documents required in 
Sec.  1.6418-2(b)(1) through (3) must be attached to the partnership or 
S corporation return for the taxable year during which the transferred 
specific credit portion was determined. For the transfer election to be 
valid, the return must be filed not later than the time prescribed by 
Sec. Sec.  1.6031(a)-1(e) and 1.6037-1(b) (including extensions of 
time) for filing the return for such taxable year. No transfer election 
may be made or revised on an amended return or by filing an 
administrative adjustment request under section 6227 of the Code. There 
is no late-election relief available under Sec. Sec.  301.9100-1 
through 301.9100-3 of this chapter for a transfer election that is not 
timely filed.
    (3) Irrevocable election. A transfer election by a partnership or S 
corporation is irrevocable.
    (e) Examples. The examples in this paragraph (e) illustrate the 
application of paragraphs (a)(6), (b), and (c) of this section.
    (1) Example 1. Transfer of all eligible credits by a transferor 
partnership--(i) Facts. A and B each contributed $150X of cash to AB 
partnership for the purpose of investing in energy property. The 
partnership agreement provides that A and B share equally in all items 
of income, gain, loss, deduction, and credit of AB partnership. AB 
partnership invests $300X in an energy property in accordance with 
section 48 and places the energy property in service on date X in year 
1. As of the end of year 1, AB partnership has $90X of eligible credits 
under section 48 with respect to the energy property. Before AB 
partnership files its tax return for year 1, AB partnership transfers 
the $90X of eligible credits to an unrelated transferee taxpayer, 
Transferee Taxpayer X for $80X and executes a transfer election 
statement with Transferee Taxpayer X.
    (ii) Analysis. Under Sec.  1.6418-3(b)(1), AB partnership allocates 
the tax exempt income resulting from the transfer of the specified 
credit portion proportionately among the partners based on each 
partner's distributive share of the otherwise eligible section 48 
credit as determined under Sec. Sec.  1.46-3(f) and 1.704-1(b)(4)(ii). 
Under Sec.  1.46-3(f)(2), each partner's share of the basis of the 
energy property is determined in accordance with the ratio in which the 
partners divide the general profits (or taxable income) of the 
partnership. Under the AB partnership agreement, A and B share 
partnership profits equally. Thus, each partner's share of the basis of 
the energy property under Sec.  1.46-3(f) and distributive share of the 
otherwise eligible credits under Sec.  1.704-1(b)(4)(ii) is 50 percent. 
The transfer made pursuant to section 6418(a) causes AB partnership's 
eligible credits under section 48 with respect to the energy property 
to be reduced to zero, and the consideration of $80X received by AB 
partnership for the transferred specified credit portion is treated as 
tax exempt income. Because the tax exempt income is allocated in the 
same proportion as the otherwise eligible credit would have been 
allocated, A and B will each be allocated $40X of tax exempt income. 
Each of partner A's and partner B's basis in its partnership interest 
and capital account will be increased by $40X. Also in year 1, the 
basis in the energy property held by AB partnership and with respect to 
which the credit is calculated is reduced under section 50(c)(3) by 50 
percent of the amount of the credit so determined, or $45. A's and B's 
basis in their partnership interests and capital accounts will be 
appropriately adjusted to take into account adjustments made to the 
energy property under section 50(c)(5) and Sec.  1.704-1(b)(2)(iv)(j). 
The tax exempt income received or accrued by AB partnership as a result 
of the transferred specified credit portion is treated as received or 
accrued, including for purposes of section 705, as of date X in year 1, 
which is the date the transferred specified credit portion was 
determined with respect to AB partnership.
    (2) Example 2. Recapture to a transferor partnership--(i) Facts. 
Assume the same facts as in paragraph (e)(1)(i) of this section 
(Example 1), except in year 3, within the recapture period related to 
the energy property, A reduces its proportionate interest in the 
general profits of the partnership by 50 percent causing a recapture 
event to A under Sec.  1.47-6(a)(2). The energy property is not 
disposed of by AB partnership and continues to be energy property with 
respect to AB partnership.
    (ii) Analysis. AB partnership should not provide notice of 
recapture to Transferee Taxpayer X as a result of the recapture event 
under Sec.  1.47-6(a)(2) with respect to A. Transferee Taxpayer X is 
not liable for any recapture amount. A, however, is subject to 
recapture as provided in Sec.  1.47-6(a)(2) and based on its share of 
the basis (or cost) of the energy property to which the eligible 
credits were determined under Sec.  1.46-3(f)(2).
