[Federal Register Volume 89, Number 84 (Tuesday, April 30, 2024)]
[Rules and Regulations]
[Pages 34770-34816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08926]
[[Page 34769]]
Vol. 89
Tuesday,
No. 84
April 30, 2024
Part VII
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Transfer of Certain Credits; Final Rule
Federal Register / Vol. 89 , No. 84 / Tuesday, April 30, 2024 / Rules
and Regulations
[[Page 34770]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9993]
RIN 1545-BQ64
Transfer of Certain Credits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final Regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations concerning the
election under the Inflation Reduction Act of 2022 to transfer certain
tax credits. The regulations describe 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 regulations describe rules related to a required IRS pre-filing
registration process. These 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:
Effective Date: These regulations are effective on July 1, 2024.
Applicability Dates: For dates of applicability, see Sec. Sec.
1.6418-1(r), 1.6418-2(g), 1.6418-3(f), 1.6418-4(d), and 1.6418-(5)(j).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, James
Holmes at (202) 317-5114 and Jeremy Milton at (202) 317-5665 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION: This document contains final regulations
that amend the Income Tax Regulations (26 CFR part 1) to implement the
statutory provisions of section 6418 of the Internal Revenue Code
(Code), as enacted by section 13801(b) of Public Law 117-169, 136 Stat.
1818, 2009 (August 16, 2022), commonly known as the Inflation Reduction
Act of 2022 (IRA).
Background
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) of the Code
(that is, any taxpayer that is not an ``applicable entity'' by reason
of 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, 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 cannot 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 taxable year ending with, or after, the eligible taxpayer's
taxable 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 (as defined in section 1361(a)) that directly holds a
facility or property for which an eligible credit is determined: (1)
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; (2) 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 (3) 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 of the Treasury or
her delegate (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
[[Page 34771]]
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) of the Code 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 Department of the Treasury (Treasury
Department) and the IRS published Notice 2022-50, 2022-43 I.R.B. 325,
to, among other things, request feedback from the public on potential
issues with respect to the transfer election provisions under section
6418 that may require guidance. Stakeholders submitted more than 200
letters in response to Notice 2022-50.
V. Proposed and Temporary Regulations
On June 21, 2023, informed by the stakeholder feedback received in
response to Notice 2022-50, the Treasury Department and the IRS
published proposed regulations under section 6418 (REG-101610-23) in
the Federal Register (88 FR 40496) to provide guidance on transfer
elections (proposed regulations). The proposed regulations included
proposed Sec. 1.6418-4, which contained proposed rules identical to
the text of temporary regulations (TD 9975) at Sec. 1.6418-4T. Those
temporary regulations also were published on June 21, 2023, in the
Federal Register (88 FR 40086) to provide guidance on the mandatory
information and registration requirements for transfer elections. The
preamble to the proposed regulations discusses stakeholder feedback
received in response to Notice 2022-50 and explains in greater detail
the provisions of the proposed regulations.
VI. 6417 Final Regulations
On March 11, 2024, the Treasury Department and the IRS published
final regulations under section 6417 (TD 9988) in the Federal Register
(89 FR 17546) to provide guidance on the section 6417 elective payment
election (section 6417 final regulations). Among other things, the
section 6417 final regulations provide guidance on the definition of
applicable entity under section 6417(d)(1)(A).
Summary of Comments and Explanation of Revisions
This Summary of Comments and Explanation of Revisions summarizes
comments submitted in response to the proposed regulations and the
revisions to the proposed regulations reflected in these final
regulations. The Treasury Department and the IRS received more than 80
written comments in response to the proposed regulations. The comments
are available for public inspection at https://www.regulations.gov or
upon request. A hearing was conducted in person and telephonically on
August 23, 2023, during which 10 presenters provided testimony. After
full consideration of the comments received and testimony provided,
these final regulations adopt the proposed regulations with
modifications in response to such comments and testimony as described
in this Summary of Comments and Explanation of Revisions.
Comments merely summarizing or interpreting the proposed
regulations, recommending statutory revisions to section 6418 or other
statutes, or addressing issues that are outside the scope of this
rulemaking, such as the calculation of eligible credits (including any
bonus credit amounts) or recommended changes to IRS forms, are beyond
the scope of these regulations and are generally not described in this
preamble.
I. General Rule and Definitions
Proposed Sec. 1.6418-1 would have described general rules related
to the transfer of eligible credits. Proposed Sec. 1.6418-1(a) would
have provided an overview of a transfer of eligible credits, and
paragraphs (b) through (q) would have provided definitions of terms
under the section 6418 regulations. Commenters addressed certain
aspects of the proposed definitions, as described in this part I. To
the extent a definition in Sec. 1.6418-1(b) through (q) is not
addressed in this part I and no comment addressed it, such definition
is adopted by this Treasury Decision as proposed.
A. Eligible Taxpayer
Section 6418(f)(2) defines the term ``eligible taxpayer'' to mean
any taxpayer that is not described in section 6417(d)(1)(A). Proposed
Sec. 1.6418-1(b) would have clarified that the term ``eligible
taxpayer'' means any taxpayer (as defined in section 7701(a)(14) of the
Code), other than one described in section 6417(d)(1)(A) and Sec.
1.6417-1(b). The intended cite in the proposed regulations was to Sec.
1.6417-1(c), rather than Sec. 1.6417-1(b). As the preamble to the
proposed regulations noted, 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.
A commenter recommended that an eligible taxpayer also include any
person that does not have a United States internal revenue tax
obligation, such as a taxpayer that is only subject to the taxes of a
territory of the United States. Broadening the definition of eligible
taxpayer in section 6418(f)(2) is beyond the definition of taxpayer in
section 7701(a)(14) and is not supported by section 6418. Section
6418(f)(2) defines eligible taxpayer as ``any taxpayer'' not described
in section 6417(d)(1)(A). Section 7701(a)(14)
[[Page 34772]]
provides the definition of taxpayer for purposes of the Code. Pursuant
to section 7701(a), the definition under section 7701(a)(14) apples to
all Code provisions unless a different definition is otherwise
distinctly expressed or the definition in section 7701(a)(14) is
manifestly incompatible with the intent of section 6418. Under section
6418, there is no distinct expression that the term ``taxpayer'' should
include those not subject to any United States tax obligations, and
there is no indication that the definition in section 7701(a)(14) is
incompatible with the intent of section 6418. Thus, it is appropriate
to use the definition of taxpayer in section 7701(a)(14) for purposes
of defining eligible taxpayer for purposes of section 6418, and these
regulations finalize the definition of eligible taxpayer as proposed.
A commenter requested a clarification that a partnership wholly or
partially owned by applicable entities described in section
6417(d)(1)(A) qualifies as an eligible taxpayer under section
6418(f)(2). The Treasury Department and the IRS agree that if such a
partnership has not elected to be treated as an applicable entity with
respect to the section 45Q credit, section 45V credit, or section 45X
credit, it can otherwise qualify as an eligible taxpayer. Section
6418(f)(2) defines eligible taxpayer as a taxpayer other than one
described in section 6417(d)(1)(A). Under section 6417 and the section
6417 final regulations, a partnership (regardless of the tax status of
its partners) can only be treated as an applicable entity with respect
to the section 45Q credit, section 45V credit, or section 45X credit
and only if the partnership makes an elective payment election.
Further, section 7701(a)(14) defines the term ``taxpayer'' as any
person subject to any internal revenue tax. The term ``person'' is
defined in section 7701(a)(1) and includes a partnership. Consequently,
if a partnership has not elected to be treated as an applicable entity
with respect to the section 45Q credit, section 45V credit, or section
45X credit, it can qualify as an eligible taxpayer.
The same commenter also sought to clarify that a partnership that
has one or more applicable entity partners described in section
6417(d)(1)(A) is entitled to transfer the entirety of the eligible
credits determined with respect to a property or facility held directly
by the partnership without a reduction of the eligible credits
allocable to the applicable entity partners. The Treasury Department
and the IRS agree that such a partnership is entitled to transfer the
entirety of the eligible credits determined with respect to a property
or facility held directly by the partnership; however, section 50(b)(3)
and (4) may limit the amount of eligible investment tax credits (ITCs)
determined with respect to any tax-exempt or government entity partner.
B. Eligible Credit Property
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. Proposed
Sec. 1.6418-1(a) would have provided that an eligible taxpayer may
make a transfer election to transfer any specified portion of an
eligible credit determined with respect to any eligible credit property
of the eligible taxpayer for any taxable year. Proposed Sec. 1.6418-
1(d) would have defined 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. Proposed Sec. 1.6418-
1(d)(1) through (11) would have described the unit of property that is
considered an eligible credit property for each of the 11 eligible
credits.
A commenter recommended that the final regulations use the same
concept of a unit of property as is used for the various underlying
eligible credit provisions (for example, energy property or energy
project for purposes of section 48, and qualified facility for purposes
of section 45). The proposed regulations referenced the statutory rules
for each eligible credit to determine the appropriate unit of
measurement for section 6418 registration and election and provided
additional information relevant for each eligible credit. For example,
proposed Sec. 1.6418-1(d)(2) would have provided that, in the case of
a section 45 credit, the relevant unit of property is a qualified
facility described in section 45(d). Likewise, proposed Sec. 1.6418-
1(d)(9) would have provided that, in the case of a section 48 credit,
the relevant unit of property is an energy property described in
section 48, or, at the option of the taxpayer, an energy project
described in section 48(a)(9)(A)(ii) and defined in guidance. The
proposed regulations, without modification, are consistent with this
comment. Thus, these final regulations, consistent with the proposed
regulations, base the definition of an eligible credit property on the
underlying Code provisions for the eligible credits and no further
changes are necessary.
Another commenter asked for clarification that section 48 credits
determined with respect to energy property qualifying as ``energy
storage technology'' under section 48(c)(6)(A) would be eligible
credits that could be transferred under section 6418. The preamble to
the proposed regulations provided in part that energy property is
comprised of all components of property necessary to generate
electricity up to the point of transmission or distribution. The
commenter raised that ``energy storage technology'' is specifically
designated as ``energy property'' under section 48(a)(3)(A)(ix), but
unlike other forms of ``energy property,'' it does not generate
electricity. The Treasury Department and the IRS confirm that, to the
extent a section 48 credit is determined with respect to energy
property held by an eligible taxpayer, whether the credit is with
respect to energy storage technology or other energy property, such
credit is an eligible credit that can be transferred under section 6418
by the eligible taxpayer.
Other commenters recommended revising the definition of eligible
credit property for purposes of section 45Q. Proposed Sec. 1.6418-
1(d)(3) would have provided that an eligible credit is determined, for
purposes of section 45Q, based on a single process train of carbon
capture equipment described in Sec. 1.45Q-2(c)(3). Commenters
recommended that, for the section 45Q credit, the definition of
eligible credit property be a component of a single process train for
the capture, disposal, utilization, or injection of qualified carbon
oxide, rather than a single process train of carbon capture equipment
described in Sec. 1.45Q-2(c)(3). Other commenters urged that the final
regulations reconcile the proposed rules with Rev. Rul. 2021-13, 2021-
30 I.R.B. 152, under which a taxpayer need own only one component in a
single process train to be the person to whom the section 45Q credit is
attributable to (assuming the taxpayer also meets the requirements of
section 45Q(a), as applicable). The Treasury Department and the IRS
agree that guidance under section 45Q does not require a taxpayer to
own every component of a single process train and have revised the
language under Sec. 1.6418-1(d)(3) (defining eligible credit property
with respect to the section 45Q credit) to state ``[i]n the case of a
section 45Q credit, a component of carbon capture equipment within a
single process train described in Sec. 1.45Q-2(c)(3).''
C. Paid in Cash
Section 6418(b)(1) requires that any amount paid by a transferee
taxpayer to an eligible taxpayer as consideration for a transfer be
paid in cash. Proposed Sec. 1.6418-1(f) would have defined the
[[Page 34773]]
term ``paid in cash'' to mean 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
proposed 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 payment of United
States dollars are made in a manner described in proposed Sec. 1.6418-
1(f)(1) and during the time period in proposed Sec. 1.6418-1(f)(2).
Several commenters recommended revising the proposed paid in cash
rule so that advanced payments could be made for eligible credits that
will be determined in later taxable years. For example, commenters
specifically requested that the final regulations allow upfront
payments for transfers of eligible credits that are production tax
credits (PTCs) that are expected to be determined in a future taxable
year. Commenters suggested that such a rule would more closely align
the timing of payments for eligible credits that are PTCs with the
timing of payments for eligible credits that are ITCs. Commenters
raised that upfront payments for PTCs determined in future taxable
years are standard in tax equity transactions and that allowing for
upfront payments for future PTCs under section 6418 would more closely
align transferability with traditional tax equity structures. Another
commenter asked for clarification that the use of certain loan
structures would not violate the paid in cash rule. Specifically, the
commenter requested confirmation that loans, including security
arrangements, made on arm's length terms by a transferee taxpayer or a
third party to an eligible taxpayer would not be treated as an upfront
payment under an eligible credit purchase and sale agreement or
otherwise recharacterized.
Allowing advanced payments prior to the taxable year an eligible
credit is determined may more closely align the section 6418
regulations with current tax equity transactions. However, proposed
Sec. 1.6418-1(f)(2) would have specifically provided a timing safe
harbor that is intended to provide certainty as to the treatment of
payments of United States dollars made during the prescribed time
period. Allowing advanced payments would also raise several complex
legal and administrative issues, such as whether an excessive credit
transfer has occurred or if the eligible taxpayer has gross income if
prepaid eligible credits were not transferred in a later tax year. No
commenter addressed the administrative and legal challenges of allowing
for advanced payments. Based on these reasons, the Treasury Department
and the IRS have adopted the paid in cash definition of the proposed
regulations without change.
Further, the Treasury Department and the IRS note that there is no
prohibition on either a transferee taxpayer or another third-party
loaning funds to an eligible taxpayer, including loans secured by an
eligible credit purchase and sale agreement, provided such loans are at
arm's length and treated as loans for Federal tax purposes. Whether
such loans are treated as upfront payments for eligible credits or
otherwise recharacterized is an analysis based on the facts and
circumstances of the loan and is otherwise outside the scope of these
final regulations.
D. Specified Credit Portion
Section 6418(a) provides 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 taxpayer. Proposed Sec. 1.6418-
1(h) would have defined the term ``specified credit portion'' to mean 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. The proposed
regulations further provided that a specified credit portion of an
eligible credit reflects 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. Thus, under the proposed regulations, an eligible taxpayer
would not be permitted to sever bonus credit amounts taken into account
to determine an eligible credit from the base eligible credit
determined with respect to the relevant eligible credit property and
separately transfer any bonus credit amount or base eligible credit
amount (horizontal credit transfer). 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 component bonus credit amounts taken into account to
determine the entire eligible credit) determined with respect to a
single eligible credit property (vertical credit transfer).
Several commenters recommended that the final regulations allow for
horizontal credit transfers and that the term ``portion'' in section
6418(a) should be broadly construed. As support, commenters contended
that horizontal credit transfers would increase flexibility and
marketability of eligible credits and allow eligible taxpayers to
better allocate credit risk among various transferee taxpayers.
Commenters also asserted that requiring vertical credit transfers
favors large investors with sufficient resources for diligence,
finance, and risk tolerance. One commenter stated that requiring
vertical credit transfers will increase the burden of tax
administration because auditing a transferee taxpayer's portion of a
vertical credit transfer would require a larger audit team and auditors
conversant with the rules applicable to the underlying eligible credits
and the rules applicable to the bonus credit amounts. Another commenter
suggested the final regulations allow for eligible taxpayers to elect
either a vertical or a horizontal credit transfer for each specified
credit portion.
Each eligible credit determined with respect to a single eligible
credit property is a single eligible credit that cannot be separated
into a base credit amount and bonus credit amounts for purposes of
making transfer elections. The language in section 6418(a) that refers
to a portion specified in the election is better understood to refer to
a percentage of a single overall eligible credit amount, rather than to
a particular ``layer'' of credit. Further, while commenters suggested
allowing horizontal transfers of eligible credits, none of the
commenters fully addressed the potential administrative issues with the
approach. For example, allowing horizontal credit transfers would add
another layer of compliance due to the need for taxpayers and the IRS
to track all base and bonus credit amounts separately. Moreover, a
bonus credit amount is not itself an eligible credit but only an amount
taken into account to determine the single eligible credit with respect
to an eligible credit property. In this regard, the pre-filing
registration portal does not allow for registration numbers associated
only with bonus credit amounts. Thus, these final regulations adopt the
definition of specified credit portion in proposed Sec. 1.6418-1(h)
without change.
[[Page 34774]]
II. Rules for Making Transfer Elections
A. In General
Proposed Sec. 1.6418-2 would have provided general rules for an
eligible taxpayer to make a transfer election under section 6418 with
respect to any eligible credit determined with respect to such
taxpayer. Proposed Sec. 1.6418-2(a)(1) would have provided that an
eligible taxpayer can make an election as provided in proposed Sec.
1.6418-2. Proposed Sec. 1.6418-2(a)(2) through (4) would have provided
rules regarding making multiple transfer elections, rules for
determining the eligible taxpayer in certain ownership situations, and
rules describing circumstances in which no transfer election is
allowed. Commenters addressed aspects of these proposed rules, as
discussed in this part II of the Summary of Comments and Explanation of
Revisions. These final regulations generally adopt the rules as
proposed, with the modifications described in this part II of the
Summary of Comments and Explanation of Revisions.
Proposed Sec. 1.6418-2(a)(2) would have provided 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 any single eligible credit property does not exceed the
amount of the eligible credit determined with respect to the eligible
credit property. A commenter asked for clarification of whether an
eligible taxpayer may transfer all or a portion of an eligible credit
to more than one taxpayer. The Treasury Department and IRS confirm that
the proposed regulations, as drafted, would have allowed an eligible
taxpayer to make multiple transfer elections of specified credit
portions of an eligible credit determined with respect to an eligible
credit property subject to the limitation that such portions, in the
aggregate, cannot exceed the amount of the determined eligible credit.
Because proposed Sec. 1.6418-2(a)(2) would have already provided this
result, a revision to the proposed rules is unnecessary, and these
final regulations adopt the proposed rule without change.
Proposed Sec. 1.6418-2(a)(3) would have provided rules for
transfer elections in certain ownership situations, specifically with
respect to ownership through a disregarded entity, as an undivided
ownership interest, as a member of a consolidated group (as defined in
Sec. 1.1502-1), and for partnerships and S corporations. One commenter
asked for clarity as to whether a grantor trust is treated as a
disregarded entity in determining ownership of an eligible credit
property, and, if a grantor trust directly holds an eligible credit
property, which party registers the property and makes a transfer
election. The Treasury Department and the IRS agree that these final
regulations should provide rules for transfer elections if eligible
property is held directly by a grantor trust. Accordingly, the final
regulations add Sec. 1.6418-2(a)(3)(v) to provide that if an eligible
taxpayer is a grantor or any other person that is treated as the owner
of any portion of a trust as described in section 671 of the Code, then
the eligible taxpayer may make a transfer election in the manner
provided in Sec. 1.6418-2 for any eligible credits determined with
respect to eligible credit property held directly by the portion of the
trust that the eligible taxpayer is treated as owning under section
671.