    (3) Example 3. Transfer of a portion of eligible credits by a 
transferor partnership--(i) Facts. C and D each contributed cash to CD 
partnership for the purpose of investing in a qualified wind facility. 
The partnership agreement provides that until a flip point, C is 
allocated 99 percent of all items of income, gain, loss, deduction and 
credit of CD partnership and D is allocated the remaining 1 percent of 
such items. After the flip point, C is allocated 5 percent of all items 
of income, gain, loss, deduction and credit of CD Partnership and D is 
allocated 95 percent of such items. CD partnership invests in a 
qualified wind facility and places the facility in service in year 1. 
CD partnership generates $100X of credit under section 45(a) for year 
1. Before the due date for CD partnership's year 1 tax return (with 
extension), C and D agree that D's share of the eligible credit will be 
transferred, and C will be allocated its share of eligible credit. CD 
partnership transfers $1X of the eligible credit to an unrelated 
transferee taxpayer for $1X. The flip point has not been reached by the 
end of year 1.
    (ii) Analysis. Under paragraph (b)(2) of this section, CD 
partnership must first determine each partner's eligible credit amount, 
which is equal to such partner's distributive share of the otherwise 
eligible section 45(a) credit as determined under Sec.  1.704-
1(b)(4)(ii). Under Sec.  1.704-1(b)(4)(ii), for an eligible credit that 
is not an investment tax credit, allocations of credit are deemed to be 
in accordance with the partner's interest in the partnership if the 
credit is allocated in the same proportion as

[[Page 40522]]

the partners' distributive share of the receipts that give rise to the 
credit. The CD partnership agreement provides that until the flip 
point, C is allocated 99 percent of all items of income, gain, loss, 
deduction and credit of CD partnership and D is allocated the remaining 
1 percent of such items. Assuming all requirements of the safe harbor 
provided for in Revenue Procedure 2007-65, 2007-2 CB 967 are met, CD 
partnership's allocations of the otherwise eligible credits would be 
respected as in accordance with section 704(b). Thus, partner C's and 
partner D's distributive share of the otherwise eligible credit is 99 
percent and 1 percent, respectively. C and D have agreed to sell D's 
eligible credit amount of $1X for full value and to allocate to C its 
eligible credit amount of $99X. The transfer made pursuant to section 
6418(a) causes CD partnership's eligible credits under section 45(a) 
with respect to the wind facility to be reduced to $99X, and the 
consideration of $1X received by CD partnership is treated as tax 
exempt income. D is allocated $1X of tax exempt income from the 
transfer of the eligible credits, and C is allocated $99X of eligible 
credits under section 45(a) with respect to the wind facility. Neither 
C nor D is allocated more eligible credits than its eligible credit 
amount. Additionally, D is allocated an amount of tax exempt income 
equal to $1X x (1-0)/1 and C is allocated none of the tax exempt 
income. The allocations of eligible credits and tax exempt income are 
permissible allocations under paragraph (b)(2) of this section.
    (4) Example 4. Upper-tier partnership of a transferor partnership--
(i) Facts. E, F, and G each contributed $100X of cash to EFG 
partnership for the purpose of investing in an energy property. E, F, 
and G are partnerships for Federal income tax purposes. The partnership 
agreement provides that E, F and G share equally in all items of 
income, gain, loss, and deduction of EFG partnership. EFG partnership 
invests $300X in an energy property in accordance with section 48 and 
places the energy property in service in year 1. As of the end of year 
1, EFG partnership has $90X of eligible credits under section 48 with 
respect to the energy property. Before the due date for EFG 
partnership's year 1 tax return (with extension), E, F and G agree that 
E's share of the eligible credits will be transferred, and F and G will 
each be allocated their shares of eligible credits (or basis). EFG 
partnership transfers $30X of the eligible credits to an unrelated 
transferee taxpayer for $25X. Assuming the allocations to E, F and G of 
the eligible credits and tax exempt income resulting from the receipt 
of cash for the transferred specified credit portion are permissible 
allocations under paragraph (b)(2) of this section, E is allocated $25X 
of tax exempt income from the transfer of the eligible credits and F 
and G are each allocated $30X of basis with respect to the energy 
property.
    (ii) Analysis. E must allocate the $25X of tax exempt income to its 
partners as if it had retained its share of the eligible credits. Under 
Sec.  1.46-3(f)(2), each partner's share of the basis of the section 48 
energy property is determined in accordance with the ratio in which the 
partners divide the general profits (or taxable income) of the 
partnership. The E partnership agreement provides for equal allocations 
of income, gain, deduction, and loss to its partners, and thus, E 
partnership must allocate the otherwise eligible credits in the same 
manner. Therefore, E partnership must allocate the $25X of tax exempt 
income equally among its partners. In accordance with paragraph 
(b)(3)(i) of this section, F and G do not qualify as an eligible 
taxpayer for purposes of section 6418 and thus, are not permitted to 
make a transfer election for any portion of the $30X of eligible credit 
allocated to them by EFG partnership. Under Sec.  1.46-3(f)(2), each 
partner's share of the basis of the section 48 energy property is 
determined in accordance with the ratio in which the partners divide 
the general profits (or taxable income) of the partnership. The F and G 
partnership agreements provide for equal allocations of income, gain, 
deduction, and loss to its partners, and F and G must allocate the 
basis from the energy property to their partners in the same manner.
    (5) Example 5. Transferee partnership--(i) Facts. Y and Z each 
contributed $50X of cash to YZ partnership for the purpose of 
purchasing eligible section 45 credits under section 6418. The 
partnership agreement provides that all items of income, gain, loss, 
deduction, and credit are shared equally among Y and Z. The partnership 
agreement also provides that any nondeductible expenses used to fund 
the purchase of any transferred specified credit portion will be shared 
equally among Y and Z. On date X in year 1, YZ partnership qualifies as 
a transferee taxpayer and makes a cash payment of $80X to an eligible 
taxpayer for $100X of a transferred specified credit portion. The 
eligible credits will be determined with respect to the eligible 
taxpayer as of the end of year 1. Both YZ partnership and the eligible 
taxpayer are calendar year taxpayers.
    (ii) Analysis. The cash payment of $80X made by YZ partnership for 
the transferred specified credit portion is treated as a nondeductible 
expenditure under section 705(a)(2)(B). Under paragraph (b)(4)(iii) of 
this section, YZ partnership must determine each partner's distributive 
share of the transferred specified credit portion based on such 
partner's distributive share of the nondeductible expenses for the 
taxable year used to fund the purchase of such transferred specified 
credit portion. The YZ partnership agreement provides that 
nondeductible expenses used to fund the purchase of any transferred 
specified credit portion will be shared equally among Y and Z and thus, 
the transferred specified credit portion is also shared equally among Y 
and Z. The transferred specified credit portion is treated as an 
extraordinary item under Sec.  1.706-4(e)(2)(ix) that is deemed to 
occur on date X in year 1. As of date X in year 1, each of Y and Z are 
allocated $40X of a section 705(a)(2)(B) expenditure with respect to 
the cash payment for the transferred specified credit portion and $50X 
of transferred section 45 credits.
    (6) Example 6. Upper-tier partnership of a transferee partnership--
(i) Facts. Assume the same facts as in paragraph (e)(5)(i) of this 
section (Example 5), except Y is a partnership for Federal tax 
purposes, and Z is a corporation for Federal tax purposes.
    (ii) Analysis. In accordance with paragraph (b)(4)(v) of this 
section, Y does not qualify as an eligible taxpayer for purposes of 
section 6418 for that portion of the transferred specified credit 
portion allocated to it by YZ partnership. Under paragraph (b)(4)(iii) 
of this section, Y must determine each partner's distributive share of 
the transferred specified credit portion based on such partner's 
distributive share of the nondeductible expenses for the taxable year 
used to fund the purchase of such transferred specified credit portion. 
The Y partnership agreement provides that all items of income, gain, 
loss, deduction, and credit are shared equally. The partnership 
agreement also provides that any nondeductible expenses used to fund 
the purchase of any specified credit portion are shared equally. Thus, 
the transferred specified credit portion must be shared equally among 
the partners of Y.
    (7) Example 7. Transferor S corporation--(i) Facts. V and W each 
contributed $150X of cash to an S corporation for the purpose of 
investing in energy property. The S corporation

[[Page 40523]]

invests $300X in an energy property in accordance with section 48 and 
places the energy property in service on date X in year 1. As of the 
end of year 1, the S corporation has $90X of eligible credits under 
section 48 with respect to the energy property. Before the due date for 
S corporation's year 1 tax return (with extension), S corporation 
transfers the $90X of eligible credits to an unrelated transferee 
taxpayer for $80X.