Proposed Sec. 1.6418-2(a)(4) would have described three
circumstances in which no transfer election can be made. First,
consistent with section 6418(g)(4), the proposed regulations would have
precluded 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, consistent with section 6418(b)(1), proposed
Sec. 1.6418-2(a)(4)(ii) would have precluded a transfer election if an
eligible taxpayer receives any amount not paid in cash (as defined in
proposed Sec. 1.6418-1(f)) as consideration in connection with the
transfer of a specified credit portion. Third, consistent with section
6418(a), proposed Sec. 1.6418-2(a)(4)(iii) would have provided that no
election is allowed if eligible credits are not determined with respect
to an eligible taxpayer. As a result, proposed Sec. 1.6418-
2(a)(4)(iii) would have provided as an example that a section 45Q
credit allowable to an eligible taxpayer because of an election under
section 45Q(f)(3)(B), or a section 48 credit allowable to an eligible
taxpayer because of an election made under section 50(d)(5) and Sec.
1.48-4, although described in proposed Sec. 1.6418-1(c)(2), is not an
eligible credit that can be transferred because such credit is not
determined with respect to the eligible taxpayer.
A commenter suggested that the final regulations allow transfers of
section 48 ITCs before the taxable year in which the energy property is
placed in service. While not explicitly referenced, the commenter
appears to be requesting that progress expenditures (under section
48(b)) be permitted to be transferred under section 6418. Section
6418(g)(4) and proposed Sec. 1.6418-2(a)(4)(i) both directly prohibit
making a transfer election if an eligible credit is related to progress
expenditures. Based on this, these final regulations adopt the rule in
proposed Sec. 1.6418-2(a)(4)(i) without change.
Multiple commenters advocated that the proposed regulations be
modified to permit a taxpayer that is allowed a section 45Q credit due
to an election under section 45Q(f)(3)(B) to make a transfer election
with respect to the section 45Q credit. Commenters generally suggested
that the proposed rule is incorrect because (1) ownership of the single
process train is not necessary for credit determination, and (2) a
taxpayer claiming the credit and making an election under section
45Q(f)(3)(B) does in fact determine the credit because of their
activities. Commenters relied in part on the language in proposed Sec.
1.6418-2(d)(1), which states that ``[f]or 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 [emphasis added].''
A taxpayer that is allowed a section 45Q credit as a result of an
election under section 45Q(f)(3)(B) is not the taxpayer with respect to
which the section 45Q credit is determined. Under section
45Q(f)(3)(A)(ii), a section 45Q credit is attributable to the person
that owns the carbon capture equipment and physically or contractually
ensures the capture and disposal, utilization, or use as a tertiary
injectant of such qualified carbon oxide. Further, under Sec. 1.45Q-
1(h)(3), it is the taxpayer described in Sec. 1.45Q-1(h)(1) to whom
the section 45Q credit is attributable (electing taxpayer), that may
elect to allow the person that enters into a contract with the electing
taxpayer to dispose of the qualified carbon oxide (disposer), utilize
the qualified carbon oxide (utilizer), or use the qualified carbon
oxide as a tertiary injectant to claim the credit (section 45Q(f)(3)(B)
election). Contrary to commenters' assertions, it is not sufficient for
a party to only conduct carbon capture activities to be eligible for a
section 45Q credit. Further, the ownership requirement in the section
45Q statute and regulations means the commenters' suggestions that the
language in proposed Sec. 1.6418-2(d)(1) allows a section 45Q credit
to be
[[Page 34775]]
determined with respect to an eligible taxpayer if the party
``otherwise conducts the activities giving rise to the underlying
applicable credit'' is misplaced. That language in proposed Sec.
1.6418-2(d)(1) applies only in the case of an eligible credit for which
ownership of property is not required, which is not the case with
respect to a section 45Q credit. Thus, these final regulations clarify
in Sec. 1.6418-2(d)(1) that the only eligible credit for which
ownership is not required is the section 45X credit. While the
activities of a contractor may be necessary for a section 45Q credit to
be determined, ultimately, the credit is attributable to and determined
by the person that both owns the equipment and physically or
contractually ensures the capture and disposal, injection, or
utilization of such qualified carbon oxide. Thus, these final
regulations adopt the proposed regulations without change on this
issue.
A commenter asked that separate, unrelated taxpayers to which
section 45Q credits and section 45Z credits are determined with respect
to the same qualified facility each be permitted to make a separate
transfer election with respect the section 45Q credits or section 45Z
credits determined with respect to such taxpayer. Specifically, the
commenter requested clarification as to who is an eligible taxpayer if
more than one eligible credit (for example, a section 45Q credit and a
section 45Z credit) is determined with respect to two unrelated,
eligible taxpayers for units of property or a facility within the same
general geographic location. The commenter stated that the qualified
facility definition under section 45Z(d)(4) should not preclude an
owner and producer taxpayer from making a transfer election, even if an
unrelated taxpayer who is eligible for the section 45Q credit makes a
transfer election in the same taxable year.
It is beyond the scope of these final regulations to address
underlying requirements of eligible credits, such as the requirements
of sections 45Q and 45Z, and who may be eligible for those credits. The
Treasury Department and the IRS will consider this comment in
connection with drafting additional guidance under sections 45Q and
45Z.
Several commenters recommended that the final regulations allow
transfer elections following a lease passthrough election under the
rules of section 50(d)(5), both generally and with specific additional
rules (such as, revising Sec. 1.48-4 to require a lessor to commit to
not making an election to transfer under section 6418 and requiring the
lessee to complete pre-filing registration). One commenter stated that
the proposed regulations are inconsistent with existing tax law,
suggesting that the original inclusion of the lease passthrough
election obviated the need to engage in more complicated sale-leaseback
transactions in order to calculate the credit based on fair market
value of a property rather than on its cost. The commenter posited that
the proposed regulations would upend that balance by putting sale-
leaseback transactions on unequal footing with lease passthrough
structures in the context of a contemplated transfer of eligible
credits, which the commenter thought was precisely the outcome that
Congress sought to avoid in 1962 at the time of the introduction of the
ITC.
There is a distinction between sale-leaseback transactions under
section 50(d)(4) and lease passthrough elections under former section
48(d) (pursuant to section 50(d)(5)). In the latter case, it is the
owner or lessor that is the party with respect to which the credit is
determined, and not the lessee that is allowed to claim the credit as a
result of the election. Therefore, the lessee does not meet the
requirement of section 6418(a), which requires the eligible credit to
be determined with respect to the eligible taxpayer making the transfer
election. For the reasons stated, these final regulations adopt the
proposed rule without change.
B. Manner and Due Date of Making a Transfer Election
1. In General
Proposed Sec. 1.6418-2(b)(1) would have provided that an eligible
taxpayer must make a transfer election to transfer a specified credit
portion on the basis of a single eligible credit property. As an
example, the proposed regulations would have provided that 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. Because no comments were received on proposed
Sec. 1.6418-2(b)(1), these final regulations adopt this provision
without change. Some commenters requested that grouping of eligible
credit properties be permitted for purposes of registration and making
a transfer election. These comments are discussed in part IV of this
Summary of Comments and Explanation of Revisions.
2. Special Rules for Certain Eligible Credits
Section 6418(f)(1)(B) provides that, in the case of any eligible
credit under sections 45, 45Q, 45V, or 45Y, an election is made (1)
separately with respect to each facility for which a credit is
determined, and (2) for each taxable year during the 10-year period
beginning on the date such facility 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). Proposed
Sec. 1.6418-2(b)(2) would have provided rules consistent with section
6418(f)(1)(B). Because no comments were received on proposed Sec.
1.6418-2(b)(2), these final regulations adopt this provision without
change.
3. Manner of Making a Valid Transfer Election
Proposed Sec. 1.6418-2(b)(3) would have provided rules for making
a valid transfer election and included that a transfer election is made
based on each specified credit portion with respect to a single
eligible credit property. To make a valid transfer election, an
eligible taxpayer as part of filing an annual tax return (or a return
for a short year within the meaning of section 443 of the Code), must
include the following: (1) a properly completed relevant source credit
form for the eligible credit for the taxable year that the eligible
credit was determined; (2) a properly completed Form 3800, General
Business Credit (or its successor); (3) a schedule attached to the Form
3800 (or its successor) showing the amount of eligible credit
transferred for each eligible credit property, except as otherwise
provided in guidance; (4) a transfer election statement as described in
proposed Sec. 1.6418-2(b)(5); and (5) any other information related to
the election specified in guidance. While comments were received on
individual aspects of this proposed rule as described later in this
Summary of Comments and Explanation of Revisions, there were no
comments received on proposed Sec. 1.6418-2(b)(3), and so these final
regulations adopt the proposed rule without substantive change.
However, the final regulations clarify that the registration number
received during the required pre-filing registration (as described in
proposed Sec. 1.6418-4) related to an eligible credit property with
respect to which a transferred eligible credit was determined must be
included on a
[[Page 34776]]
properly completed relevant credit source form.
4. Due Date and Original Return Requirement of a Transfer Election
Section 6418(e)(1) states that an election under section 6418(a) to
transfer any portion of an eligible credit must be made not later than
the due date (including extensions of time) for the return of tax for
the taxable year for which the credit is determined, but in no event
earlier than 180 days after the date of the enactment of this section.
Proposed Sec. 1.6418-2(b)(4) would have provided that a transfer
election must be made on an original return not later than the due date
(including extensions) for the original return of the eligible taxpayer
for the taxable year for which the eligible credit is determined. The
proposed regulations stated that no transfer election could be made or
revised on an amended return or by filing an administrative adjustment
request under section 6227 of the Code (AAR). The preamble to the
proposed regulations clarified that an original return includes a
superseding return filed on or before the due date (including
extensions). The proposed regulations also did not provide for relief
under Sec. Sec. 301.9100-1 through 301.9100-3 (9100 relief) for a late
transfer election.
Some commenters asked that a transfer election be permitted on an
amended return or AAR and/or that a taxpayer be permitted an extension
of time under the 9100 relief procedures to make a late election.
Commenters raised concerns that the amount of information required to
obtain a registration number and file a transfer election is
substantial, and that given there are bound to be omissions and
misstatements, an eligible taxpayer should have the ability to cure
errors or omissions on an amended return or pursuant to an AAR.
Further, commenters urged that 9100 relief should be available in
situations in which the parties acted in good faith with respect to a
transfer election.
The section 6418 transfer election process is novel and eligible
taxpayers may experience inadvertent errors or omissions. The statutory
text of section 6418(e), however, provides that a transfer election
must not be made ``later than the due date (including extensions of
time) for the return of tax for the taxable year for which the credit
is determined.'' The preamble to the proposed regulations provided that
eligible taxpayers could make a transfer election on a superseding
return up until the extended due date for the return.
Neither the Code nor regulations define a superseding return, but
administrative IRS guidance provides that a superseding return is a
return filed subsequent to the originally-filed return but before the
due date for filing the return (including extensions). For example, if
an eligible taxpayer subject to an automatic 6-month extension files an
original return on the due date (excluding extensions) and then files a
subsequent return within the automatic extension period, the subsequent
return would generally be considered a superseding return. Unlike a
superseding return, an amended return is a return filed after the
taxpayer filed an original return and after the due date for filing the
return (including extensions).
Accordingly, these final regulations modify proposed Sec. 1.6418-
2(b)(4) by clarifying that a transfer election filed by an electing
taxpayer may be made or revised on a superseding return, but not on an
amended return or AAR. These final regulations further clarify that a
transfer election cannot be made for the first time on an amended
return, withdrawn on an amended return, or made or withdrawn by filing
an AAR, although a numerical error with respect to a properly claimed
transfer election may be corrected on an amended return or by filing an
AAR if necessary. This clarification is intended to address situations
in which an eligible taxpayer intended to make a transfer election but
made a reporting error with respect to an element of a valid election
(for example, miscalculating the amount of the eligible credit on the
original return or making a typographical error in the process of
inputting a registration number), and to allow the eligible taxpayer to
correct any errors that would result in a denial of the transfer
election. The provision cannot be used to revoke a transfer election
made on an original return or to make a transfer election for the first
time on an amended return. In addition, the eligible taxpayer's
original return (including a superseding return), which must be signed
under penalties of perjury, must contain all of the information,
including a registration number, required by these final regulations.
In order to correct an error on an amended return or AAR, an eligible
taxpayer must have made an error in the information included on the
original return such that there is a substantive item to correct; a
taxpayer cannot correct a blank item or an item that is described as
being ``available upon request.''
The Treasury Department and the IRS note that the rules described
in this part II.B.4 of the Summary of Comments and Explanation of
Revisions, regarding the original return requirement, apply to transfer
elections made on an originally filed return of the eligible taxpayer.
A transferee taxpayer, however, may take a transferred specified credit
portion into account on a properly filed amended return or AAR, or
correct the amount of the transferred specified credit portion on a
properly filed amended return or AAR to, for example, avoid a
determination by the IRS that the transferee taxpayer is subject to an
excessive credit transfer under Sec. 1.6418-5(a). Excessive credit
transfers are discussed in more detail in part V.A of this Summary of
Comments and Explanation of Revisions.
An eligible taxpayer may file an amended return or an AAR to adjust
the amount of the eligible credit following a timely and properly filed
transfer election. Such an adjustment may affect the information that
was reported on the transfer election statement under Sec. 1.6418-
2(b)(5)(ii), for example, the total amount of the credit determined
with respect to the eligible credit property and any corresponding
specified credit portion being transferred. Some commenters suggested
that the final regulations provide clarity for a taxpayer that may need
to correct the amount of an eligible credit reported on its tax return.
The final regulations modify proposed Sec. 1.6418-2(b)(4) to provide
that an eligible taxpayer may, after making a timely and complete
transfer election, file an amended return or AAR, if applicable, to
adjust the amount of the eligible credit reported on the eligible
taxpayer's original return if the amount of the eligible credit was
incorrectly reported on the original return. Under Sec. 1.6418-
2(b)(4)(ii)(B), to the extent the eligible taxpayer's correction of an
eligible credit results in an increase in the amount of the eligible
credit reported, such amount must be reflected on the credit source
forms with the eligible taxpayer's amended return or AAR, if
applicable. However, such increase cannot be reflected by either the
eligible taxpayer or the transferee taxpayer as a transferred specified
credit portion on the transfer election statement, in accordance with
the rules set forth in Sec. 1.6418-2(b)(4)(i). Those rules, regarding
the due date and original return requirement of a transfer election,
are described in greater detail in part II.B.3 and 4 of the Summary of
Comments and Explanation of Revisions.
Under Sec. 1.6418-2(b)(4)(ii)(C), to the extent the eligible
taxpayer's correction of an eligible credit results in a decrease in
the amount of the eligible credit
[[Page 34777]]
reported, such amount must be reflected on the credit source forms with
the eligible taxpayer's amended return or AAR, if applicable, and the
transfer election statement reducing the amount of the credit reported.
The amount of the decrease first reduces the amount of the eligible
credit that is retained, if any (and thus not transferred) by the
eligible taxpayer. Any portion of such decrease that remains after
reducing the eligible credit retained by the eligible taxpayer then
reduces the amount reported by the transferee taxpayer. If the eligible
credit was transferred to more than one transferee taxpayer, the
reduction to each transferee taxpayer's specified credit portion is on
a pro rata basis. The amount of any cash consideration retained by the
eligible taxpayer after accounting for any reduction in the amount of
the eligible credit transferred to the transferee taxpayer(s) cannot be
excluded from gross income. These rules are further described in Sec.
1.6418-2(e)(2). The final regulations provide examples illustrating
these rules.
If an eligible taxpayer has made an adjustment such that the
specified credit portion is reduced, depending on the facts and
circumstances, a transferee taxpayer may be at risk for an excessive
credit transfer, should the IRS make such a determination prior to the
transferee taxpayer making its own adjustment to correct the specified
credit portion through a qualified amended return under Sec. 1.6664-
2(c)(3). The eligible taxpayer itself may have income to include to the
extent it received a payment that directly relates to the excessive
credit transfer.
These final regulations do not mandate a reporting or notification
requirement on the eligible taxpayer or the transferee taxpayer in the
event of an adjustment that occurs after a timely and properly filed
transfer election. The eligible taxpayer and the transferee taxpayer
may freely contract for such a requirement. Nevertheless, this part
II.B.4 of the Summary of Comments and Explanation of Revisions
acknowledges that an adjustment to the eligible credit determined by an
eligible taxpayer may impact the tax liability of a transferee
taxpayer.
Additionally, these final regulations modify the proposed
regulations to permit an extension of time under Sec. 301.9100-2(b) to
allow for an automatic six-month extension of time from the due date of
the return (excluding extensions) to make the election prescribed in
section 6418(e)(1). A transfer election is a statutory election because
its due date is prescribed by statute. As such, the section 9100 relief
procedures only apply insofar as the late election is being filed
pursuant to Sec. 301.9100-2(b), which requires that the taxpayer
timely filed its return for the year the election should have been
made. Relief under this provision will only apply to taxpayers that
have not received an extension of time to file a return after the
original due date (excluding extensions). Taxpayers eligible for this
relief must take corrective action under Sec. 301.9100-2(c) and follow
the procedural requirements of Sec. 301.9100-2(d).
5. Transfer Election Statement
Proposed Sec. 1.6418-2(b)(5)(i) generally would have defined a
transfer election statement as a written document that describes the
transfer of a specified credit portion between an eligible taxpayer and
transferee taxpayer and would have provided rules for both an eligible
taxpayer and transferee taxpayer to attach a transfer election
statement to their respective return. The proposed regulations would
have provided that any document can be used that meets the requirements
of proposed Sec. 1.6418-2(b)(5)(ii), with the document labeled as a
``Transfer Election Statement'' that is attached to a return. The
information required in proposed Sec. 1.6418-2(b)(5)(ii) would not
otherwise have limited 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 proposed regulations
would have provided that the statement must be signed under penalties
of perjury by an individual with authority to legally bind the eligible
taxpayer and must also include the written consent of an individual
with authority to legally bind the transferee taxpayer.
Proposed Sec. 1.6418-2(b)(5)(ii) described the information
required in a transfer election statement, which generally would have
included: (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) an attestation that the parties are not related
(within the meaning of section 267(b) or 707(b)(1)); (4) a statement or
representation from the eligible taxpayer that it has or will comply
with all relevant requirements to make a transfer election; (5) 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); and (6) a statement or representation from the
eligible taxpayer that it has provided the required minimum
documentation to the transferee taxpayer.
A commenter requested clarification on whether a transfer election
statement can be a partnership agreement. Unless otherwise provided in
guidance, any document, including a written partnership agreement, can
serve as a transfer election statement if the document otherwise meets
the requirements of proposed Sec. 1.6418-2(b)(5)(i) and includes the
information outlined in proposed Sec. 1.6418-2(b)(5)(ii). The Treasury
Department and the IRS did not include a specific rule in these final
regulations allowing for a partnership agreement to be treated as a
transfer election statement because the language in proposed Sec.
1.6418-2(b)(5) was already broad enough to allow for such an agreement
to qualify.
Another commenter recommended that an eligible taxpayer be
required, in a form accompanying its annual tax return, to list all tax
credits it generated in the year by credit type, the total amount of
those tax credits it sold, a schedule of projects to which the sold
credits relate, the parties to whom it sold, and the remaining credits
it retained. The Treasury Department and the IRS note that the
registration and transfer election process will require an eligible
taxpayer to list all eligible credits it determined and transferred
during a taxable year. Additionally, an eligible taxpayer will be
required to file the relevant credit source forms and the Form 3800,
which will include the type of credits the eligible taxpayer determined
and if it claimed any credits against its tax liability. At this time,
the Treasury Department and the IRS do not think it is necessary for
tax administration purposes for an eligible taxpayer to report the
parties to whom it transferred eligible credits as part of the
registration process. This is because the IRS matches the registration
numbers obtained by an eligible taxpayer in the registration process
with the transferee taxpayers that claim transferred specified credit
portions against their tax liability. Because no changes are necessary
to proposed Sec. 1.6418-2(b)(5)(i) and (ii), these final regulations
adopt these provisions without substantive change.
Proposed Sec. 1.6418-2(b)(5)(iii) described the time by which a
transfer election statement must be completed. The proposed rule
provided that a transfer election statement can be completed at any
time after the eligible taxpayer and transferee taxpayer have
sufficient information to meet the
[[Page 34778]]
requirements of proposed Sec. 1.6418-2(b)(5)(ii), but, for any year,
the transfer election statement cannot be completed after the earlier
of: (1) 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 credit; or (2) the filing of the transferee taxpayer's
return for the year in which the specified credit portion is taken into
account. Because no comments were received on proposed Sec. 1.6418-
2(b)(5)(iii), these final regulations adopt this provision without
change.
Proposed Sec. 1.6418-2(b)(5)(iv) would have defined required
minimum documentation as the minimum documentation that the eligible
taxpayer is required to provide to a transferee taxpayer. This
documentation included: (1) information that validates the existence of
the eligible credit property; (2) if applicable, documentation
substantiating that the eligible taxpayer has satisfied the
requirements to include any bonus credit amounts (as defined in
proposed Sec. 1.6418-1(c)(3)); and (3) 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, in the case of a
transfer of an eligible credit that is a production credit. Proposed
Sec. 1.6418-2(b)(5)(v) would have specified that a transferee
taxpayer, consistent with Sec. 1.6001-1(e), would be required to
retain the required minimum documentation provided by the eligible
taxpayer so long as the contents thereof may become material in the
administration of any internal revenue law.
Several commenters recommended that the final regulations increase
the amount of required minimum documentation that an eligible taxpayer
must provide to a transferee taxpayer to make a valid transfer election
under section 6418(a). One commenter urged that all of the records that
would be necessary for an eligible taxpayer to substantiate the claimed
tax credit should be provided to the transferee taxpayer. Other
commenters stated that more robust minimum documentation requirements
should be imposed, including specific disclosure requirements and
minimum documentation that an eligible taxpayer must provide to a
transferee taxpayer concerning compliance with labor laws and an
affirmation that the eligible taxpayer has undertaken best efforts to
establish compliance. Another commenter asked for confirmation that the
required minimum documentation is the same for all taxpayers.
In providing for the required minimum documentation that an
eligible taxpayer must provide to a transferee taxpayer, the intention
was to require a baseline of information that is necessary for
validating an eligible taxpayer's claim of eligibility to an eligible
credit, while not overburdening the eligible taxpayer with production
requirements or altering the arm's length arrangement between the
parties. Further, the proposed regulations did not limit the amount or
type of information that a transferee taxpayer can require prior to
agreeing to an eligible credit transfer. This means that while the
required minimum documentation requirements are the same for all
taxpayers, any particular agreement between an eligible taxpayer and
transferee taxpayer may go beyond the required minimum documentation
based on the arrangement of the parties. The proposed regulations
allowed sufficient flexibility for market participants to determine if
more information is necessary in a particular transaction, while
balancing the burden of producing the required minimum documentation
required to make a transfer election. Thus, these final regulations
adopt proposed Sec. 1.6418-2(b)(5)(iv) and (v) without substantive
change.
Another commenter requested clarification that any responsibility
to engage in regular reporting of certified payroll, apprentice labor
hour reports, or other obligation under the prevailing wage and
apprenticeship requirements for transferred specified credit portions
remain with the eligible taxpayer. Because an eligible taxpayer
determines any increased credit amount applicable to the prevailing
wage and apprenticeship requirements, proposed regulations under
section 45 would provide that the requirements relevant to determining
the credit, including the correction and penalty provisions described
in section 45(b)(7)(B) and 45(b)(8)(D), would remain with the eligible
taxpayer who determined the credit. On August 30, 2023, the Treasury
Department and the IRS published proposed regulations under section 45
(REG-100908-23) in the Federal Register (88 FR 60018) (section 45
proposed regulations) that would also provide that the general
recordkeeping requirements for prevailing wage and apprenticeship (PWA)
requirements would remain with an eligible taxpayer who transfers a
specified credit portion that includes an increased credit amount. The
section 45 proposed regulations would not require regular reporting of
certified payroll or apprentice labor hour reports to the IRS. The
responsibility of determining a credit is initially with the eligible
taxpayer, and the transfer of an eligible credit does not relieve an
eligible taxpayer of this responsibility or the responsibility to
substantiate. Thus, the responsibility for substantiating a PWA
increased credit amount does not shift to the transferee taxpayer,
although a transferee taxpayer may be treated as the relevant taxpayer
for other purposes under the IRA under section 6418(a). In light of the
section 45 proposed regulations, the Treasury Department and the IRS
have determined that no clarification is needed under proposed Sec.
1.6418-2(b)(5)(iv) and (v) and thus, these final regulations adopt
these provisions without substantive change.
C. Limitations After a Transfer Election Is Made
Proposed Sec. 1.6418-2(c)(1) would have provided that a transfer
election with respect to a specified credit portion is irrevocable. No
comments were received on this rule, and these final regulations adopt
the rule without change.
Consistent with section 6418(e)(2), proposed Sec. 1.6418-2(c)(2)
would have provided that a specified credit portion may only be
transferred pursuant to a transfer election once. A transferee taxpayer
cannot make a transfer election of any specified credit portion
transferred to the transferee taxpayer. As described in the Explanation
of Provisions in the preamble to the proposed regulations, the proposed
rule would have disallowed any arrangement in which 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. In contrast, the Explanation of Provisions in
the preamble to the proposed regulations provided that an arrangement
using a broker to match eligible taxpayers and transferee taxpayers
should not violate the no additional 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.
Commenters advocated for the final regulations to allow certain
transactions with brokers, or other taxpayers, that were disallowed
under proposed Sec. 1.6418-2(c)(2) based on the no additional transfer
rule of section 6418(e)(2). Those commenters posited that allowing such
transactions would increase the number of participants entering the
credit purchasing market. Another commenter recommended that
[[Page 34779]]
the final regulations apply the no additional transfer rule in proposed
Sec. 1.6418-2(c)(2) to prohibit only successive transfers made by a
transferee taxpayer specified in the transfer election, assuming the
intent of the rule is not to prohibit the development of a liquid
trading market or derivative activity by third parties other than the
eligible taxpayer. The commenter stated that if the intent of the rule
is to prevent the development of such a market or activities, then the
final regulations should contain clear and administrable rules based
upon the other timing rules provided in the proposed regulations
because applying normal ``benefits and burdens of ownership''
principles, as described in the Explanation of Provisions in the
preamble to the proposed regulations, to transfers of eligible credits
is not workable.
The Treasury Department and the IRS agree that it is unnecessary to
apply benefits and burdens of ownership principles to transfers of
eligible credits under section 6418, but no changes are needed to
proposed Sec. 1.6418-2(c)(2) because it does not reference those
principles. To clarify the rules, to make a transfer election, all the
requirements of Sec. 1.6418-2(b) must be satisfied. Until the
requirements are satisfied, then there is no valid transfer, no
transferee taxpayer, and the requirements of Sec. 1.6418-2(c)(2) are
not applicable. To the extent there are brokers or other taxpayers
providing liquidity, it is noteworthy that any payments received by
those taxpayers related to eligible credits will be taxable because the
provisions of section 6418 will not prevent the inclusion of gross
income for such taxpayers, or for any amounts received by an eligible
taxpayer other than amounts paid by a transferee taxpayer in
consideration for the eligible credit. Further, if brokers, or others,
are transferred a specified credit portion after satisfying the rules
of Sec. 1.6418-2(b) such that they are considered transferee
taxpayers, then the prohibition of section 6418(e)(2) and the
requirements of Sec. 1.6418-2(c)(2) will prevent a second transfer by
such transferee taxpayer.
A commenter recommended that the final regulations clarify that
agreements for the right to purchase eligible credits may be
transferred and are not subject to the rule in proposed Sec. 1.6418-
2(c)(2). Specifically, the commenter raised that the statutory language
prohibiting multiple transfers with respect to any portion of an
eligible credit does not prohibit a transferee taxpayer that entered
into an agreement with an eligible taxpayer for the right to purchase
eligible credits for a number of years from transferring that right to
another transferee taxpayer as long as the eligible credits themselves
have not been transferred to the original transferee taxpayer first.
These final regulations do not adopt a specific rule related to this
situation because it describes a transaction that is outside of section
6418. As previously described, until the requirements of a valid
transfer election are satisfied, then there is no valid transfer and no
transferee taxpayer.
Several commenters asked for clarity on when a transfer has
occurred or recommended the point at which a transfer has occurred. For
example, one commenter recommended a rule that once the amount of the
credit has been determined, the specified credit portion is considered
to have been transferred on the earliest date on which payment for
credit has been made, the last day of the eligible taxpayer's taxable
year, or (if earlier) the date the transfer election statement has been
filed. To clarify, a transfer of a specified credit portion does not
technically occur until an eligible taxpayer satisfies all the
requirements in Sec. 1.6418-2(b) to make a valid transfer election.
However, it is important to note that the technical transfer date does
not necessarily control for other purposes of section 6418. For
example, under the paid in cash rule, amounts can be paid with respect
to the specified credit portion as early as the beginning of the
taxable year in which the related eligible credit is determined.
D. Determining the Eligible Credit
Section 6418(a) states that an eligible taxpayer may elect to
transfer an eligible credit determined with respect to such taxpayer.
Proposed Sec. 1.6418-2(d) would have provided rules to clarify how an
eligible taxpayer determines an eligible credit. Under proposed Sec.
1.6418-2(d)(1), an eligible taxpayer can only transfer eligible credits
determined with respect to the eligible taxpayer. The proposed
regulations would have provided that, 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, conduct the activities giving rise to the underlying
eligible credit.
A commenter suggested that, in the absence of clear statutory
language indicating that ownership of underlying eligible credit
property or conducting activities giving rise to the underlying
eligible credit is a prerequisite to transferability, such requirements
should not be imposed under proposed Sec. 1.6418-2(d)(1). The text of
section 6418(a), which requires the eligible credit to be determined
with respect to the eligible taxpayer, and the text of the underlying
eligible credit provisions confirm the requirement that ownership of
underlying eligible credit property or conducting activities giving
rise to the underlying eligible credit is a prerequisite to
transferability. However, as discussed in part 2.A of this Summary of
Comments and Explanation of Revisions, these final regulations clarify
that the only eligible credit for which an eligible taxpayer does not
have to own an underlying eligible credit property, and instead can
merely conduct activities, is section 45X. This revision should help
clarify the ``determined with respect to'' requirements of section
6418.
A commenter noted that section 50(b)(1) limits the use of certain
eligible credits in the territories and requested that the final
regulations provide an exception to section 50(b)(1) to allow eligible
taxpayers in U.S. territories to transfer all eligible credits. Since
before the enactment of the IRA, section 50(b)(1) has limited the use
of certain credits (including ITCs, vehicle-related credits, and energy
efficiency incentives) for property used in the U.S. territories.
Section 50(b)(1) provides that no credit can be determined with respect
to any property that is used predominantly outside the United States
\1\ unless section 168(g)(4)(G) applies. Section 168(g)(4)(G) provides
an exception for any property that is owned by a domestic corporation
or by a United States citizen other than a citizen entitled to the
benefits of sections 931 or 933, and that is used predominantly in a
possession of the United States by such a corporation or such a
citizen, or by a corporation created or organized in, or under the law
of, a possession of the United States. The IRA did not amend these
provisions; instead, the IRA specifically referenced section 50(b)(1)
in section 30C and did not exclude section 48, 48C, or 48E from the
application of section 50(b)(1). Without specific language in section
6418 or in the underlying eligible credits addressing section 50(b)(1),
or other compelling evidence of Congressional intent, a special rule
turning off the application of section 50(b)(1) is not supported by the
Code. Therefore, these final regulations do not adopt this
recommendation.
---------------------------------------------------------------------------
\1\ Under section 7701(a)(9), ``[t]he term `United States' when
used in a geographical sense includes only the States and the
District of Columbia.''
---------------------------------------------------------------------------
[[Page 34780]]
E. Treatment of Payments Made in Connection With a Transfer Election
Section 6418(b)(1) through (3) provides rules related to the
treatment of payments made in connection with a transfer. Proposed
Sec. 1.6418-2(e)(1) through (4) would have provided guidance related
to these rules, including that such amounts are required to be paid in
cash, are not includable in the gross income of the eligible taxpayer
and are not deductible by the transferee taxpayer, as well as an anti-
abuse rule that included examples illustrating the anti-abuse rule.
1. Cash Requirement
Section 6418(b)(1) requires that any amount paid by a transferee
taxpayer for an eligible credit must be paid in cash. Consistent with
section 6418(b)(1), proposed Sec. 1.6418-2(e)(1) would have provided
that an amount paid by a transferee taxpayer to an eligible taxpayer
would be consideration for a transfer of a specified credit portion
only if it is paid in cash (as defined in proposed Sec. 1.6418-1(f)),
directly relates to the specified credit portion, and is not described
in proposed Sec. 1.6418-5(a)(3) (describing payments related to an
excessive credit transfer). Consistent with section 6418(b)(2),
proposed Sec. 1.6418-2(e)(2) would have provided that any amount paid
to an eligible taxpayer as consideration for a transfer of a specified
credit portion is not includible in the gross income of the eligible
taxpayer. Correspondingly and consistent with section 6418(b)(3),
proposed Sec. 1.6418-2(e)(3) would have provided that no deduction is
allowed to the transferee taxpayer for consideration that is paid as
consideration for a transfer of a specified credit portion.
2. Anti-Abuse Provision
Section 6418(h) authorizes the Secretary to issue regulations or
other guidance that may be necessary to carry out the purposes of
section 6418. To prevent transactions contrary to the purposes of
section 6418, the proposed regulations would have included an anti-
abuse provision in proposed Sec. 1.6418-2(e)(4). This rule would have
provided that 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 in which 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. For example, under the proposed rule, an amount of cash paid by a
transferee taxpayer would not be considered as paid in connection with
the transfer of a specified credit portion in proposed Sec. 1.6418-
2(e)(1) if a principal purpose of a transaction or series of
transactions was to allow an eligible taxpayer to avoid gross income.
Conversely, an amount of cash paid by a transferee taxpayer would have
been considered paid in connection with the transfer of a specified
credit portion under proposed Sec. 1.6418-2(e)(1) if a principal
purpose of a transaction or series of transactions was to increase a
Federal income tax deduction of a transferee taxpayer.
The proposed regulations included two examples in Sec. 1.6418-
2(e)(4)(ii) and (iii) to illustrate the application of the anti-abuse
rule. In the first example, to avoid recognizing gross income, the
eligible taxpayer (Taxpayer A) undercharges for services to the
transferee taxpayer (Customer B) in combination with the transfer of a
specified credit portion, and so the transaction is recharacterized.
Specifically, 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 an eligible credit. The example provides that Taxpayer
A instead charges Customer B $100 for the eligible credit and $0 for
the services. In the second example, to increase a transferee
taxpayer's (Customer D) deduction, an eligible taxpayer (Taxpayer C)
overcharges for property and undercharges for the eligible credit.
Specifically, Taxpayer C normally charges $20 for the same property
without the transfer of the eligible credit, and the average transfer
price of an eligible credit between unrelated parties is $80 paid in
cash for $100 of the eligible credit. The example provides that
Taxpayer C instead charges Customer D $80 for the property and $20 for
the eligible credit. In both examples, the proposed regulations would
have recharacterized the transactions.
A number of commenters made suggestions related to the proposed
anti-abuse rule and examples. One commenter urged the Treasury
Department and the IRS to take all possible precautionary measures to
protect taxpayer interests and prevent abuse. Another commenter, while
acknowledging that concerns raised by the anti-abuse rule and the
examples are fair and appropriate, recommended as an alternative that
the final regulations only include the general anti-abuse rule and
remove the specific rules and examples. The commenter suggested that
the IRS could rely on generally applicable principles and the anti-
abuse rule to recharacterize abusive transactions and separately issue
sub-regulatory guidance to provide safe harbors for cases in which the
anti-abuse rule will not be asserted. The commenter also suggested that
the IRS could issue further clarifying guidance if a publicly available
and readily commoditized market develops. While the commenter did not
expressly describe the specific rules it recommended be removed, the
Treasury Department and the IRS infer that the commenter was referring
to the language describing situations that had a principal purpose of
eligible taxpayers avoiding the recognition of gross income or of
transferee taxpayers increasing deductions. Other commenters, however,
recommended that the final regulations include additional specific
examples or safe harbors to determine those situations that would not
be considered abusive. In considering all of these commenters' views,
the Treasury Department and IRS have determined that taxpayers would
benefit from having fact patterns in these final regulations that are
likely to represent situations in which abuse could be present. Thus,
these final regulations adopt the anti-abuse provision of the proposed
regulations, but with certain revisions in response to commenters that
are described in the following paragraphs.
A commenter noted a discrepancy in the language of the anti-abuse
rule in proposed Sec. 1.6418-2(e)(4)(i), making it unclear whether the
standard of the anti-abuse rule was that parties to the transaction
have engaged in the transaction or a series of transactions with
``the'' or ``a'' principal purpose of tax avoidance. As noted by the
commenter, the use of ``the'' or ``a'' represent different standards.
To demonstrate the difference, the commenter compared the regulations
under section 269 of the Code (employing a ``the principal purpose''
standard) with the regulations under section 881 of the Code (section
881 regulations) (employing a ``one of the principal purposes''
standard). The proposed rule was intended to apply the anti-abuse
provision if a transaction was entered into with ``a'' principal
purpose of avoidance of tax beyond the intent of section 6418. In
response to the comment, these final regulations are
[[Page 34781]]
clarified. This ``a'' principal purpose standard is similar to other
anti-abuse standards, such as the standard in the section 881
regulations cited by the commenter or the anti-abuse rule in Sec.
1.45D-1(g) (relating to the new markets tax credit determined under
section 45D (section 45D credit)). This standard is appropriate based
on the goals of preventing fraud and improper payments and in
accordance with section 6418(h) to provide rules necessary to carry out
the purposes of section 6418.
Another commenter requested clarification on the meaning of the
phrase ``will be considered paid'' in proposed Sec. 1.6418-2(e)(4)(i),
noting that the proposed regulations would have provided that 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.'' The commenter stated, however, that the next
sentence in proposed Sec. 1.6418-2(e)(4)(i) provides: ``[c]onversely,
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 [emphasis added].'' The
commenter believed that the ``will be considered paid'' in the quoted
second sentence should read as ``will not be considered paid'' similar
to the quoted first sentence. The Treasury Department and the IRS
clarify that the proposed rule is written as intended, and no changes
to the proposed rule are made based on this comment. The quoted second
sentence is describing a situation in which a transferee taxpayer paid
less for an eligible credit and more for an item or service that
resulted in a deduction. In this scenario, it is correct that the
amount ``will be considered paid'' in connection with the transfer of
the specified credit portion, and not with respect to the purchase of
the item that was deductible.