    (ii) Analysis. The transfer made pursuant to section 6418(a) causes 
the S corporation's eligible credits under section 48 with respect to 
the energy property to be reduced to zero, and the consideration of 
$80X received by the S corporation for the transferred specified credit 
portion is treated as tax exempt income. Under paragraph (c)(1) of this 
section, each of V and W must take into account its pro rata share (as 
determined under section 1377(a)) of any tax exempt income resulting 
from the receipt of consideration for the transfer of the eligible 
credit, or $40X. Under section 1367(a)(1)(A), each of the shareholder's 
basis in its stock will be increased by $40X. Also in year 1, the basis 
in the energy property with respect to which the credit is calculated 
is reduced under section 50(c)(3) by 50 percent of the amount of the 
credit so determined, or $45. The tax exempt income received or accrued 
by S corporation as a result of the transfer of the specified credit 
portion is treated as received or accrued, including for purposes of 
section 1366, as of date X in year 1, which is the date the transferred 
specified credit portion was determined with respect to the transferor 
S corporation.
    (8) Example 8. Transferee S corporation--(i) Facts. J and K each 
contributed $50X of cash to S corporation for the purpose of purchasing 
eligible section 48 credits under section 6418. At the beginning of 
year 2, S corporation qualifies as a transferee taxpayer and makes a 
cash payment of $80X to an eligible taxpayer for $100X of a transferred 
specified credit portion. The transferred specified credit portion was 
determined with respect to the eligible taxpayer for energy property 
placed in service in year 1. Both S corporation and the eligible 
taxpayer are calendar year taxpayers.
    (ii) Analysis. The cash payment of $80X made by the S corporation 
for the transferred specified credit portion is treated as an 
expenditure described in section 1367(a)(2)(D). Each of J and K must 
take into account its pro rata share (as determined under section 
1377(a)) of the transferred specified credit portion. The transferred 
specified credit portion is deemed to arise for purposes of sections 
1366 and 1377 during year 2 of the S corporation. For year 2, each of J 
and K take into account $40X of a section 1367(a)(2)(D) expenditure 
with respect to the cash payment for the transferred specified credit 
portion and $50X of transferred section 48 credits.
    (f) Applicability date. This section applies to taxable years 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].


Sec.  1.6418-4  Additional information and registration.

    (a) Pre-filing registration and election. As a condition of, and 
prior to, any specified credit portion being transferred by an eligible 
taxpayer to a transferee taxpayer pursuant to an election under Sec.  
1.6418-2, or a specified credit portion being transferred by a 
partnership or S corporation pursuant to Sec.  1.6418-3, the eligible 
taxpayer is required to satisfy the pre-filing registration 
requirements in paragraph (b) of this section. An eligible taxpayer 
that does not obtain a registration number under paragraph (c)(1) of 
this section, and report the registration number on its return pursuant 
to paragraph (c)(5) of this section, is ineligible to make a transfer 
election for a specified credit portion under Sec.  1.6418-2 or Sec.  
1.6418-3, with respect to the eligible credit determined with respect 
to the specific eligible credit property for which the eligible 
taxpayer has failed to obtain and report a registration number. 
However, completion of the pre-filing registration requirements and 
receipt of a registration number does not, by itself, mean the eligible 
taxpayer is eligible to transfer any specified credit portion 
determined with respect to the eligible credit property.
    (b) Pre-filing registration requirements--(1) Manner of pre-filing 
registration. Unless otherwise provided in guidance, eligible taxpayers 
must complete the pre-filing registration process electronically 
through an IRS electronic portal and in accordance with the 
instructions provided therein.
    (2) Pre-filing registration and election for members of a 
consolidated group. A member of a consolidated group is required to 
complete pre-filing registration to transfer any eligible credit 
determined with respect to the member. See Sec.  1.1502-77 (providing 
rules regarding the status of the common parent as agent for its 
members).
    (3) Timing of pre-filing registration. An eligible taxpayer must 
satisfy the pre-filing registration requirements of this paragraph (b) 
and receive a registration number under paragraph (c) of this section 
prior to making a transfer election under Sec.  1.6418-2 or Sec.  
1.6418-3 for a specified credit portion on the taxpayer's return for 
the taxable year at issue.
    (4) Each eligible credit property must have its own registration 
number. An eligible taxpayer must obtain a registration number for each 
eligible credit property with respect to which a transfer election of a 
specified credit portion is made.