Commenters requested clarification of the language in the examples
in proposed Sec. 1.6418-2(e)(4)(ii) and (iii) that referred to the
``the average transfer price of the eligible credit between unrelated
parties'' in determining whether the transactions are subject to
recharacterization under the proposed anti-abuse rule. Commenters
raised concerns about the availability of pricing information,
including specifically in the case of the section 45U credit. A
commenter thought that there will be insufficient publicly available
pricing information, and if the available data are limited and
incomplete, price averages will not yield reliable results. That same
commenter noted that if the IRS develops the requisite data to
determine an average transfer price for each eligible credit,
organizing such data and publishing it regularly would be
administratively burdensome. Further, commenters were concerned that
the average price would not take into account the facts and
circumstances of an arrangement, which commenters believed relevant for
determining price. The commenter recommended changing ``the average
transfer price of the eligible credit between unrelated parties'' to
``an arm's length price of the eligible credit without regard to other
commercial relationships'' could solve potential issues with the
language in the proposed regulations. The commenter stated that the
recommendation would also resolve a separate comment related to the use
of the term ``unrelated party'' in the proposed regulations by
clarifying that the intent was the price be determined without regard
to other commercial relationships.
In response, these final regulations adopt the commenter's
suggested language and revise the examples in proposed Sec. 1.6418-
2(e)(4)(ii) and (iii) accordingly. This change is made in
acknowledgment that average price data may not be currently available,
may take more time to develop, and will most likely be dependent on the
facts and circumstances of the transaction (for example, the risk
profile of the project). The language suggested by the commenter will
still allow average transfer price data to be used to the extent it is
relevant. The intent of using an average transfer price was to suggest
an objective criterion for evaluating a transaction, along with using
the pricing information of the eligible taxpayer in the determination.
While the language ``an arm's length price of the eligible credit
without regard to other commercial relationships'' has the potential to
add more subjectivity to the determination, concerns with respect to
determining the average transfer price of a certain eligible credit,
including those with limited markets, outweigh any benefit with respect
to retaining a potentially more objective standard.
Another commenter requested clarification on whether a transfer of
a credit for cash consideration could ever be fully respected in cases
in which the cash consideration for such credit transfer is greater or
less than the average transfer price of the eligible credit between
unrelated parties. Any deviation from an average transfer price of an
eligible credit should not necessarily require recharacterization under
the anti-abuse rule; however, the revisions made to the examples in
proposed Sec. 1.6418-2(e)(4)(ii) and (iii) should help clarify this
issue. The intent of the anti-abuse rule is to allow recharacterization
if the price paid is not economically supportable and is unreasonable
based on the facts and circumstances of the transaction.
Another commenter asked that the final regulations include
considerations of whether an eligible taxpayer is viewed as
transferring credits at a discount without avoiding tax liabilities.
For example, if an eligible taxpayer is willing to transfer eligible
credits at a discount and receive income from product sales or services
that is in accordance with such eligible taxpayer's acceptable
investment rate of return, the commenter wanted to know whether the
anti-abuse rule would be applicable. In the commenter's hypothetical,
the eligible taxpayer appears to be decreasing the price of eligible
credits to encourage customers to purchase products or services but not
making a corresponding increase to the price of its products or
services, which could avoid recognizing gross income. However, the
facts and circumstances would dictate whether the eligible taxpayer and
the transferee taxpayer were engaging in the transaction with a
principal purpose of avoiding any Federal income tax liability beyond
the intent of section 6418.
The Treasury Department and the IRS have concluded that it is
premature to adopt any safe harbor or a list of abuse examples in these
final regulations in Sec. 1.6418-2(e)(4) but will continue to study
transactions between eligible taxpayers and transferee taxpayers to
determine if it is appropriate to adopt an objective safe harbor or
clarify other examples of abusive practices.
F. Transferee Taxpayer's Treatment of Eligible Credit
1. Taxable Year
Pursuant to section 6418(d), a transferee taxpayer takes the
transferred eligible credit into account in its first taxable year
ending with, or after, the eligible taxpayer's taxable year with
respect to which the transferred eligible credit was determined.
Proposed Sec. 1.6418-2(f)(1) would have adopted this rule and further
explained that to the extent the taxable years of an eligible taxpayer
and a transferee taxpayer end on the same date, the
[[Page 34782]]
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 first taxable year that ends after the taxable year of the
eligible taxpayer.
Commenters requested clarification on whether a taxpayer that has a
52-53-week taxable year can rely on Sec. 1.441-2(c)(1) to allow its
taxable year that otherwise ends the last Saturday in December to be
treated as ending on December 31. Otherwise, a transferee taxpayer with
a 52-53-week taxable year would have to wait until the following
taxable year to take into account an eligible credit that was
transferred by an eligible taxpayer with a calendar year. A similar
delay could result if the eligible taxpayer had a 52-53-week taxable
year ending in January and the transferee taxpayer has a taxable year
ending on December 31. Section 1.441-2(c)(1) provides, in relevant
part, that for purposes of determining the effective date (for example,
of legislative, regulatory, or administrative changes) or the
applicability of any provision of the internal revenue laws that is
expressed in terms of taxable years beginning, including, or ending
with reference to the first or last day of a specified calendar month,
a 52-53-week taxable year is deemed to begin on the first day of the
calendar month nearest to the first day of the 52-53-week taxable year,
and is deemed to end or close on the last day of the calendar month
nearest to the last day of the 52-53-week taxable year, as the case may
be. While the fact patterns from commenters do not fall within the
explicit language of Sec. 1.441-2(c)(1), the Treasury Department and
the IRS conclude it is consistent to adopt a similar rule with respect
to taxable year ends for purposes of section 6418(d). Thus, these final
regulations include a rule in Sec. 1.6418-2(f)(1)(ii) providing that,
for purposes of determining the taxable year in which a credit is taken
into account under section 6418(d) and Sec. 1.6418-2(f)(1)(i), a 52-
53-week taxable year of an eligible taxpayer and transferee taxpayer is
deemed to end on or close on the last day of the calendar month nearest
to the last day of the 52-53-week taxable year, as the case may be.
Thus, in the fact patterns described by commenters, the transferee
taxpayer and the eligible taxpayer would have the same year end, and
the transferee taxpayer would not have to wait until the following
year-end to take the eligible credit into account.
Another commenter asked when a transferee taxpayer with a taxable
year that is a calendar year can take into account an eligible credit
transferred from an eligible taxpayer that has a fiscal year ending
June 30, if the eligible taxpayer's project was placed in service on
November 1, 2023, and the eligible taxpayer proposes to transfer the
eligible credit to the transferee taxpayer on November 15, 2023 (and
assuming all other requirements of section 6418 were met). It appears
this comment is seeking clarity on whether it is possible for an
eligible taxpayer to determine an eligible credit during its taxable
year beginning July 1, 2023, and ending June 30, 2024, and transfer the
eligible credit in November 2023 to a transferee taxpayer with a
taxable year ending December 31, 2023, for the transferee taxpayer to
use in calculating its 2023 tax liability. Section 6418(d)(1) requires
that a transferee taxpayer take a specified credit portion into account
in a taxable year ending with or after the taxable year of the eligible
taxpayer to which the eligible credit was determined. In this fact
pattern, the transferee taxpayer's taxable year ends after the eligible
taxpayer's taxable year. The transferee taxpayer cannot take into
account the eligible credit until its first taxable year ending after
June 30, 2024, meaning that the transferee taxpayer would have to wait
until it filed its 2024 tax return (not considering whether the
transferee taxpayer was able to use the eligible credit against its
estimated tax payments as described in part II.F.5 of this Summary of
Comments and Explanation of Revisions). The eligible taxpayer's taxable
year end of June 30, 2023, does not impact this analysis, as there was
no eligible credit determined with respect to the eligible taxpayer in
that taxable year. Further, even if a credit was determined in the
taxable year ending June 30, 2023, because section 6418 only applies to
taxable years beginning after December 31, 2022, no eligible credits
generated in such year are eligible to be transferred.
2. No Gross Income for a Transferee Taxpayer Upon Claiming a
Transferred Specified Credit Portion
Proposed Sec. 1.6418-2(f)(2) would have provided that a transferee
taxpayer does not have gross income upon 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.
A commenter suggested that the proposed rule conflicted with Palmer
v. Commissioner, 302 U.S. 63 (1937), which held that the purpose of a
bargain purchase determines its tax treatment; that is, if it is
intended as compensation, then it is so treated for Federal tax
purposes. Based on the case, the commenter thought that it is not
possible to determine that a bargain purchase of a tax credit is not
gross income to the purchaser, as the proposed regulations provided,
without examining the facts and circumstances surrounding the
transaction.
Proposed Sec. 1.6418-2(f)(2) does not conflict with Palmer. The
proposed rule presumes that the eligible taxpayer and the transferee
taxpayer negotiated the consideration paid for the specified credit
portion at arm's length and that the difference between the specified
credit portion and the consideration paid for the credit (the
``discount'') reflects the transferee taxpayer's assumption of the risk
of an excess credit transfer or recapture event. The proposed rule does
not preclude the IRS from parsing the net consideration paid for the
specified credit portion and analyzing whether the net consideration
reflects a reduction due to an amount separately owed by the transferor
to the transferee due to the receipt of services or property from the
transferee. In such situation, the proposed rule does not preclude the
IRS from asserting that a portion of the discount is income to the
transferee taxpayer under Palmer or the anti-abuse rule in Sec.
1.6418-2(e)(4) if a portion of the discount, in fact, constitutes
compensation to the transferee taxpayer under section 61. Section
6418(a) is unambiguous that the transferee taxpayer is treated as the
eligible taxpayer for purposes of the Code. Because the eligible
taxpayer does not recognize gross income from generating or claiming a
transferred specified credit portion under the Code, the Treasury
Department and the IRS interpret section 6418(a) to provide the
transferee taxpayer with the same treatment upon claiming a transferred
specified credit portion acquired at a discount. Section 6418(a) is
also unambiguous that the income exclusion is limited to the claiming
of the eligible credit and does not cover compensation paid to the
transferee taxpayer.
For these reasons, these final regulations adopt proposed Sec.
1.6418-2(f)(2) without substantive change.
[[Page 34783]]
3. Transferee Taxpayer Treated as the Eligible Taxpayer
Consistent with the language in section 6418(a), proposed Sec.
1.6418-2(f)(3)(i) would have provided that 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.
Proposed Sec. 1.6418-2(f)(3)(i) further explained that 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 sections 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 sections 38 or 469, as
applicable.
a. Passive Credit Rules Generally
Proposed Sec. 1.6418-2(f)(3)(ii) provided a more specific rule
regarding application of section 469 to a transferee taxpayer. This
proposed rule provided that 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
(passive credit rules).
Many comments were received regarding the application of section
469 to transferred specified credit portions. One commenter supported
applying the passive credit rules to transferee taxpayers and believed
that a more restrictive rule would better prevent potential fraud and
abuse. Similarly, another commenter raised that allowing individuals to
be credit purchasers raises important potential concerns about fraud
and abuse since individuals, particularly those who are less affluent,
may have less ability to perform due diligence on the transferred
eligible credits and may become targets of fraudulent schemes. Most
commenters, however, asserted that the passive credit rules should not
apply to transferee taxpayers or that the rules should only apply in
limited circumstances.
Some commenters argued that applying the rules will limit the
market of potential purchasers of eligible credits to corporate
entities with large tax liabilities and thus, exclude other taxpayers
as potential investors. Other commenters contended that if the passive
credit rules did not apply to transferee taxpayers, participation of
individuals could materially increase, which would strengthen the
transferability market and support the IRA's renewable energy and job
creation goals. One commenter supported providing a carveout from the
application of the passive credit rules for projects that generate less
than 5 megawatts of energy. A few commenters requested that if the
application of the passive credit rules remains, the Treasury
Department and the IRS should allow for some amount of non-passive
income tax liability flowing from operating S corporations and limited
liability companies to be eligible to be offset by transferred eligible
credits.
Many commenters addressed the rule in proposed Sec. 1.6418-
2(f)(3)(ii) that would treat a specified credit portion transferred to
a transferee taxpayer as determined in connection with the conduct of a
trade or business. One commenter generally supported the position that
an eligible credit is earned in connection with the conduct of a trade
or business, as that reflects how an eligible credit would arise. Other
commenters, however, contended that treating transferred specified
credit portions as earned in connection with a trade or business is
inconsistent with the language in section 6418(a), which states that
the transferee taxpayer is treated as the taxpayer with respect to a
transferred credit. Some commenters stated that the language in section
6418(a) should be read as only transferring the rights of the credit to
the transferee rather than subjecting the transferee to the passive
credit rules. Another commenter argued that section 469 cannot apply to
an activity that is not owned directly, or indirectly, by the taxpayer.
A few commenters urged that instead of treating transferred specified
credit portions as determined in connection with the conduct of a trade
or business, it would be appropriate to treat transferee taxpayers as
engaged in an investment activity and specified credit portions as
determined in connection with such investment activity. As support for
this position, these commenters cited Rev. Rul. 2010-16, 2010-26 I.R.B.
769, which addresses the application of the passive credit rules to
section 45D credits earned through certain factual situations. Although
unclear, another commenter appeared to assert that a transferred
specified credit portion should be treated as a capital asset under
section 1221 to a transferee taxpayer and that Palmer v. Commissioner,
supra, is misapplied.
The language in section 6418 is most straightforwardly understood
to not support disregarding the passive credit rules for transferred
specified credit portions or applying the rules in a different manner
than they apply to other general business credits arising in a trade or
business. In enacting the novel credit delivery mechanisms of sections
6417 and 6418 as part of the IRA, Congress considered the application
of the rules governing the determination and the utilization of tax
credits. In cases in which Congress desired to alter the application of
certain rules, they provided as such. For example, Congress generally
turned off section 38(c) and sections 50(b)(3) and (4)(A)(i) in the
case of elective pay under section 6417. Like section 38(c), the
application of section 469 can materially affect whether a taxpayer can
use tax credits to offset its tax liability. There is no carveout for
section 469 in section 6418. Instead, section 469 provides in relevant
part that a credit is subject to the passive credit rules if the credit
arises in the conduct of a trade or business in which the taxpayer does
not materially participate in the year to which it is attributable, and
the credit is a general business credit under section 38. All of the
eligible credits listed in section 6418(d) arise in the conduct of a
trade or business and are general business credits under section 38. As
a result, section 469 applies to the use of such eligible credits
unless Congress provides otherwise, and commenters did not point to
strong statutory or other evidence that Congress intended a different
result. Moreover, any differences in the application of the passive
credit rules among taxpayers is a result of section 469(a) and not the
result of section 6418 or the proposed regulations.
Also, the application of section 469 to a transferee taxpayer is
not inconsistent with the language in section 6418(a) that provides a
transferee taxpayer ``shall be treated as the taxpayer'' for purposes
of the Code with respect to a transferred credit. Absent section 6418,
any taxpayer that has determined a general business credit under
section 38 in the conduct of a trade or business is subject to section
469. While section 469 may not apply, for example, because a taxpayer
is not a person described in section 469(a)(2), or may not result in a
passive activity credit because a taxpayer materially participated in
the trade or business or has sufficient passive activity income, all
taxpayers have to consider whether section 469 is applicable to the use
of any general
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business credit arising in the conduct of a trade or business. Thus, it
is not inconsistent to apply section 469 to a transferee taxpayer that
is treated as the taxpayer for purposes of the Code with respect to a
transferred credit. Moreover, an eligible credit generated through the
conduct of a trade or business and transferred does not lose its status
as a section 38 credit or its status of having arisen in a trade or
business solely because the credit is transferred. 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. Lastly, the
Treasury Department and the IRS agree with commenters that not applying
the passive credit rules to transferred specified credit portions could
increase the risk of fraud and abuse.
It is also inappropriate to treat transferred specified credit
portions as determined in connection with the conduct of an investment
activity or as a capital asset. Specifically, the facts and analysis in
Rev. Rul. 2010-16 are distinguishable from transfers of specified
credit portions under section 6418. Rev. Rul. 2010-16 held that if an
acquisition, either directly or indirectly through a partnership, of a
qualified equity investment in a community development entity (CDE) is
not in connection with the conduct of a trade or business (or in
anticipation of a trade or business), the section 45D credit will not
be a passive activity credit under section 469. The determination of a
section 45D credit does not require the conduct of a trade or business.
Instead, a section 45D credit is determined based on the percentage of
the amount paid to a CDE for a qualified equity investment at original
issue and can be determined through a mere investment activity. Under
the facts of Rev. Rul. 2010-16, the section 45D credit was not a
passive activity credit under section 469 to either the individual or
the partnership investors because it did not arise in the conduct of a
trade or business. Conversely, eligible credits under section 6418 can
only be determined (or arise) in connection with the conduct of a trade
or business. Moreover, eligible credits are not determined through (or
do not arise in connection with) an investment activity by a transferee
taxpayer. Instead, all eligible credits are determined with respect to
(or arise in connection with) the conduct of a trade or business owned
by an eligible taxpayer. Eligible credits are transferred after they
are determined. Thus, they cannot be redetermined in connection with an
investment activity by a transferee. For these reasons, the final
regulations do not adopt commenters' suggestions to not apply the
passive credit rules to transferred specified credit portions or to
apply the passive credit rules in a different manner than as provided
in the proposed regulations. For a discussion of the application of
Palmer v. Commissioner, supra, to section 6418, see part II.F.2 of this
Summary of Comments and Explanation of Revisions.
A comment was received stating that the proposed regulations were
silent on the rule of section 48(a)(3)(C) requiring the property to be
used in a trade or business or held for the production of income. Any
rules applicable to the underlying eligible credits are beyond the
scope of the final regulations; however, the Treasury Department and
the IRS note that any rules that relate to the determination of the
eligible credit apply to the eligible taxpayer as described in proposed
Sec. 1.6418-2(d).
b. Material Participation and Grouping Rules
Proposed Sec. 1.6418-2(f)(3)(ii) provided that 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))
(material participation rules). Accordingly, a transferee taxpayer will
not ordinarily materially participate within the meaning of section
469(h) in order to be treated as participating in the activity.
Proposed Sec. 1.6418-2(f)(3)(ii) also provided that a transferee
taxpayer cannot change the characterization of its 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) (grouping rules).
Generally, Sec. 1.469-4(c) allows a taxpayer to satisfy the material
participation standard for a specific activity by virtue of having
materially participated in a separate but related trade or business.
Comments were received in connection with the application of the
material participation and grouping rules under section 469 to
transferred specified credit portions. One commenter supported treating
a transferee as not materially participating in the trade or business
that generates an eligible credit if they did not actually do so. Other
commenters asserted that the final rules should clarify that a
transferee taxpayer that actually owns an interest in an eligible
taxpayer, and materially participates in the credit generating
activity, is treated as owning an interest in the eligible taxpayer's
trade or business at the time the work was done. One commenter
requested that transferee taxpayers that conduct an activity directly
relating to and necessary for the generation of an eligible credit (but
do not own an interest in the eligible taxpayer's credit generating
trade or business) be treated as materially participating in the credit
generating activity for purposes of section 469. Another commenter
supported an approach that would permit taxpayers subject to the
passive credit rules that satisfy the material participation
requirement with respect to a specific activity (but do not own an
interest in the activity that generates to the specified credit
portion) to treat purchased credits from that activity as nonpassive.
The same commenter raised that the application of the grouping rules
under Sec. 1.469-4(c) could be used to expand the potential purchasers
of credits but acknowledged that this approach would be difficult to
administer. Other commenters suggested that the language in section
6418(a) treating the transferee taxpayer as the taxpayer for purposes
of the Code with respect to the transferred specified credit portion
supports attributing the activities or all characteristics of an
eligible taxpayer to a transferee taxpayer for purposes of applying the
passive credit rules.
The Treasury Department and the IRS agree that in the limited
circumstance of a transferee taxpayer who materially participates in an
eligible credit generating activity within the meaning of section
469(h) in which the transferee taxpayer owns an interest at the time
the work is done, the transferee taxpayer should be permitted to
purchase eligible credits generated from the activity (assuming the
transferee taxpayer is not related to the eligible taxpayer within the
meaning of section 267(b) or section 707(b)(1)) and treat those
purchased credits as not arising in connection with a passive activity.
It is not workable to expand the material participation rules under
section 469 for purposes of transferred specified credit portions in a
meaningful manner without substantially increasing administrative
burdens. For example, such a view would presumably require ownership of
the underlying eligible credit property to be attributed to a
transferee taxpayer. This formulation would be impracticable for
purposes of section 50(c) and section 6418(g)(3)(A), which require an
eligible taxpayer to make basis adjustments for transferred ITCs.
Commenters did not address how to overcome the technical and
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administrative complexities in attributing the activities or attributes
of an eligible taxpayer to a transferee taxpayer for purposes of
applying the passive credit rules. Additionally, allowing a transferee
taxpayer to change the characterization of an eligible credit based on
grouping with its own activities is inconsistent with the grouping
rules under Sec. 1.469-4(c) and would create significant
administrative complexity. As such, these final regulations clarify
that a transferee taxpayer who directly owns an interest in an eligible
taxpayer's trade or business at the time the work was done (as required
for the material participation rules), is not deemed to fail the
requirements of section 469(h). However, these final regulations do not
adopt commenters' suggestions to expand the material participation or
grouping rules for purposes of applying the passive credit rules to
transferred specified credit portions.
Lastly, commenters wanted confirmation that an individual
transferee taxpayer can use eligible credits acquired as a result of a
transfer election to offset passive income tax liability if the
approach from the proposed regulations is adopted. The Treasury
Department and the IRS confirm that if an individual transferee
taxpayer does not materially participate (within the meaning of
Sec. Sec. 1.469-5 and 1.469-5T) in the activity that generates a
specified credit portion, a transferred specified credit portion will
be treated to the transferee taxpayer as arising in connection with a
passive activity.
4. Transferee Taxpayer Requirements To 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 rules on how a transferee taxpayer can take a transferred
specified credit portion into account. To that end, proposed Sec.
1.6418-2(f)(4) would have required (1) 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; (2) the transfer election statement described earlier
in this preamble attached to the return; and (3) any other information
related to the transfer election specified in guidance. Because no
comments were received on proposed Sec. 1.6418-2(f)(4), these final
regulations adopt this provision without change.
5. Estimated Tax Payments
The preamble to the proposed regulations explained that a
transferee taxpayer could take into account a specified credit portion
that it has purchased, or intends to purchase, to calculate its
estimated tax payments, though the transferee taxpayer remains liable
for any additions to tax in accordance with sections 6654 and 6655 of
the Code to the extent the transferee taxpayer has an underpayment of
estimated tax.
Commenters generally acknowledged that the preamble to the proposed
regulations provided that transferred credits could be taken into
account for purposes of calculating estimated tax but asked that the
final regulations include a specific rule on how transferred credits
should be taken into account. Commenters also offered particular
circumstances for the Treasury Department and the IRS to consider in
formulating a potential rule regarding transferred credits and
estimated tax. One commenter requested that credits purchased in the
first quarter could be applied against the transferee taxpayer's first
quarter estimated tax payment if the taxpayer relied on a ``prior year
safe harbor'' under section 6655(d)(2)(B). Another commenter requested
clarification that the transferred credits should apply to a
transferee's tax liability when the credit is determined. Another
commenter requested that the final regulations should permit a
transferee taxpayer to make an election to take into account the
specified credit portion in the first taxable year in which such credit
was determined by the eligible taxpayer.
The addition of a specific rule on estimated tax payments is
unnecessary. The appropriateness of a transferee taxpayer taking the
eligible credit into account for purposes of determining its quarterly
estimated tax liability depends on the facts and circumstances.
Nevertheless, as a clarification, because section 6418 generally
contemplates a transferee taxpayer effectively stepping in the shoes of
the eligible taxpayer from whom the transferee taxpayer was transferred
the eligible credit, it follows that a transferee taxpayer can take
into account the eligible credit for purposes of determining its
quarterly estimated tax liability no earlier than an eligible taxpayer
would. Further, if a transferee taxpayer is required to take a
transferred eligible credit into account in a taxable year that has not
yet begun because of the application of section 6418(d) and Sec.
1.6418-2(f)(1), then a transferee taxpayer cannot take the eligible
credit into account for purposes of determining quarterly estimated tax
liability until after the start of that later year. As noted in the
preamble to the proposed regulations and confirmed in this part II.F.5
of the Summary of Comments and Explanation of Revisions, 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.
For example, if a calendar year eligible taxpayer enters into an
agreement with a calendar year transferee taxpayer during calendar year
2024 to transfer an eligible credit, and such credit is determined with
respect to the eligible taxpayer in calendar year 2024, then assuming a
timely and complete transfer election is made, the transferee taxpayer
can take the transferred credit into account when calculating the
required annual payment and quarterly estimated tax installments for
calendar year 2024. The transferee taxpayer cannot treat the
transferred credit as a payment of estimated tax. If any portion of the
eligible credit that is ultimately transferred to a transferee taxpayer
under section 6418(a) is subsequently adjusted to an amount less than
what was agreed upon by the eligible taxpayer and the transferee
taxpayer in calendar year 2024, the transferee taxpayer may be liable
for any additions to tax under sections 6654 or 6655, given the reduced
credit amount being transferred.
Commenters requested clarification of the phrase ``intends to
purchase'' as used in the preamble to the proposed regulations. The
phrase captures a situation in which the taxpayer plans to complete a
transaction that meets the requirements of proposed Sec. 1.6418-2(b)
so that the taxpayer would qualify as a transferee taxpayer with
respect to a specified credit portion, but has not yet done so. This
phrase illustrates that all the requirements of proposed Sec. 1.6418-
2(b) do not have to be met for a transferee taxpayer to take the
expected eligible credit into account in its estimated tax
calculations, though the transferee taxpayer remains liable for any
additions to tax in accordance with sections 6654 and 6655 of the Code
to the extent the transferee taxpayer has an underpayment of estimated
tax if the eligible credit is not obtained as expected.
6. Chaining
Multiple commenters responding to the section 6418 proposed
regulations, as well as the section 6417 proposed regulations,
requested that a transferee
[[Page 34786]]
taxpayer that is also an applicable entity under section 6417 be
permitted to make an elective payment election under section 6417(a)
for a credit that the transferee taxpayer purchased from an eligible
taxpayer under section 6418(a) (referred to in the section 6417
regulations as ``chaining''). These comments are outside of the scope
of these final regulations because they ask a question that can only be
resolved under section 6417. As explained in the preamble to TD 9988,
the Treasury Department and the IRS note that Sec. 1.6417-2(c)(4)
specifically does not adopt commenters' recommendations. However, the
Treasury Department and the IRS also published Notice 2024-27, 2024-12
IRB 715, which requests comments on situations in which a section
6417(a) election could be made for credits purchased in transfers under
section 6418(a). Written comments submitted pursuant to procedures
described in Notice 2024-27 are due by December 1, 2024.
III. Additional Rules for Partnerships and S Corporations
Section 6418(c)(2) provides that, in the case of any facility or
property held directly by a partnership or an S corporation, any
election under section 6418(a) is made by such partnership or S
corporation. Section 6418(c)(1)(A) and (B) describes the treatment of a
transfer election made by a partnership or an S corporation, and
proposed Sec. 1.6418-3 would have provided additional rules for
partnerships or S corporations that are eligible taxpayers or
transferee taxpayers.
A. Rules Applicable to Both Partnerships and S Corporations
Proposed Sec. 1.6418-3(a)(1) through (6) provided certain rules
that are applicable to both partnerships and S corporations. Proposed
Sec. 1.6418-3(a)(1) provided generally 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. Proposed Sec. 1.6418-3(a)(2) provided that in the case of any
specified credit portion determined with respect to any eligible credit
property held directly by a partnership or an 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 proposed Sec. 1.6418-3(b)(1) and (2).
Proposed Sec. 1.6418-3(a)(3) clarified that in the case of an eligible
credit property held directly by a partnership or an S corporation, no
transfer election by any partner or S corporation shareholder is
allowed. Proposed Sec. 1.6418-3(a)(4) clarified 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. Proposed Sec. 1.6418-
3(a)(5) provided 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). Additionally,
the proposed regulations provided that 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). Lastly, proposed Sec. 1.6418-3(a)(6)(i) provided
that the disposition of a partner's interest under Sec. 1.47-6(a)(2)
or the disposition of an S corporation shareholder's interest under
Sec. 1.47-4(a)(2) in a transferor partnership or an S corporation,
respectively, does not result in recapture under section 6418(g)(3)(B)
to which a transferee taxpayer is liable. Likewise, proposed Sec.
1.6418-3(a)(6)(ii) provided that 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 for purposes of section
6418(g)(3)(B). That is, only the applicable partner in the transferor
partnership or shareholder in the transferor S corporation is liable
for recapture in such a circumstance. As such, notification by the
transferor partnership or transferor S corporation to the transferee
taxpayer of a section 49 recapture event is not required. Because there
were no comments related to the provisions described in this paragraph,
the proposed regulations are adopted without change in these final
regulations.
B. Rules Solely Applicable to Transferor and Transferee Partnerships
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. Proposed Sec.
1.6418-3(b)(1) provided that a transferor partnership must generally
determine a partner's distributive share of any tax exempt income
resulting from the receipt of consideration by a transferor partnership
for a transferred specified credit portion 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). The proposed
regulations noted that 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). The proposed regulations further clarified that any tax
exempt income resulting from the receipt of consideration 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 (such as, for investment credit property,
the date the property is placed in service).
Proposed Sec. 1.6418-3(b)(2) provided a special rule for
allocations of tax exempt income and eligible credits resulting from a
transfer of a specified credit portion of less than all eligible
credits determined with respect to an eligible credit property held by
a transferor partnership. This special rule permitted tax exempt income
resulting from the receipt of consideration 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, the
proposed regulations provided that 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
[[Page 34787]]
partnership would 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 would be permitted to 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 did 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) would be 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 would
be 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 would be 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 provided
examples of this rule.
A commenter generally supported the partnership allocation rules in
the proposed regulations, although there was a non-specific question
related to the administrability of the proposed rules in the tax credit
industry. The Treasury Department and the IRS appreciate that the
partnership allocation rules under section 6418 could be considered
complex and difficult to administer, but any such complexity of those
rules is warranted given the flexibility they provide to taxpayers
operating through transferor partnerships.
A commenter requested clarifying language and an example showing
that the varying annual election and separate determination of each
partner's eligible credit amount to be transferred under section 6418
and the portion of each partner's eligible credit amount to be retained
and allocated to such partner and related allocations of tax exempt
income can be made or revised at any time during the taxable year the
eligible credit is generated and the following taxable year up to the
due date of the partnership return for the taxable year under sections
706 and 761. Section 761(c) provides that for purposes of subchapter K
of chapter 1 of the Code, a partnership agreement includes any
modifications of the agreement made on or before the due date (not
including extensions) of the partnership return for the taxable year,
which are agreed to by all the partners or are adopted in accordance
with the provisions of the agreement. The effect of section 761(c) is
that a partnership is allowed to change its partners' distributive
shares of income, gain, loss, deductions or credits for a taxable year
(assuming such allocations are compliant with section 704(b)) up until
the due date (not including extensions) for the partnership's tax
return for such year. Proposed Sec. 1.6418-3(b)(2)(ii) would have
provided that a transferor partnership may determine, in any 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. Assuming the agreement between the
partners as to 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, is properly
treated as part of the partnership's agreement, such amounts can be
made or revised under section 761(c) up until the due date (not
including extensions) of the partnership's annual tax return. As such,
there would already be considerable flexibility under the proposed
regulations, and that additional language or an example is unnecessary
to address this commenter's request.
Proposed Sec. 1.6418-3(b)(4)(i) would have provided that 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. The proposed regulations also would have provided
that while a transferee partnership is subject to the no additional
transfer rule, 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. Proposed
Sec. 1.6418-3(b)(4)(ii) would have provided that 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). Proposed Sec. 1.6418-3(b)(4)(iii) would have provided
that 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. Under the proposed regulations,
each partner's distributive share of the section 705(a)(2)(B)
expenditures used to fund the purchase of any transferred specified
credit portion would be determined by the partnership agreement. Or, if
the partnership agreement did not provide for the allocation of such
nondeductible expenditures, then each partner's distributive share
would be 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), the proposed regulations in proposed Sec.
1.6418-3(b)(4)(iv) would have provided that a transferred specified
credit portion purchased by a transferee partnership is treated as an
extraordinary item under Sec. 1.706-4(e) (and would have included a
proposed addition to Sec. 1.706-4(e) confirming a transferred
specified credit portion is an extraordinary item). The proposed
regulations further would have provided 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. The proposed regulations also
would have provided that 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.
Lastly, proposed Sec. 1.6418-3(b)(4)(v) would have provided that
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 proposed regulations
would have provided that an upper-tier partnership must determine each
partner's distributive share of the transferred specified credit
portion in accordance
[[Page 34788]]
with rules in proposed Sec. 1.6418-3(b)(4)(iii) and (iv) and must
report the credits to its partners in accordance with guidance.
A commenter recommended that the final regulations avoid excluding
partners from credit allocations due to the extraordinary items rule of
proposed Sec. 1.6418-3(b)(4)(iv) if a new partner is admitted to the
partnership after the transferee taxpayer signs a credit purchase
agreement but before any cash payments have been made. The commenter's
concern was with respect to the application of proposed Sec. 1.6418-
1(f)(3) to a partnership. This provision stated that the term ``paid in
cash'' means a payment in U.S. dollars and ``[m]ay 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.'' The commenter suggested
that the clause in the previous sentence could be interpreted to mean
that the term ``paid in cash'' means the advance contractual commitment
itself, rather than the payment pursuant to the advance commitment and
suggested some changes to proposed Sec. 1.6418-1(f)(3). The paid in
cash definition in proposed Sec. 1.6418-1(f)(3) confirms that advanced
commitments are permissible and do not violate the paid in cash
requirement. As the commenter hypothesizes, this provision is intended
to clarify that payments in U.S. dollars made at the proper time can
qualify even if the payments are made pursuant to advance contractual
commitments. Likewise, the Treasury Department and the IRS confirm that
an advanced commitment is not by itself considered a cash payment.
Thus, if a partnership has not yet made any cash payments pursuant to a
commitment to purchase eligible credits, an extraordinary item has not
yet arisen.
A commenter requested additional guidance in the form of examples
that illustrate the transfer of partnership interests. The Treasury
Department and the IRS have considered these general requests and have
determined such additional guidance is not necessary. The final
regulations already provide examples demonstrating the rules applicable
to a transferee partnership and its partners under section 6418,
including rules applicable to an upper-tier partnership that is a
direct or indirect partner in a transferee partnership. However, the
final regulations clarify that an upper-tier partnership's distributive
share of a transferred specified credit portion is treated as an
extraordinary item to the upper-tier partnership. As a result, a
transferred specified credit portion must be allocated among the
partners of an upper-tier partnership as of the time the transfer of
the specified credit portion is treated as occurring to the transferee
partnership in accordance with Sec. 1.6418-3(b)(4)(iv) and Sec.
1.706-4(e)(1) and (e)(2)(ix). This is the case regardless of whether
the transferee partnership and the upper-tier partnership have
different taxable years under section 706(b).
A commenter recommended updates to Sec. 1.704-1(b)(3) to provide
that the special allocations of tax exempt income and non-deductible
expenses in the manner contemplated by the proposed regulations will be
treated as having been made in accordance with the partners' interests
in the partnership. The Treasury Department and the IRS have considered
whether updates to Sec. 1.704-1(b)(3) are necessary and have
determined that updates to those regulations are outside the scope of
final regulations for section 6418.
C. Rules Solely Applicable to Transferor and Transferee S Corporations
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. Proposed Sec. 1.6418-3(c)(1) would have provided that 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. The proposed regulations further would
have provided that any tax exempt income resulting from the receipt of
consideration by a transferor S corporation for a transferred specified
credit portion is treated as received or accrued, including for
purposes of section 1366 of the Code, 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).
Proposed Sec. 1.6418-3(c)(2)(i) would have provided that 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. The proposed regulations also would have provided
that while a transferee S corporation is subject to the no additional
transfer rule, 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. Proposed Sec. 1.6418-
3(c)(2)(ii) would have provided that 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. Proposed Sec. 1.6418-3(c)(2)(iii) would have provided that 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. The proposed regulations
further would have provided that if a 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 section 1378(b)) or the taxable year elected under
section 444 that the transferee S corporation first makes a cash
payment as consideration to the eligible taxpayer for the specified
credit portion. The proposed regulations also would have provided that
if a 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. Because there were no comments related to the provisions
described in this paragraph, the proposed regulations are adopted
without change in these final regulations.
D. Elections for Transferor Partnerships and Transferor S Corporations
Proposed Sec. 1.6418-3(d) would have provided specific rules
relating to elections for transferor partnerships or transferor S
corporations. Proposed Sec. 1.6418-3(d)(1) would have provided that 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. Proposed Sec. 1.6418-3(d)(2)
would have provided that a transfer election for a specified credit
portion must be made in the manner provided in proposed Sec. 1.6418-
2(b)(1) through (3), including that all documents required in proposed
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
specified
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credit portion was determined. The proposed regulations further would
have provided that 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. Additionally, the proposed
regulations would have provided that no transfer election may be made
or revised on an amended return or by filing an AAR and that no 9100
relief would be available for a transfer election that is not timely
filed. Lastly, proposed Sec. 1.6418-3(d)(3) would have provided that a
transfer election by a partnership or an S corporation is irrevocable.
As described in greater detail in part II.B.4 of this Summary of
Comments and Explanation of Revisions, these final regulations modify
proposed Sec. 1.6418-2(b)(4) to permit an automatic six-month
extension of time under Sec. 301.9100-2(b) to make the election
prescribed in section 6418(e)(1). Consistent with that modification,
these final regulations also modify proposed Sec. 1.6418-3(d)(2) to
provide for late-election relief under Sec. 301.9100-2(b) for a
partnership or an S corporation making a transfer election and permit,
based on some commenters' requests, that a partnership or an S
corporation, much like any other eligible taxpayer, may correct a
numerical error with respect to a properly claimed transfer election on
an amended return or AAR. The partnership`s or S corporation's original
return must have been signed under penalties of perjury and must have
contained all of the information, including a registration number,
required by these final regulations. The final regulations clarify that
in order to correct an error on an amended return or AAR, a partnership
or an S corporation must have made an error in the information included
on the original return such that there is a substantive item to
correct. A partnership or an S corporation cannot correct a blank item
or an item that is described as being ``available upon request.''