    (5) Information required to complete the pre-filing registration 
process. Unless modified in future guidance, an eligible taxpayer is 
required to provide the following information to the IRS to complete 
the pre-filing registration process:
    (i) The eligible taxpayer's general information, including its 
name, address, taxpayer identification number, and type of legal 
entity;
    (ii) Any additional information required by the IRS electronic 
portal, such as information establishing that the entity is an eligible 
taxpayer;
    (iii) The taxpayer's taxable year, as determined under section 441;
    (iv) The type of annual tax return(s) normally filed by the 
eligible taxpayer, or that the eligible taxpayer does not normally file 
an annual tax return with the IRS;
    (v) The type of eligible credit(s) for which the eligible taxpayer 
intends to make a transfer election;
    (vi) Each eligible credit property that the eligible taxpayer 
intends to use to determine a specified credit portion for which the 
eligible taxpayer intends to make a transfer election;
    (vii) For each eligible credit property listed in paragraph 
(b)(5)(vi) of this section, any further information required by the IRS 
electronic portal, such as--
    (A) The type of eligible credit property;
    (B) Physical location (that is, address and coordinates (longitude 
and latitude) of the eligible credit property);
    (C) Any supporting documentation relating to the construction or 
acquisition of the eligible credit property (such as State, Indian 
Tribal, or local government permits to operate the eligible credit 
property, certifications, evidence of ownership that ties to a land 
deed, lease, or other documented right to use and access any land or 
facility upon which the eligible credit property is constructed or 
housed, and U.S. Coast Guard registration numbers for offshore wind 
vessels);
    (D) The beginning of construction date, and the placed in service 
date of the eligible credit property; and

[[Page 40524]]

    (E) Any other information that the eligible taxpayer believes will 
help the IRS evaluate the registration request;
    (viii) The name of a contact person for the eligible taxpayer. The 
contact person is the person whom the IRS may contact if there is an 
issue with the registration. The contact person must either:
    (A) Possess legal authority to bind the eligible taxpayer; or
    (B) Must provide a properly executed power of attorney on Form 
2848, Power of Attorney and Declaration of Representative;
    (ix) A penalties of perjury statement, effective for all 
information submitted as a complete application, and signed by a person 
with personal knowledge of the relevant facts that is authorized to 
bind the registrant; and
    (x) Any other information the IRS deems necessary for purposes of 
preventing duplication, fraud, improper payments, or excessive payments 
under this section that is provided in guidance.
    (c) Registration number--(1) In general. The IRS will review the 
registration information provided and will issue a separate 
registration number for each eligible credit property for which the 
eligible taxpayer provided sufficient verifiable information.
    (2) Registration number is only valid for one taxable year. A 
registration number is valid to an eligible taxpayer only for the 
taxable year in which the credit is determined for the eligible credit 
property for which the registration is completed, and for a transferee 
taxpayer's taxable year in which the eligible credit is taken into 
account under Sec.  1.6418-2(f).
    (3) Renewing registration numbers. If an election to transfer an 
eligible credit will be made with respect to an eligible credit 
property for a taxable year after a registration number under this 
section has been obtained, the eligible taxpayer must renew the 
registration for that subsequent taxable year in accordance with 
applicable guidance, including attesting that all the facts previously 
provided are still correct or updating any facts.
    (4) Amendment of previously submitted registration information if a 
change occurs before the registration number is used. As provided in 
instructions to the pre-filing registration portal, if specified 
changes occur with respect to one or more applicable credit properties 
for which a registration number has been previously obtained, but not 
yet used, an eligible taxpayer must amend the registration (or may need 
to submit a new registration) to reflect these new facts. For example, 
if the owner of a facility previously registered for a transfer 
election under Sec.  1.6418-2 or Sec.  1.6418-3 for eligible credits 
determined with respect to that facility and the facility undergoes a 
change of ownership (incident to a corporate reorganization or an asset 
sale) such that the new owner has a different employer identification 
number (EIN) than the owner who obtained the original registration, the 
original owner of the facility must amend the original registration to 
disassociate its EIN from the eligible credit property and the new 
owner must submit separately an original registration (or if the new 
owner previously registered other credit properties, must amend its 
original registration) to associate the new owner's EIN with the 
previously registered eligible credit property.
    (5) Reporting of registration number by an eligible taxpayer and a 
transferee taxpayer--(i) Eligible taxpayer reporting. As part of making 
a valid transfer election under Sec.  1.6418-2 or Sec.  1.6418-3, an 
eligible taxpayer must include the registration number of the eligible 
credit property on the eligible taxpayer's return (as provided in Sec.  
1.6418-2(b) or Sec.  1.6418-3(d)) for the taxable year the specified 
credit portion was determined. The IRS will treat an election as 
ineffective if the eligible taxpayer does not include a valid 
registration number on the return.
    (ii) Transferee taxpayer reporting. A transferee taxpayer must 
report the registration number received (as part of the transfer 
election statement as described in Sec.  1.6418-2(b) or otherwise) from 
a transferor taxpayer on the Form 3800, General Business Credit, as 
part of the return for the taxable year that the transferee taxpayer 
takes the transferred specified credit portion into account. The 
specified credit portion will be disallowed to the transferee taxpayer 
if the transferee taxpayer does not include the registration number on 
the return.