IV. Additional Information and Registration
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. Proposed Sec. 1.6418-4 would have
addressed these requirements by adding a pre-filing registration
process, and Sec. 1.6418-4T, issued contemporaneously, put those rules
into effect for taxable years ending on or after June 21, 2023. Because
the temporary regulations are removed, this part IV discusses the
proposed regulations rather than the temporary regulations, which are
identical.
Proposed Sec. 1.6418-4(a)-(c) would have provided the mandatory
pre-filing registration process that, except as provided in guidance,
an eligible taxpayer would be required to complete as a condition of,
and prior to, the transfer of an eligible credit under proposed Sec.
1.6418-2 or Sec. 1.6418-3.
Proposed Sec. 1.6418-4(a) would have provided an overview of the
pre-filing registration process. Proposed Sec. 1.6418-4(b) would have
included the pre-filing registration requirements, including: (1)
manner of pre-filing registration; (2) pre-filing registration and
election for members of a consolidated group; (3) timing of pre-filing
registration; (4) that each eligible credit property must have its own
registration number; and (5) information required to complete the pre-
filing registration process. Proposed Sec. 1.6418-4(c) would have
provided rules related to the registration number, including: (1)
general rules; (2) that the registration number is valid for only one
taxable year; (3) renewing registration numbers; (4) amendment of
previously submitted registration information if a change occurs before
the registration number is used; and (5) that the registration number
is required to be reported by an eligible taxpayer and transferee
taxpayer.
Several commenters requested that the IRS implement a streamlined
process for registration, including registration for multiple
properties. Several commenters provided suggestions for alternatives to
a registration process, such as creating a registry of tax credits, an
election out of pre-filing registration, or utilizing the current
process for matching transactions. Section 6418(g)(1) provides that the
Secretary may implement a registration process she deems necessary for
purposes of preventing duplication, fraud, or improper or excessive
transfers of eligible credits. Proposed Sec. 1.6418-4(a) would have
required an eligible taxpayer to satisfy the pre-filing registration
requirements of proposed Sec. 1.6418-4(b) as a condition of, and prior
to, making a transfer election under section 6418(a). The Treasury
Department and the IRS recognize the concerns of eligible taxpayers
needing an efficient registration process to transfer eligible credits
but must mitigate opportunities for fraud. The IRS will consider ways
outside of these final regulations to make the pre-filing registration
process more streamlined for eligible taxpayers, and the IRS will
continue to monitor the pre-filing registration process to determine
whether there are areas in which more efficiencies in the pre-filing
registration process can be created. However, these final regulations
finalize proposed Sec. 1.6418-4(a) without change.
Several commenters recommended that the final regulations allow
transfers under section 6418(a) without a registration requirement if
the pre-filing registration application had been submitted. The
Treasury Department and the IRS understand commenters' recommendations
were made prior to the pre-filing registration portal being open;
however, pre-filing registration is necessary to help meet the
government's compelling interest to prevent fraud and duplication while
also allowing for a more efficient processing and payment upon filing
of the return. These final regulations do not adopt this suggestion
because the timing of the submission is only one issue. The quality and
accuracy of information of the provided information is also important,
and so only submitting an application is an insufficient guardrail.
Several commenters stated that the registration process might
create burdens for taxpayers that could prevent their participation in
transfer opportunities. A commenter stated that the documentation and
process related to acquiring a registration number should account for
the fact that, while there are many large taxpayers that may be selling
tax credits, the transfer market will include many smaller taxpayers as
well. The Treasury Department and the IRS understand commenters'
concerns about the need for resources to complete the pre-filing
registration process; however, as described previously, pre-filing
registration is necessary to help meet the government's compelling
interest to prevent fraud and duplication while also allowing for a
more efficient processing of the eligible taxpayer's return and the
transferee taxpayer's return. The information requested during the pre-
filing registration process is also information that the eligible
taxpayer should have available after having engaged in an activity for
which an eligible credit is determined. Further, for smaller eligible
taxpayers that engage in fewer projects, the pre-filing registration
process will be less complex. For example, an eligible taxpayer with
one eligible credit property for which an eligible credit is
[[Page 34790]]
determined during the taxable year will have a more streamlined
registration process than will an eligible taxpayer with multiple
eligible credit properties for which multiple eligible credits are
determined during the taxable year. Finally, the IRS is committed to
ongoing efforts to provide guidance to help taxpayers understand how to
qualify for the underlying credits, how to meet the pre-filing
registration requirements, and how to complete the transfer election
process. These efforts, among others undertaken by the IRS, should
address the commenters' concerns. Thus, these final regulations adopt
the pre-filing registration process as proposed.
Commenters recommended a time limit for registration approval. A
commenter urged the IRS to provide registration numbers as quickly as
possible and publicly share estimates for issuing registration numbers
to incentivize efficiency. Another commenter urged that the IRS be
required to clarify reasons for delay in issuing a registration number
and provide relief from estimated tax penalties due to the delay.
Several commenters recommended that the final regulations create
specific exceptions to the pre-filing registration requirement, such as
a transition rule allowing transferee taxpayers to take eligible
credits into account on the transferee taxpayer's 2023 tax return
without a registration number for the eligible credits if a pre-
registration application has been submitted by the eligible taxpayer.
These final regulations do not adopt these suggestions for a time limit
or a transition rule for a 2023 taxable year. Instead, the Treasury
Department and the IRS recommend that taxpayers with these sorts of
questions consult the current version of Publication 5884, Inflation
Reduction Act (IRA) and CHIPS Act of 2022 (CHIPS) Pre-Filing
Registration Tool User Guide and Instructions, for the latest guidance
on the pre-filing registration process. In April 2024, Publication 5884
stated:
Even though registration is not possible prior to the beginning
of the tax year in which the credit will be earned, the IRS
recommends that taxpayers register as soon as reasonably practicable
during the tax year. The current recommendation is to submit the
pre-filing registration at least 120 days prior to when the
organization or entity plans to file its tax return. This should
allow time for IRS review, and for the taxpayer to respond if the
IRS requires additional information before issuing the registration
numbers.
This information in Publication 5884 should also help other
commenters that asked for clarification on the timeline for such a pre-
filing registration process, including the lead-time required to
initiate the process before the anticipated date of filing the
applicable tax return.
One commenter suggested that the proposed regulations failure to
mention bonus credits in proposed Sec. 1.6418-4 means it is ambiguous
whether eligible taxpayers must separately declare their intent to
elect to transfer a bonus credit. The commenter strongly encouraged
that the final regulations resolve this ambiguity and clearly specify
that such an intent must be separately reported. However, as explained
in part I.D of the Summary of Comments and Explanation of Revisions,
bonus credits are not separately transferred from an eligible credit.
Further, these final regulations do not adopt these proposed revisions
to the proposed regulations because the pre-filing registration process
is primarily intended to verify that the applicant is an eligible
taxpayer and that the registered property is an eligible credit
property. Calculation of the credit amount (including qualifying for
any bonus amounts that would increase the base credit amount) is done
on an annual return. However, the Treasury Department and the IRS will
monitor the pre-filing registration process to determine whether
requesting additional information is needed to prevent duplication,
fraud, improper payments, or excessive credit transfers under section
6418.
Several commenters requested clarification of the IRS's review and
determination procedures after a taxpayer completes registration,
including whether taxpayers may appeal any denials of registration
numbers. Publication 5884 describes this process. In cases in which a
pre-filing registration submission is incomplete, the IRS will attempt
to contact the registrant using the information provided to indicate
deficiencies with the registration prior to making a determination.
Section 7803(e)(3) of the Code provides that it is the function of
the IRS Independent Office of Appeals (Appeals) to resolve Federal tax
controversies without litigation. Decisions made by the IRS relating to
the denial, suspension, or revocation of a registration number are not
Federal tax controversies within the meaning of section 7803(e)(3)
because registration is too attenuated and separate from any tax
liability of the eligible taxpayer. Accordingly, once the IRS
determines that a registration number should not be given, the
registrant cannot appeal the denial unless the IRS and Appeals agree
that such review is available and the IRS provides the time and manner
for such review.
Commenters requested that the final regulations clarify
documentation retention requirements, including additional rules for
the types of documents to retain or the type of information to be
retained. The documentation to support the existence of valid eligible
credit property will vary by the credit being claimed. The pre-filing
registration portal and Publication 5884 list, for each credit, a
description of the types of documents that will facilitate processing
of the pre-filing registration. A registrant does not need to provide
all information that may be available; in fact, as of April 2024,
Publication 5884 states:
If detailed project plans or contractual agreements are the best
support that the taxpayer is engaging in activities or making tax
credit investments that qualify the registrant to claim a credit,
the registrant should submit an extract of the document showing the
name of the taxpayer, date of purchase and identifying information
such as serial numbers, rather than the entire document.
However, to the extent the information provided is insufficient for
purposes of the pre-filing registration process, the IRS may request
further information. See Publication 5884.
Commenters provided suggestions of how the registration portal
should be constructed and how it should function. Commenters also
recommended that the IRS enable a transferee taxpayer to verify the
legitimacy of a registration number by providing the eligible
taxpayer's pre-filing registration information, including a truncated
taxpayer identification number, into the portal. The Treasury
Department and the IRS recognize that these comments were provided
prior to the opening of the registration portal; however, much of the
infrastructure and planning for the registration portal was in process
at the time these comments were received. The Treasury Department and
the IRS will continue to review the efficiency of the registration
portal, including functionality responses from the public, to determine
whether changes should be implemented or whether additional guidance or
publications should be issued; however, these comments are outside of
the scope of these final regulations.
Several commenters stated that the final regulations should allow
grouping for registration and transfer either by means of the
underlying Code section provisions or existing guidance. Other
commenters recommended changes in the final regulations to allow for
grouping based on specific types of property. The definition of
eligible credit property in section 6418 is based
[[Page 34791]]
on the relevant rules for the underlying eligible credit, and changes
to the definition of particular properties pursuant to the underlying
Code sections is outside the scope of this rulemaking. If any such
underlying Code section allows grouping to determine a qualified
property, then grouping for purposes of a registration number is
permitted. If such definition does not allow grouping, then each
eligible credit property must be registered separately; however, for
some eligible credits, the pre-filing registration portal allows
eligible credit property information to be uploaded by way of a
spreadsheet file (bulk upload). See Publication 5884.
A commenter specifically asked that grouping of charging properties
under section 30C be permitted for registration purposes. The commenter
argued that requiring the pre-registration on a single eligible credit
property basis would be unduly burdensome and costly in some cases. The
commenter suggested allowing taxpayers to bundle multiple projects at
different locations into a single pre-registration to process and
reduce transaction costs, believing in most cases that it would reflect
the realities of the transfer. The Treasury Department and the IRS did
not adopt the commenters recommendation regarding section 30C, as the
approach recommended was determined to be too subjective, which could
lead to differences in interpretation between taxpayers and the IRS. As
such, the grouping of eligible credit property continues to depend on
the definition of that eligible credit property under the relevant Code
section and regulations implementing the underlying eligible credit. In
this commenter's case, this means the rules in section 30C(c). However,
it is relevant to note the pre-filing registration portal allows
eligible credit property information to be uploaded by way of bulk
upload for certain credits, including the section 30C credit. See
Publication 5884.
Commenters sought clarification that the pre-filing registration
process will not require designation of a qualified clean hydrogen
production facility's applicable ``lifecycle greenhouse gas emissions
rate'' under section 45V. Similar to the issue of grouping eligible
credit properties, the definition of eligible credit property in
section 6418 is based on the relevant rules for the underlying eligible
credit, and clarification of the definitions contained in the
underlying Code sections for particular properties is outside the scope
of this rulemaking. Therefore, these final regulations do not make this
recommended change.
A commenter recommended that the final regulations allow the owner
of a single process train to register the eligible credit property and
the owner and the disposer(s) or utilizer(s) to each make a transfer
election using the same registration number for a section 45Q credit.
The commenter also recommended that in this case the pre-filing
registration portal allow the owner of the single process train to
disclose as part of its pre-filing registration that the credit or a
portion thereof will be allowed to disposer(s) or utilizer(s) under a
section 45Q(f)(3)(B) election. As explained in part II.A of this
Summary of Comments and Explanation of Revisions, Sec. 1.6418-
2(a)(4)(iii) of these final regulations provides that a section 45Q
credit allowable to an eligible taxpayer because of an election under
section 45Q(f)(3)(B) is not an eligible credit that can be transferred
because the credit is not determined with respect to the eligible
taxpayer. Thus, the final regulations do not adopt this recommendation.
Several commenters sought exceptions to the yearly registration
requirement. A commenter requested an illustration of a specified
change that would require an amendment or resubmission. The purpose of
the registration process is to assist with the administrative needs of
the IRS in tracking the eligible credit property and the transferred
specified credit portion. Proposed Sec. 1.6418-4(c)(2) would have
stated that a registration number is valid with respect 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 proposed Sec. 1.6418-2(f).
Additionally, proposed Sec. 1.6418-4(c)(3) would have stated that
renewal must be made in accordance with applicable guidance, including
attesting that all the facts previously provided are still correct or
updating any facts. Thus, any changes to the pre-filing registration
process to make it be more streamlined for renewals will be addressed
in applicable guidance. After reviewing this comment, the Treasury
Department and the IRS have determined that a yearly registration
process is still necessary to meet these administrative needs.
Proposed Sec. 1.6418-4(b)(5)(vii)(D) would have required that, to
complete the pre-filing registration process, registrants must provide
information as to the beginning of construction date and the placed in
service date of the eligible credit property. Commenters requested that
the final regulations require registration up to sixty days before
construction has begun as well as an IRS visit to the jobsite as part
of the registration process for PWA purposes. The Treasury Department
and the IRS have determined that a registration number should not be
given before the eligible credit property is placed in service, which
is an important step to ensuring that the eligible credit property
qualifies for the eligible credit for which the eligible taxpayer seeks
to make a transfer election. Because a credit must be determined in the
taxable year of the transfer election, maintaining the proposed
requirement will ensure that taxpayers are not attempting to make a
transfer election in a year in which a credit is not determined.
Further, this information will help the IRS prevent fraud. The Treasury
Department and the IRS have also determined that it is not necessary
for sound tax administration to require registration or a jobsite visit
prior to construction for PWA purposes. Thus, these final regulations
adopt proposed Sec. 1.6418-4(b)(5)(vii)(D) without change.
A commenter recommended that tax professionals be allowed to assist
in the registration process on behalf of eligible taxpayers. The
Treasury Department and the IRS note that the proposed regulations
would not have restricted a taxpayer from authorizing a representative
to apply for a registration number on behalf of the taxpayer, and these
final regulations similarly do not do so. See Publication 5884, which
provides that a person who wishes to access Energy Credits Online on
behalf of a taxpayer must authorize an IRS Energy Credits Online
account by selecting ``Start Authorization.'' These final regulations
modify proposed Sec. 1.6418-4(c)(5) to clarify that a valid
registration number is one that was assigned to the particular taxpayer
during the pre-registration process.
A commenter requested guidance stating that subsequent changes in
law will not impact tax credits for which the taxpayer has already
applied in the pre-filing registration process. The Treasury Department
and the IRS do not adopt this request. The pre-filing registration
process is not a guarantee that a project will qualify for an eligible
credit for which a transfer election may be made, as verification of
initial pre-filing information cannot be used by the IRS to confirm
compliance with the requirements of an underlying credit. Compliance
with the underlying credit requirements is reported and verified in
additional detail on the annual tax return, and, as those requirements
are provided in Code sections outside of
[[Page 34792]]
section 6418, are largely outside the scope of these final regulations.
Generally, for an ITC, the amount of the credit can be determined as of
the placed in service date, and for a PTC, the amount of the credit is
generally determined as of the end of the taxable year. Thus, for
either type of credit, changes in later taxable years to the underlying
Code sections would not affect an eligible taxpayer's qualification in
the taxable year the credit was determined.
V. Special Rules
A. Excessive Credit Transfers
Pursuant to section 6418(g)(2)(A), 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. Under section 6418(g)(2)(B),
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 (1) the amount of the eligible credit
claimed by the transferee taxpayer with respect to such facility or
property for such taxable year; over (2) 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.
1. In General
Proposed Sec. 1.6418-5(a)(1) would have provided a general rule
that is consistent with the rule in section 6418(g)(2)(A) for any
specified credit portion transferred to a transferee taxpayer pursuant
to an election in proposed Sec. 1.6418-2(a) or proposed Sec. 1.6418-
3.
2. Taxable Year of Determination
Proposed Sec. 1.6418-5(a)(2) would have defined the taxable year
of determination as the taxable year that includes the determination of
the excessive credit transfer to the transferee taxpayer and not the
taxable year during which the eligible credit was originally determined
by the eligible taxpayer, unless those are the same taxable years.
A commenter recommended that the final regulations also describe
any further procedures that apply with respect to this IRS
determination or the taxable year of the determination. The commenter
noted that the proposed regulations do not describe any appeal rights
of the taxpayer of such determination, including the application of
deficiency procedures and the right to petition the U.S. Tax Court. The
commenter recommended that the final regulations clarify that appeal
rights and deficiency procedures apply to any excessive credit transfer
determination.
Any excessive credit transfer determination will be made by the IRS
under established examination procedures and these final regulations do
not except any taxpayers or any calculations from this process. An
eligible taxpayer or transferee taxpayer may challenge an adverse
determination by the IRS with respect to an excess credit transfer
determination if the determination creates a tax deficiency, for which
deficiency procedures apply, including the right to petition the U.S.
Tax Court. For example, if a transferee taxpayer claimed a transferred
specified credit portion, and the transferred specified credit portion
was subsequently disallowed and determined by the IRS to be an
excessive credit transfer, then the transferee taxpayer could protest
the disallowance before Appeals and ultimately petition the U.S. Tax
Court, if desired.
3. Payments Related to Excessive Credit Transfer
Proposed Sec. 1.6418-5(a)(3) would have provided a rule that any
payments made by a transferee taxpayer to an eligible taxpayer that
directly relate to an excessive credit transfer (as defined in proposed
Sec. 1.6418-5(b)) are not subject to section 6418(b)(2) or proposed
Sec. 1.6418-2(e).
Several commenters recommended clarifying the tax consequences to a
transferee taxpayer with respect to payments made to an eligible
taxpayer that directly relate to an excessive credit transfer. In
general, the commenters thought that proposed Sec. 1.6418-5(a)(3) only
addressed the eligible taxpayer side of a transaction by only
referencing section 6418(b)(2). Specifically, some commenters
recommended revising the rule so that section 6418(b)(3), which says
that payments related to the transfer of an eligible credit are not
deductible to the transferee taxpayer, would not apply in the excessive
credit transfer context. For example, a commenter raised that amounts
paid as consideration by a transferee taxpayer related to an excessive
credit transfer should be deductible as an ordinary business expense in
year of the excess credit determination, and corresponding indemnity or
insurance payment received should be included as ordinary income in the
year the all events test is met (for accrual method) or in the year of
payment (for cash method). Another commenter stated that amounts paid
by a transferee taxpayer related to an excessive credit transfer should
be deductible only to the extent they exceed the amount for which there
is a claim or reimbursement with a reasonable prospect of recovery. A
commenter also recommended clarifying the amount of the deduction, if a
deduction is possible. Lastly, a commenter asked that the final
regulations provide that any indemnification payments made by an
eligible taxpayer to a transferee taxpayer relating to an excessive
credit transfer be deductible as an ordinary business expense under
section 162(a) in the year that the liability to make the payment is
taken into account under section 461, assuming the eligible taxpayer
uses the accrual method.