    (d) Applicability date. This section applies to taxable years 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].


Sec.  1.6418-5  Special rules.

    (a) Excessive credit transfer tax imposed--(1) In general. If any 
specified credit portion that is transferred to a transferee taxpayer 
pursuant to an election in Sec.  1.6418-2(a) or Sec.  1.6418-3 is 
determined to be an excessive credit transfer (as defined in paragraph 
(b) of this section), the tax imposed on the transferee taxpayer by 
chapter 1 (regardless of whether such entity would otherwise be subject 
to chapter 1 tax) for the taxable year in which such determination is 
made will be increased by an amount equal to the sum of--
    (i) The amount of such excessive credit transfer; and
    (ii) An amount equal to 20 percent of such excessive credit 
transfer.
    (2) Taxable year of the determination. The taxable year of the 
determination for purposes of paragraph (a)(1) of this section is the 
taxable year that includes the determination and not the taxable year 
when the eligible credit was originally determined by the eligible 
taxpayer, unless those are the same taxable years.
    (3) Payments related to excessive credit transfer. Any payments 
made by a transferee taxpayer to an eligible taxpayer that directly 
relate to the excessive credit transfer (as defined in paragraph (b) of 
this section) are not subject to section 6418(b)(2) or Sec.  1.6418-
2(e).
    (4) Reasonable cause. Paragraph (a)(1)(ii) of this section does not 
apply if the transferee taxpayer demonstrates to the satisfaction of 
the IRS that the excessive credit transfer resulted from reasonable 
cause. Determination of reasonable cause will be made based on the 
relevant facts and circumstances. Generally, the most important factor 
is the extent of the transferee taxpayer's efforts to determine that 
the amount of specified credit portion transferred by the eligible 
taxpayer to the transferee taxpayer is not more than the amount of the 
eligible credit determined with respect to the eligible credit property 
for the taxable year in which the eligible credit was determined and 
has not been transferred to any other taxpayer. Circumstances that may 
indicate reasonable cause can include, but are not limited to, review 
of the eligible taxpayer's records with respect to the determination of 
the eligible credit (including documentation evidencing eligibility for 
bonus credit amounts), reasonable reliance on third party expert 
reports, reasonable reliance on representations from the eligible 
taxpayer that the total specified credit portion transferred (including 
portions transferred to other transferee taxpayers when an eligible 
taxpayer makes multiple transfer elections with respect to a single 
credit property) does not exceed the total eligible credit determined 
with respect to the eligible credit property for the taxable year, and 
review of audited financial statements provided to the Securities and 
Exchange Commission (and underlying information), if applicable.
    (5) Recapture events. A recapture event under section 45Q(f)(4) or 
50(a) is not an excessive credit transfer.

[[Page 40525]]

    (b) Excessive credit transfer defined--(1) In general. The term 
excessive credit transfer means, with respect to an eligible credit 
property for which a transfer election is made under Sec.  1.6418-2 or 
Sec.  1.6418-3 for any taxable year, an amount equal to the excess of--
    (i) The amount of the transferred specified credit portion claimed 
by the transferee taxpayer with respect to such eligible credit 
property for such taxable year; over
    (ii) The amount of the eligible credit that, without the 
application of section 6418, would be otherwise allowable under the 
Code with respect to such eligible credit property for such taxable 
year.
    (2) Multiple transferees treated as one. All transferee taxpayers 
are considered as one transferee for calculating whether there was an 
excessive credit transfer and the amount of the excess credit transfer. 
If there was an excessive credit transfer, then the amount of excessive 
credit transferred to a specific transferee taxpayer is equal to the 
total excessive credit transferred multiplied by the transferee 
taxpayer's portion of the total specified credit portions transferred 
to all transferees. The rule in this paragraph (b)(2) is applied on an 
eligible credit property basis, as applicable.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (b):
    (i) Example I--No excessive credit transfer. Taxpayer A claims $50 
of an eligible credit and transfers $50 of an eligible credit to 
Transferee Taxpayer B related to a single facility that was expected to 
generate $100 of such eligible credit. In a later year it is determined 
that the facility only generated $50 of such eligible credit. There is 
no excessive credit transfer in this case because the amount of the 
eligible credit claimed by Transferee Taxpayer B of $50 is equal to the 
amount of the credit that would be otherwise allowable with respect to 
such facility for the taxable year the transfer occurred. Taxpayer A is 
disallowed the $50 of the eligible credit claimed.
    (ii) Example II--Excessive credit transfer. Same facts as in 
paragraph (b)(3)(i) of this section (Example I) except that Taxpayer A 
transfers $80 of the $100 of eligible credit to Transferee Taxpayer B. 
Taxpayer A claims $20 of the eligible credit and Transferee Taxpayer B 
claims $80 of the eligible credit. In this situation, there is a $30 
excessive credit transfer because the amount of the credit claimed by 
Transferee Taxpayer B ($80) exceeds the amount of credit otherwise 
allowable with respect to the facility ($50) by $30. Therefore, 
Transferee Taxpayer B's tax is increased in the later year by $36, 
which is equal to the amount of the excessive credit transfer plus 20 
percent of the excessive credit transfer as provided in paragraph (a) 
of this section and section 6418(g)(2)(A). If Transferee Taxpayer B can 
show reasonable cause as provided in paragraph (a)(4) of this section 
and section 6418(g)(2)(B), then Transferee Taxpayer B will only have a 
tax increase of $30. Taxpayer A is disallowed the $20 of the eligible 
credit claimed, and pursuant to paragraph (a)(3) of this section the 
payments made to Taxpayer A from Transferee Taxpayer B that directly 
relate to the excessive credit transfer are not subject to section 
6418(b)(2) or Sec.  1.6418-2(e).
    (iii) Example III--Excessive credit with multiple transferees. Same 
facts as in paragraph (b)(3)(i) of this section (Example I) except that 
Taxpayer A transfers $45 of the eligible credit to Transferee Taxpayer 
B and $35 of the eligible credit to Transferee Taxpayer C. Taxpayer A 
claims $20 of the eligible credit, Transferee Taxpayer B claims $45 of 
the eligible credit, and Transferee Taxpayer C claims $35 of the 
eligible credit. In this situation, because there are multiple 
transferees, all transferees are treated as one transferee for 
determining the excessive credit transfer amount under paragraph (b)(2) 
of this section. There is a total excessive credit transfer of $30 
because the amount of the credit claimed by the transferees in total 
($80) exceeds the amount of credit otherwise allowable with respect to 
the facility ($50) by $30. The excessive credit transfer to Taxpayer B 
is equal to ($45/$80 * $30) = $16.88, and the excessive credit transfer 
to Taxpayer C is equal to ($35/$80 * $30) = $13.12. Therefore, 
Transferee Taxpayer B and Transferee Taxpayer C are subject to the 
provisions in paragraph (a) of this section. Transferee Taxpayer B's 
and Transferee Taxpayer C's tax is increased in the later year by the 
respective excessive credit transfer amount and 20 percent of the 
excessive credit transfer amount ($20.26 for Transferee Taxpayer B and 
$15.74 for Transferee Taxpayer C) as provided in paragraph (a) of this 
section and section 6418(g)(2)(A). If Transferee Taxpayer B or 
Transferee Taxpayer C can show reasonable cause as provided in 
paragraph (a)(4) of this section and section 6418(g)(2)(B), then the 
tax increase will only be $16.88 or $13.12, respectively. Taxpayer A is 
disallowed the $20 of eligible credit claimed and pursuant to paragraph 
(a)(3) of this section the payments made to Taxpayer A that directly 
relate to the excessive credit transfer are not subject to section 
6418(b)(2) or Sec.  1.6418-2(e).
    (c) Basis reduction under section 50(c). In the case of any 
transfer election under Sec.  1.6418-2 or Sec.  1.6418-3 with respect 
to any specified credit portion described in Sec.  1.6418-1(c)(2)(ix) 
through (xi), section 50(c) will apply to the applicable investment 
credit property (as defined in section 50(a)(6)(A)) as if such credit 
was allowed to the eligible taxpayer.
    (d) Notification and impact of recapture under section 50(a) or 
49(b)--(1) In general. In the case of any election under Sec.  1.6418-2 
or Sec.  1.6418-3 with respect to any specified credit portion 
described in Sec.  1.6418-1(c)(2)(ix) through (xi), if, during any 
taxable year, the applicable investment credit property (as defined in 
section 50(a)(6)(A)) is disposed of, or otherwise ceases to be 
investment credit property with respect to the eligible taxpayer, 
before the close of the recapture period (as described in section 
50(a)(1)(A)), other than as described in Sec.  1.6418-3(a)(6), or has a 
reduction in credit base causing recapture under section 49, other than 
as described in Sec.  1.6418-3(a)(6), such eligible taxpayer and the 
transferee taxpayer must follow the notification process in paragraph 
(d)(2) of this section, with recapture impacting the transferee 
taxpayer and eligible taxpayer as described in paragraph (d)(3) of this 
section.