In response to these comments, these final regulations revise
proposed Sec. 1.6418-5(a)(3) to provide that any payment made by a
transferee taxpayer to an eligible taxpayer that directly relates to
the excessive credit transfer (as defined in proposed Sec. 1.6418-
5(b)) is not subject to section 6418(b)(2), section 6418(b)(3), or
proposed Sec. 1.6418-2(e). Adding the reference to section 6418(b)(3)
should clarify that a transferee taxpayer is not precluded from
deducting the portion of the consideration paid to the eligible
taxpayer for a specified credit portion that relates to an excessive
credit transfer. In addition, these final regulations revise proposed
Sec. 1.6418-5(a)(3) to clarify that the amount of a payment that
directly relates to an excessive credit transfer is equal to the total
consideration paid in cash by the transferee taxpayer for its specified
credit portion multiplied by the ratio of the amount of the excessive
credit transferred to the transferee taxpayer to the amount of the
transferred specified credit portion claimed by the transferee
taxpayer. However, determining the timing and character of any
deduction, or the impact of insurance or indemnity payments, is beyond
the scope of these final regulations. General income tax principles
apply to determine the timing of any deduction to a transferee
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taxpayer, or gross income to an eligible taxpayer, with respect to a
payment that directly relates to an excessive credit transfer.
Similarly, the character of any deduction to a transferee taxpayer, or
gross income to an eligible taxpayer, with respect to a payment that
directly relates to an excessive credit transfer may be determined
under section 6418 and general income tax principles. Finally, general
income tax principles apply to determine the income tax consequences of
any insurance payments received by a transferee taxpayer or indemnities
paid by the eligible taxpayer to a transferee taxpayer.
4. Reasonable Cause
Section 6418(g)(2)(B) provides that, if a transferee taxpayer
demonstrates to the satisfaction of the Secretary that the excessive
credit transfer resulted from reasonable cause, the excessive credit
transfer addition to tax described in section 6418(g)(2)(A)(ii) will
not apply. Proposed Sec. 1.6418-5(a)(4) would have provided that the
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 in a case in which
an eligible taxpayer makes multiple transfer elections with respect to
a single eligible 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.
The Treasury Department and the IRS received several comments
regarding the definition of reasonable cause. For the reasons described
further in this part V.A.4 of the Summary of Comments and Explanation
of Revisions, these final regulations do not adopt the recommendations
submitted by commenters, and the proposed regulations are finalized
without any substantive changes on this issue.
A few commenters stated that the proposed regulations defined
reasonable cause subjectively and did not sufficiently protect
transferee taxpayers from an eligible taxpayer's inadequate controls or
fraud, such as cases in which an eligible taxpayer provided material,
false, or misleading information on which the transferee taxpayer
relied. Some commenters suggested bright-line or safe harbor rules
under which the reasonable cause exception would be deemed to be
satisfied, such as if an eligible taxpayer provides to a transferee
taxpayer a written certification that the requirements of a section
6418 transfer have been met, or if a transferee taxpayer can produce
due diligence information or attestations or uses a third-party advisor
for its due diligence.
A commenter requested that the final regulations provide guidance
on the definition of reasonable cause for labor standards
noncompliance, including that state and local governments should
receive reasonable cause relief if a failure is due to labor
noncompliance. Another commenter recommended transferee taxpayers be
able to rely on project labor agreements for purposes of determining
reasonable cause.
These final regulations do not adopt these comments because the
determination of whether an excessive credit transfer was due to
reasonable cause is based on full consideration of all the facts and
circumstances. To the extent additional rules are needed to prevent
eligible taxpayers from providing materially false or misleading
information to transferee taxpayers, or to the extent additional
enforcement mechanisms are needed to prevent this type of abuse, such a
change is beyond the scope of these final regulations. These final
regulations also do not adopt a bright-line rule or safe harbor
identifying any particular action or omission as the transferee
taxpayer's deemed satisfaction of the reasonable cause standard.
Guidance regarding reasonable cause in the context of labor standards
noncompliance is outside the scope of these final regulations.
The Treasury Department and the IRS note that section 6418(g)(2)(B)
specifically places a due diligence responsibility on the transferee
taxpayer. As provided in proposed Sec. 1.6418-5(a)(4), the most
important factor in demonstrating reasonable cause under section 6418
would be the transferee taxpayer's efforts in determining that the
eligible taxpayer had the specified credit portion to transfer. As
acknowledged by one of the commenters, the proposed regulations would
have considered representations by an eligible taxpayer as part of
determining whether a transferee taxpayer has demonstrated reasonable
cause. Relying solely on an eligible taxpayer's representations does
not align with section 6418(g)(2)(B). Moreover, reasonable cause
standards are already well-established under case law and
administrative and regulatory authorities. A transferee taxpayer that
is subject to an excessive credit transfer may assert defenses that are
commonly raised by taxpayers in other situations in which the IRS has
asserted an addition to tax. Section 1.6664-4, for example, provides
guidance related to reasonable cause in the context of accuracy-related
penalties under section 6662. Accordingly, these final regulations do
not adopt commenters' suggestions to create bright-line rules, safe
harbors, or other new standards and adopt the proposed regulations
without modification.
5. Recapture Events
Proposed Sec. 1.6418-5(a)(5) clarified that a recapture event
under section 45Q(f)(4) or 50(a) is not an excessive credit transfer.
The Treasury Department and the IRS did not receive any comments
regarding this clarification, and thus, these final regulations adopt
proposed Sec. 1.6418-5(a)(5) without change, except that, for clarity,
the final regulations add section 49(b) to the list of recapture events
that are not an excessive credit transfer.
6. Definition of Excessive Credit Transfer
Proposed Sec. 1.6418-5(b)(1) would have defined an excess credit
transfer consistent with section 6418(g)(2)(C) as meaning, with respect
to an eligible credit property for which a transfer 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 (1) 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
(2) 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.
Proposed Sec. 1.6418-5(b)(2) would have provided a rule for
determining an excessive credit transfer if there are multiple
transferees by treating the
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transferees as one. The proposed regulations would have provided 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 would be equal to the total excessive credit
transferred multiplied by the transferee taxpayer's portion of the
total credit transferred to all transferee taxpayers. This rule would
be applied on an eligible credit property basis.
A commenter recommended that the final regulations adopt a rule
allowing an eligible taxpayer to determine the order of eligible
credits transferred for determining an excessive credit transfer if
there are multiple transferees. Specifically, the commenter recommended
allowing an eligible taxpayer to choose the order in which transferred
credits will be treated as excessive credit transfers. The Treasury
Department and the IRS acknowledge that an ordering rule could
potentially limit the number of transferee taxpayers to which an
excessive credit transfer determination is made, rather than applying
pro rata to all transferee taxpayers as provided in proposed Sec.
1.6418-5(b)(2). However, inclusion of an ordering rule between an
eligible taxpayer and transferee taxpayers is not described in the
definition of excessive credit transfer in section 6418(g)(2)(C). The
definition, by limiting excessive credit transfers to amounts claimed
by a transferee taxpayer over amounts otherwise allowable, effectively
only applies to the extent the disallowed credit exceeds the amount
retained by an eligible taxpayer. For example, if an eligible taxpayer
retained $25X of a $100X eligible credit and transferred $75X of the
same eligible credit and it was later determined that only $75X of the
eligible credit is otherwise allowable with respect to the relevant
eligible credit property, the excess credit transfer would be $0 ($75X
- $75X). The $25X of disallowed credit would be disallowed to the
eligible taxpayer. Thus, the definition of an excessive credit transfer
effectively includes an ordering rule so that any disallowed eligible
credit first reduces the eligible credit retained by an eligible
taxpayer before applying to any transferee taxpayer. However, the
definition does not distinguish between different transferee taxpayers.
Further, adding an ordering election would add administrative
complexity that does not exist with a pro rata rule. For example, rules
would be needed on whether the election is made on a single eligible
credit property basis or for all eligible credit properties, and the
IRS would have to create additional systems to track that such an
election was made. Also, additional complexity could arise with respect
to tax administration if there was a disagreement between an eligible
taxpayer and transferee taxpayers as to the order of a transfer. Based
on this reasoning, the Treasury Department and the IRS do not adopt the
commenter's suggestion, and these final regulations adopt the
definition of excessive credit transfer without change and provide
clarifying language for calculating the amount of excessive credit
transferred to a specific transferee taxpayer if there is more than one
transferee taxpayer.
7. Examples Illustrating Excessive Credit Transfers
Proposed Sec. 1.6418-5(b)(3) would have provided three examples to
illustrate cases in which there is no excessive credit transfer, in
which there is an excessive credit transfer, and in which there is an
excessive credit transfer as to multiple transferees. Consistent with
the modifications made to proposed Sec. 1.6418-5(a)(3), as described
in part V.A.3 of this Summary of Comments and Explanation of Revisions,
the final regulations provide additional clarification to each of the
three examples in Sec. 1.6418-5(b)(3).
The Treasury Department and the IRS understand from the comment
letters that partners in a transferor partnership that decide to retain
their share of eligible credits generated through the partnership may
refuse to consent to the partnership transferring other partners'
shares of eligible credits because eligible taxpayers are first liable
under the excessive credit transfer rules up to the amount of the
credit retained. Commenters requested that the final regulations
include an election not to apply any disallowed eligible credit amounts
to an eligible taxpayer (to the extent it retained eligible credits)
before triggering an excessive credit transfer. As previously
described, section 6418(g)(2)(C) limits an excessive credit transfer to
the amount claimed by a transferee taxpayer(s) over amounts otherwise
allowable, meaning the rule only applies to the extent the disallowed
credit exceeds the amount retained by an eligible taxpayer. After
considering this comment, the Treasury Department and the IRS have
determined that including an election not to apply the excessive credit
transfer rules in specified circumstances is not consistent with the
definition of an excessive credit transfer in section 6418(g)(2)(C).
Several comments were received seeking clarification on the
interaction between the additions to tax for excessive credit transfers
and penalties for labor standards noncompliance, as well as
recommendations for additional enforcement and documentation rules.
After considering these comments, the Treasury Department and the IRS
have decided not to provide further clarification in these final
regulations. The additions to tax imposed by section 6418 are applied
in addition to other penalties imposed by the Code. Moreover, the
imposition of penalties under section 45(b)(7) and (8) are addressed in
the section 45 proposed regulations. The Treasury Department and the
IRS will continue to study whether inequities or unfair burdens exist
for taxpayers and potentially address such situations in future
guidance.
B. Recapture
Unlike excessive credit transfers, recapture of a tax credit occurs
if the original tax credit reported would have been correct without the
occurrence of a subsequent recapture event.
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)), then (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 would have included a rule that
the recapture amount is calculated and taken into account by the
transferee taxpayer.
The proposed regulations would have provided 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), stating that an eligible taxpayer is
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)).
On November 22, 2023, the Treasury Department and the IRS published
[[Page 34795]]
proposed regulations (REG-132569-17) in the Federal Register (88 FR
82188) relating to the section 48 credit that supplemented proposed
Sec. 1.6418-5 to provide guidance on the notification requirements for
an eligible taxpayer and that a transferee taxpayer is responsible for
any amount of tax increase under section 48(a)(10)(C). These final
regulations reserve on Sec. 1.6418-5(f) as proposed in REG-132569-17
because the Treasury Department and the IRS continue to consider
comments received regarding the application of section 48(a)(10)(C).
Accordingly, any comments received on Sec. 1.6418-5(f) as proposed in
REG-132569-17 will be separately addressed as part of that rulemaking.
Commenters recommended that the final regulations allocate the risk
of recapture to the eligible taxpayer for several reasons, including
that the eligible taxpayer would have the greatest ability to cause or
prevent a recapture event. Another commenter urged that the final
regulations allocate the risk of recapture to the eligible taxpayer for
recapture events solely under section 50(a). Other commenters stated
that placing the risk of recapture on the transferee taxpayer creates
increased transactions costs, reduces the number of market
participants, and distorts the market value of the transferred credits.
The Treasury Department and the IRS have determined that the risk of
recapture should be borne by the transferee taxpayer with respect to
its specified credit portion for all types of recapture events
(including those under sections 49(b) and 45Q(f)(4)) directly relating
to an eligible taxpayer (that is, other than section 50(a) and 49(b)
recapture events involving transfers of interests by partners in a
transferor partnership or shareholders in a transferor S corporation).
This determination is consistent with the statutory framework for
recapture under sections 45Q(f)(4), 49(b), and 50(a), which generally
imposes recapture tax on the taxpayer who claimed the credit,
regardless of whether the underlying credit is determined with respect
to such taxpayer (for example, whether the taxpayer owns the underlying
credit property). 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 the recapture
amount, if any, to the eligible taxpayer. Therefore, these final
regulations adopt the proposed rule without change on this issue.
A commenter requested clarification as to the allocation of
recapture liability between an eligible taxpayer and a transferee
taxpayer to the extent the eligible taxpayer retains any eligible
credits and whether there is an ordering rule applied similar to an
excessive credit transfer. As discussed in part V.A.5 of this Summary
of Comments and Explanation of Revisions section, proposed Sec.
1.6418-5(a)(5) would have clarified that recapture tax liability is not
treated in the same manner as an excessive credit transfer tax
liability, and these final regulations adopt that rule without change.
Under the excessive credit transfer rules, the eligible taxpayer will
be subject to a credit reduction up to the amount of the eligible
credit retained before a transferee taxpayer's credit is reduced.
However, the position most consistent with the statutory language of
the multiple Code sections involved is that the transferee taxpayer
bears a proportionate share of recapture risk, without looking to the
eligible taxpayer first. Consequently, the Treasury Department and the
IRS have not made a change to the proposed regulations allocating
recapture risk to the eligible taxpayer for any retained credits before
causing a recapture event to any transferee taxpayer. However, the
final regulations under Sec. 1.6418-5(d)(3)(i) clarify that, except in
the case of a partner or S corporation shareholder that has disposed of
an interest in a transferor partnership or transferor S corporation and
is subject to the rules relating to such disposition under Sec. 1.47-
6(a)(2) or Sec. 1.47-4(a)(2), respectively, recapture liability
applies proportionately to any transferee taxpayers and an eligible
taxpayer to the extent an eligible taxpayer has retained eligible
credits determined with respect to the relevant eligible credit
property. The final regulations also add formulas for determining the
recapture amount for which a transferee taxpayer and an eligible
taxpayer is responsible for.
In addition, the final regulations clarify the effect of a partner
or S corporation shareholder recapture event on the remaining amount of
recapture liability for which the transferee taxpayer and the
transferor partnership or transferor S corporation is responsible and
provide two examples to illustrate who is responsible for recapture in
the case of a sale of a portion of an interest in a transferor
partnership and a subsequent sale of the investment credit property by
the transferor partnership.
A commenter stated that the recapture notice requirement under
proposed Sec. 1.6418-5(d) could be burdensome, particularly to smaller
taxpayers, due to the complexity and compliance needed to prepare the
necessary documentation and notify the respective party of the
occurrence of a recapture event or the determination of the recapture
amount. The Treasury Department and the IRS note that section
6418(g)(3)(B)(i) provides these notification requirements and that the
proposed regulations merely implement the statute. For these reasons,
the Treasury Department and the IRS have determined that the
notification requirements in the proposed regulations should be
retained.
Several commenters requested that exceptions be provided to the
recapture rules, for example, by limiting the scope of recapture
events, such as if a project ceases to be credit eligible property, or
by limiting recapture events to those causing recapture under the
former grant program created under section 1603 of the American
Recovery and Reinvestment Tax Act of 2009 (Pub. L. 111-5, 123 Stat.
115, 364). Section 6418(g)(3)(B) specifically provides for recapture in
the event 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 end of the
recapture period described in section 50(a)(1). As such, providing
exceptions to the operation of section 50(a) is beyond the scope of
these final regulations. Consequently, the Treasury Department and the
IRS decline to make the recommended changes.
Some commenters urged the Treasury Department and the IRS to
mitigate instances of duplicate recapture of the same ITC.
Specifically, commenters requested that to the extent an amount of an
eligible ITC has been recaptured by a partner in a transferor
partnership or a shareholder in a transferor S corporation under
section 50(a) or section 49(b) pursuant to Sec. 1.6418-3(a)(6), the
amount of potential recapture liability remaining to a transferee
taxpayer should be reduced accordingly. The Treasury Department and the
IRS agree that a single ITC should not be subject to duplicate
recapture. As a result, the final regulations clarify that to the
extent a partner in a transferor partnership or a shareholder in a
transferor S corporation recognizes an amount of tax increase under
sections 50(a) or 49(b) that does not result in recapture liability to
a transferee taxpayer pursuant to Sec. 1.6418-3(a)(6), that amount
reduces
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the remaining amount of ITC subject to recapture for a recapture event
caused directly by the transferor partnership or transferee S
corporation.
Commenters also requested additional guidance and examples of the
recapture rules, including a recapture event under Sec. Sec. 1.6418-
5(e) and 1.45Q-5. For purposes of recapture, section 6418(g)(3) cross-
references to section 50(a). Thus, recapture occurs with respect to the
taxable year in which an investment credit property for which an
eligible credit is 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. 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. The proposed regulations would have clarified that the rules
under proposed Sec. Sec. 1.6418-5(e) and 1.45Q-5 apply to a transferee
taxpayer to the extent any eligible section 45Q credit is transferred
under section 6418. Based on the explanations provided in the preamble
to the proposed regulations, as well as this Summary of Comments and
Explanation of Revisions, the Treasury Department and the IRS have
decided not to provide additional guidance generally or through
examples. However, the final regulations clarify that recapture
liability applies proportionately to an eligible taxpayer and any
transferee taxpayers to the extent an eligible taxpayer has retained
any amount of an eligible credit determined with respect to a component
of carbon capture equipment owned by the eligible taxpayer within a
single process train described in Sec. 1.45Q-2(c)(3).
A commenter requested examples illustrating the section 49(b) rules
causing recapture to a transferee taxpayer, particularly in cases in
which specified credit portions are transferred to multiple transferee
taxpayers. The Treasury Department and the IRS believe examples of the
interaction of sections 49 and 6418 are beyond the scope of these
regulations. As such, no examples have been added to these final
regulations regarding this interaction.
A commenter stated that credit buyers will prefer purchasing
credits from partnerships or S corporations because owners of
partnerships and S corporations may transfer their interests without
triggering recapture to the transferee taxpayer and achieve the same
tax result as a sale of the underlying assets. The Treasury Department
and the IRS acknowledge that the recapture rules for indirect
dispositions by partners in a transferor partnership or shareholders in
a transferor S corporation are different than the rules for direct
dispositions by an eligible taxpayer. However, these differences are
generally consistent with the effect of entity versus aggregate
principles throughout the Code and regulations. Consequently, no
changes are necessary to the proposed regulations on this issue.
C. Ineffective Transfers
Proposed Sec. 1.6418-5(f) states that an ineffective transfer
election means that no transfer of an eligible credit has occurred for
purposes of section 6418, including section 6418(b). The proposed
regulations would have provided a clarification that an ineffective
election is not considered an excessive credit transfer to the
transferee taxpayer. 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.