    (2) Notification requirements--(i) Eligible taxpayer. The eligible 
taxpayer must provide notice of the occurrence of recapture to the 
transferee taxpayer. This notice must provide all information necessary 
for a transferee taxpayer to correctly compute the recapture amount (as 
defined under section 50(c)(2)), and the notification must occur in 
sufficient time to allow the transferee taxpayer to compute the 
recapture amount by the due date of the transferee taxpayer's return 
(without extensions) for the taxable year in which the recapture event 
occurs. The eligible taxpayer and transferee taxpayer can contract with 
respect to the form of the notice and any specific time periods that 
must be met, so long as the terms of the contractual arrangement do not 
conflict with the requirements of this paragraph (d)(2)(i). Any 
additional information that is required or other specific time periods 
that must be met may be prescribed by the IRS in guidance issued with 
respect to this notification requirement.
    (ii) Transferee taxpayer. The transferee taxpayer must provide 
notice of the recapture amount (as defined in section 50(c)(2)), if 
any, to the eligible taxpayer. This must occur in sufficient time to 
allow the eligible taxpayer to calculate any basis adjustment with

[[Page 40526]]

respect to the investment credit property by the due date of the 
eligible taxpayer's return (without extensions) for the taxable year in 
which the recapture event occurs. The eligible taxpayer and transferee 
taxpayer can contract with respect to the form of the notice and any 
specific time periods that must be met, so long as the terms of the 
contractual arrangement do not conflict with the requirements of this 
paragraph (d)(2)(ii). Any additional information that is required or 
other specific time periods that must be met may be provided in 
guidance prescribed by the IRS issued with respect to this notification 
requirement.
    (3) Impact of recapture--(i) Impact of recapture on transferee. The 
transferee taxpayer is responsible for any amount of tax increase under 
section 50(a) upon the occurrence of a recapture event.
    (ii) Impact on eligible taxpayer. The eligible taxpayer must 
increase the basis of the investment credit property (immediately 
before the event resulting in such recapture) by an amount equal to the 
recapture amount provided to the eligible taxpayer by the transferee 
taxpayer under paragraph (d)(2)(ii) of this section and in accordance 
with section 50.
    (e) Notification and impact of recapture under section 45Q(f)(4)--
(1) In general. In the case of any election under Sec.  1.6418-2 or 
Sec.  1.6418-3 with respect to any specified credit portion described 
in Sec.  1.6418-1(c)(2)(iii), if, during any taxable year, there is 
recapture of any section 45Q credit allowable with respect to any 
qualified carbon oxide that ceases to be captured, disposed of, or used 
as a tertiary injectant in a manner consistent with section 45Q, before 
the close of the recapture period (as described in Sec.  1.45Q-5(f)), 
such eligible taxpayer and the transferee taxpayer must follow the 
notification process in paragraph (e)(2) of this section with recapture 
impacting the transferee taxpayer as described in paragraph (e)(3) of 
this section.
    (2) Notification requirements. The notification requirements for 
the eligible taxpayer are the same as for an eligible taxpayer that 
must report a recapture event as described in paragraph (d)(2)(i) of 
this section, except that the recapture amount that must be computed is 
defined in Sec.  1.45Q-5(e).
    (3) Impact of recapture. The transferee taxpayer is responsible for 
any amount of tax increase under section 45Q(f)(4) and Sec.  1.45Q-5 
upon the occurrence of a recapture event.
    (f) Impact of an ineffective transfer election by an eligible 
taxpayer. An ineffective transfer election means that no transfer of an 
eligible credit has occurred for purposes of section 6418, including 
section 6418(b). Section 6418 does not apply to the transaction and the 
tax consequences are determined under any other relevant provisions of 
the Code. For example, an ineffective election results if an eligible 
taxpayer tries to elect to transfer a specified credit portion, but the 
eligible taxpayer did not register and receive a registration number 
with respect to the eligible credit property (or otherwise satisfy the 
requirements for making a transfer election under the section 6418 
regulations) with respect to which the specified credit portion was 
determined.
    (g) Carryback and carryforward. A transferee taxpayer can apply the 
rules in section 39(a)(4) (regarding a 3-year carryback period for 
unused current year business credits) to a specified credit portion to 
the extent the specified credit portion is described in section 6417(b) 
(list of applicable credits, taking into account any placed in service 
requirements in section 6417(b)(2), (3), and (5)).
    (h) Applicability date. This section applies to taxable years 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-12799 Filed 6-14-23; 11:15 am]
BILLING CODE 4830-01-P