A commenter requested clarification of the general tax consequences
of a transfer that was ineffective. The Treasury Department and the IRS
have reviewed this comment and determined that the proposed regulations
provide sufficient guidance for taxpayers if an ineffective transfer
occurs. To avoid the risk of not addressing a specific consequence of
an ineffective transfer, the proposed regulations would have stated
that the tax consequences are determined under any relevant provision
of the Code. Addressing those tax consequences is outside of section
6418 and is beyond the scope of these final regulations. Consequently,
these final regulations adopt the rule in proposed Sec. 1.6418-5(f)
(redesignated as Sec. 1.6418-5(g)), without including specific tax
consequences.
A commenter requested that the final regulations address
ineffective transfer determinations made after the transfer election
deadline and the resulting conflict given that an eligible taxpayer is
entitled to transfer a tax credit once. The Treasury Department and the
IRS understand this comment to mean that there is a potential
prohibition on a transfer if the same eligible taxpayer attempted to
transfer the same eligible credit in relation to an eligible credit
property, but the previous transaction was deemed to be an ineffective
transaction. If a previous transaction is unwound because it is deemed
to be an ineffective transaction, then no transfer has occurred. In
addition to the application of existing tax rules, the eligible
taxpayer would be able to make a transfer election to properly transfer
the credit assuming the eligible taxpayer can satisfy the requirements
for making a transfer election. Because the proposed regulations would
have identified the treatment of ineffective transactions, these final
regulations are adopted without change.
Another commenter suggested that the final regulations adopt a rule
providing for reasonable cause relief in the event of an ineffective
transfer election. These final regulations do not adopt this comment.
As described in the preamble to the proposed regulations, and
previously in this part V.C of the Summary of Comments and Explanation
of Revisions, an ineffective transfer does not result in an excessive
credit transfer to the transferee taxpayer, and so reasonable cause
relief is not necessary.
D. Credit Carryforward
The proposed regulations would have provided special rules relating
to the carryback and carryforward of transferred specified credit
portions. Proposed Sec. 1.6418-5(g) would have stated that a
transferee taxpayer can apply the rules in section 39(a)(4) of the Code
(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)). The preamble to the proposed
regulations provided clarity on two complementary issues related to the
carryback of transferred credits stating (i) if the credit is listed in
section 6417(b), then the credit is an applicable credit, and (ii) no
statutory language prohibits a transferee taxpayer from using the rule
in section 39(a)(4) with respect to an eligible credit.
Several commenters asked that the final regulations confirm that
the transferee taxpayer should be able to carryforward an unused credit
amount. These final regulations provide the requested clarification by
revising proposed Sec. 1.6418-5(g) (redesignated as Sec. 1.6418-5(h))
so that the language now refers to both the carryback and carryforward
period when describing application of the rules in section 39(a)(4).
E. Real Estate Investment Trusts
With respect to real estate investment trusts under section 856 of
the Code (REITs), commenters requested that the final regulations
clarify that eligible credits that have not yet been transferred are
treated as real estate assets, cash, or cash items and, thus,
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will not cause a REIT to fail REIT qualification under section
856(c)(4)(A) (section 856(c)(4)(A) together with section 856(c)(4)(B),
the REIT Asset Test). Another commenter requested that the final
regulations state that eligible credits that have not been transferred
are disregarded for purposes of determining whether a REIT satisfies
the REIT Asset Test. Commenters asserted that guidance is needed to
avoid instances in which a REIT might fail the REIT Asset Test because
it planned to make an election to transfer an eligible credit but did
not do so prior to the end of a calendar quarter, when the REIT's
compliance with the REIT Asset Test is measured.
The Treasury Department and the IRS recognize that REITs may be
continuously earning and selling eligible credits and, therefore, need
certainty with respect to this REIT qualification issue. Accordingly,
Sec. 1.6418-5(i)(1) of these final regulations addresses those
comments by providing that eligible credits that have not yet been
transferred pursuant to section 6418 are disregarded for purposes of
the REIT Asset Test.
The preamble to the proposed regulations stated that under section
6418, the cash received by an eligible REIT as consideration for the
transfer of an eligible credit is not included in that taxpayer's gross
income. Because the transaction does not result in any net income, the
transfer does not pose a prohibited transaction tax issue. A commenter
stated that, although this clarification is appreciated, the final
regulations should contain a provision that the transfer of an eligible
credit pursuant to section 6418 is not a sale of property for purposes
of the ``seven sales'' safe harbor in section 857(b)(6)(C)(iii)(I) or
section 857(b)(6)(D)(iv)(I) of the Code. The commenter further pointed
out that many eligible credit programs allow a taxpayer to earn a large
number of separately transferable credits. Thus, the commenter
explained, if the transfer of an eligible credit were a sale of
property for these purposes, that result could cause the REIT to have
so many sales that it would be taxed 100 percent on any sale of real
property in which it engaged. The possibility of that 100 percent tax
could effectively deter REITs from participating in any eligible credit
programs.
The Treasury Department and the IRS agree that participation in the
transfer of eligible credits under section 6418 should not burden all
of a REIT's sales of real property. Accordingly, Sec. 1.6418-5(i)(2)
of these final regulations provides that the transfer of a specified
credit portion pursuant to a valid section 6418 election is not a sale
of property for purposes of section 857(b)(6)(C)(iii) and section
857(b)(6)(D)(iv) and, thus, does not count as one of the seven sales
described in those provisions.
One commenter requested confirmation that receipt of (or the right
to receive) an eligible credit does not result in income to an eligible
taxpayer that is a REIT. Generally, Federal income tax rules do not
treat a taxpayer as receiving gross income upon becoming entitled 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, these final regulations do not include the requested rule
specifically addressing REITs.
A commenter also requested 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). Although, a REIT's
Federal income tax treatment of the sale of energy and earning of
eligible credits is outside the scope of these final regulations, the
Treasury Department and the IRS note that the preamble to TD 9784 (81
FR 59849, 59856 (August 31, 2016)) (2016 preamble) stated 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). 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(b)(6).
VI. Other Comments
A. Normalization
The proposed regulations did not address the impact of the rules
described in section 50(d)(2) (normalization rules) on eligible credit
transfers under section 6418, which only are relevant for credits that
are ITCs. Several commenters requested guidance on the application of
the normalization rules. Some commenters stated that the normalization
rules could not and should not apply to eligible credit transfers. One
commenter suggested that there is no authority to apply the
normalization rules to eligible credit transfers. Lastly a commenter
stated that the normalization rules do apply to credits related to
public utility property otherwise subject to the ITC normalization
requirements because section 6417(g) provides, in part, that ``rules
similar to the rules of section 50'' apply for purposes of section
6417. The commenter went on to state that there is not a similar
provision included in section 6418 to invoke application of the
normalization rules, and the wording of section 6418(a) has the
opposite effect. The final regulations do not adopt a specific rule
addressing the normalization rules because it is beyond the scope of
the final regulations. However, the Treasury Department and the IRS
clarify that an eligible taxpayer is not subject to the normalization
rules with respect to any cash consideration paid by a transferee
taxpayer for a specified credit portion that is described in section
6418(b)(2). Any portion of an eligible credit that is not transferred,
however, would remain subject to the normalization rules as applicable.
B. Transaction Costs and Deductions
The proposed regulations did not address the Federal income tax
treatment of transaction costs, either for the eligible taxpayer or the
transferee taxpayer but described specific matters and considerations
that the Treasury Department and the IRS are taking into account in
developing rules outside of these final regulations.
Commenters recommended that the final regulations clarify the
treatment of transaction costs, including categories of costs such as:
legal and consulting fees; success-based fees; tax insurance; and
indemnity payments. The treatment of transaction costs is beyond the
scope of the section 6418 final regulations. Section 6418(b)(2) and (3)
only cover the treatment of consideration that is paid for the transfer
of an eligible credit. The treatment of other costs is generally
governed by other Code sections, and subject to general Federal income
tax principles. However, the application of other Code sections and
general Federal income tax principles to determine such treatment may
involve the relation-back of such costs to the credit transfer
transaction and its general characterization under section 6418(a) and
(b). The Treasury Department and the IRS anticipate issuing further
guidance taking into account the
[[Page 34798]]
comments received regarding transaction costs.
Effect on Other Documents
The temporary regulations are removed effective July 1, 2024.
Special Analyses
I. 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(b) of Executive Order 12866, as amended. Therefore, a
regulatory impact assessment is not required.
II. 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 final regulations contain
reporting and recordkeeping requirements. The recordkeeping
requirements mentioned within these final 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 final regulations also mention reporting requirements related
to making transfer elections as detailed in 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 final regulation
in 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 final regulations also describe recapture procedures as
detailed in 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 final regulation is not changing or creating new collection
requirements not already approved by OMB.
These final 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 Sec. 1.6418-
4. The pre-filing registration portal is approved under 1545-2310 for
all filers.
The IRS solicited feedback on the collection requirements for
reporting, recordkeeping, and pre-filing registration. Although no
public comments received by the IRS were directed specifically at the
PRA or on the collection requirements, several commenters generally
expressed concerns about the burdens associated with the documentation
requirements contained in the Proposed Rules. As described in the
relevant portions of this preamble, the Treasury Department and IRS
believe that the documentation requirements are necessary to administer
the transfer of eligible credit under section 6418.
III. 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 a final
regulatory flexibility analysis (FRFA) of the final regulations. The
Treasury Department and the IRS have not determined whether the final
regulations will likely have a significant economic impact on a
substantial number of small entities. This determination requires
further study. Because there is a possibility of significant economic
impact on a substantial number of small entities, a FRFA is provided in
these final regulations.
Pursuant to section 7805(f) of the Code, the proposed regulations
were submitted to the Chief Counsel of Advocacy of the Small Business
Administration, and no comments were received.
1. Need for and Objectives of the Rule
The final regulations provide greater clarity to eligible taxpayers
that intend to make an election under section 6418 to transfer eligible
credits. The final regulations also provide guidance to transferee
taxpayers as to the treatment of transferred eligible credits under
section 6418. The final regulations 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. Significant Issues Raised by Public Comments in Response to the IRFA
There were no comments filed that specifically addressed the
Proposed Rules and policies presented in the IRFA. Additionally, no
comments were filed by the Chief Counsel of Advocacy of the Small
Business Administration.
3. 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 final regulations, 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 final
regulations
[[Page 34799]]
does not depend on the size of the business, as defined by the Small
Business Administration. As described more fully in the preamble to
these final regulations and in this FRFA, section 6418 and these final
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 rules is
50,000 taxpayers. The Treasury Department and the IRS expect to receive
more information on the impact on small businesses once taxpayers start
to make transfer elections using the guidance and procedures provided
in these final regulations.
4. Impact of the Rules
The final 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.
5. Alternatives Considered
The Treasury Department and the IRS considered alternatives to the
final regulations. The final regulation 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
final regulations, these final 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 in which 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 final regulation requirement that eligible
taxpayers and transferee taxpayers complete a transfer election
statement. In determining to adopt this proposed rule, 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 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 final
regulation requirement also will benefit small businesses that are
transferee taxpayers as it provides a mechanism to receive such
information from the eligible taxpayer.
Treasury and the IRS solicited comments 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. The
comments received in response to this request have been discussed in
the preceding paragraphs.
5. Duplicative, Overlapping, or Conflicting Federal Rules
The final regulations do not duplicate, overlap, or conflict with
any relevant Federal rules. As discussed above, the final regulations
merely provide procedures and definitions to allow taxpayers to take
advantage of the ability to transfer eligible credits. The Treasury
Department and the IRS solicited input from interested members of the
public about identifying and avoiding overlapping, duplicative, or
conflicting requirements. No comments were received in response to this
request.
[[Page 34800]]
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 final
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 final 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. These final regulations do 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. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs has designated this
rule as a major rule as defined by 5 U.S.C. 804(2).
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 final 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.
Amendments to the Regulations
Accordingly, the Treasury Department and the IRS 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 and republish paragraph (g).
The addition, revision and republication 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. (1) Except with respect to paragraph (c)(3)
of this section, this section applies for partnership taxable years
that begin on or after August 3, 2015. The rules of paragraph (c)(3) of
this section apply for taxable years of partnerships other than
existing publicly traded partnerships that begin on or after August 3,
2015. For purposes of the immediately preceding sentence, an existing
publicly traded partnership is a partnership described in section
7704(b) that was formed prior to April 14, 2009. For purposes of this
effective date provision, the termination of a publicly traded
partnership under section 708(b)(1)(B) due to the sale or exchange of
50 percent or more of the total interests in partnership capital and
profits is disregarded in determining whether the publicly traded
partnership is an existing publicly traded partnership.
(2) Paragraph (e)(2)(ix) of this section applies to taxable years
ending on or after April 30, 2024.
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.
[[Page 34801]]
(b) Rules applicable to partnerships.
(c) Rules applicable to S corporations.
(d) Transfer election by a partnership or an 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) Notification and impact of recapture under section
48(a)(10)(C).
(g) Impact of an ineffective transfer election by an eligible
taxpayer.
(h) Carryback and carryforward.
(i) Rules applicable to real estate investment trusts.
(j) 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 of terms
for purposes of applying section 6418 and the section 6418 regulations.
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 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 component of carbon
capture
[[Page 34802]]
equipment within a single process train 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) Section 48 property--(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 this section during the time period
described in paragraph (f)(2) of this section.
(g) Section 6418 regulations. The term section 6418 regulations
means Sec. Sec. 1.6418-1 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.
(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 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 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 April 30, 2024. For taxable years ending before
April 30, 2024, taxpayers, however, may choose to apply the rules of
this section and Sec. Sec. 1.6418-2, -3, and -5, provided the
taxpayers apply the rules in their entirety and in a consistent manner.
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 under which 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
[[Page 34803]]
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 (as defined in Sec. 1.1502-1) 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 an 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.
(v) Grantors or others treated as owners of a trust. If an eligible
taxpayer is a grantor or any other person that is treated as the owner
of any portion of a trust as described in section 671 of the Code, then
the eligible taxpayer may make a transfer election in the manner
provided in this section for eligible credits determined with respect
to any eligible credit property held directly by the portion of the
trust that the eligible taxpayer is treated as owning under section
671.
(4) Circumstances under which 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 if eligible credit transferred for non-
cash consideration. No transfer election is allowed if 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 if 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 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 paragraph (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 an annual tax 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, including 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;
(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. (i) In general. A transfer election by an eligible taxpayer
with respect to a specified portion of an eligible credit must be made
on an original return (including a superseding return or any revisions
made on a superseding 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 for the first time on an amended return,
withdrawn on an
[[Page 34804]]
amended return, or made or withdrawn by filing an administrative
adjustment request under section 6227 of the Code. A numerical error
with respect to a properly claimed transfer election may be corrected
on an amended return or by filing an administrative adjustment request
under section 6227 if necessary; however, the eligible taxpayer's
original return, which must be signed under penalties of perjury, must
contain all of the information, including a registration number,
required by the section 6418 regulations. In order to correct an error
on an amended return or administrative adjustment request under section
6227, an eligible taxpayer must have made an error in the information
included on the original return such that there is a substantive item
to correct; an eligible taxpayer cannot correct a blank item or an item
that is described as being ``available upon request.'' There is no
late-election relief available under Sec. Sec. 301.9100-1 or 301.9100-
3 of this chapter for a transfer election that is not timely filed;
however, relief under Sec. 301.9100-2(b) may apply if the eligible
taxpayer has not received an extension of time to file a return after
the original due date, has timely filed a return, takes corrective
action under Sec. 301.9100-2(c) within the six-month extension period,
and meets the procedural requirements outlined in Sec. 301.9100-2(d).
(ii) Amending the amount of the eligible credit reported--(A) In
general. If an eligible taxpayer, after making a transfer election in
accordance with paragraph (b)(3) of this section on an original return
in accordance with this paragraph (b)(4)(i) of this section, determines
that the amount of the eligible credit reported on the eligible
taxpayer's original return is incorrect, the eligible taxpayer may
timely file an amended return, or administrative adjustment request
under section 6227, if applicable, adjusting the amount of eligible
credit.
(B) Amending the amount of the credit determined to reflect an
increased amount. To the extent an eligible taxpayer corrects the
amount of an eligible credit to reflect an increase in the amount of
the eligible credit reported, such amount must be reflected on the
credit source forms filed with the amended return, or administrative
adjustment request under section 6227, if applicable, but cannot be
reflected by either the eligible taxpayer or any transferee taxpayer as
a transferred specified credit portion on the transfer election
statement.
(C) Amending the amount of the credit determined to reflect a
decreased amount. To the extent an eligible taxpayer corrects the
amount of the eligible credit to reflect a decrease in the amount of
the eligible credit reported, such amount must be reflected on the
credit source forms filed with the amended return or administrative
adjustment request, if applicable, and the transfer election statement
reducing the amount of the credit reported in accordance with the
following--
(I) The amount of such decrease first reduces the amount if any, of
the eligible credit not transferred by the eligible taxpayer; and
(II) Any portion of the amount of such decrease that remains after
applying the reduction described in paragraph (b)(4)(ii)(C)(I) of this
section, reduces the amount reported by the transferee taxpayer, or if
the eligible credit was transferred to more than one transferee
taxpayer, reduces the amount of each transferee taxpayer's specified
credit portion on a pro rata basis.
(D) Treatment of cash consideration. In the case of a decrease in
the amount of the credit determined by the eligible taxpayer, any
amount of the cash consideration retained by the eligible taxpayer
after making an adjustment in accordance with paragraph (b)(4)(ii)(C)
of this section that does not directly relate to the remaining
specified credit portion must not be excluded from gross income as
described in paragraph (e)(2) of this section.
(iii) Examples. The examples in this paragraph (b)(4)(iii)
illustrate the application of paragraphs ((b)(6)(i) and (ii) of this
section.
(A) Example 1. A, a U.S. C corporation for Federal income tax
purposes (as defined in section 1361(a)(2) of the Code), qualifies as
an eligible taxpayer and determines a section 45V clean hydrogen tax
credit of $100X in year 1. At the end of year 1, A transfers the entire
$100X of the section 45V credit to B. A timely makes a transfer
election and properly reports the transaction in accordance with Sec.
1.6418-2(b) on its original return. In year 2, A concludes that the
amount of section 45V credit determined in year 1 was $120X. A may file
an amended return increasing the amount of the credit reported by $20X
on the appropriate credit source forms. A cannot increase the amount of
the credit reported on the transfer election statement, and B cannot
increase the amount of credit claimed on its return.
(B) Example 2. Same facts as Example 1 except that, in year 2, A
concludes that the amount of section 45V credit determined in year 1
was $80X. On an amended return, A decreases the amount of the credit
reported by $20X on the appropriate credit source forms. A should then
reduce the amount of the credit reported on the transfer election
statement. To avoid a determination of an excessive credit transfer, B
should file a qualified amended return pursuant to Sec. 1.6664-2(c)(3)
reducing the amount of credit claimed on its return by $20X.
(C) Example 3. C, a U.S. C corporation for Federal income tax
purposes (as defined in section 1361(a)(2) of the Code), qualifies as
an eligible taxpayer and determines a section 45Y clean electricity
production tax credit of $100X in year 1. At the end of year 1, C
transfers $80X of the 45Y credit determined to D, E, and F, with D
receiving $40X, E receiving $32X, and F receiving $80X. C timely makes
the transfer election and properly reports the transaction in
accordance with Sec. 1.6418-2(b) on its original return. In year 2, C
concludes that the amount of section 45Y credit determined in year 1
was $60X. C files an amended return decreasing the amount of the credit
reported by $40X on the appropriate credit source forms to reflect $60X
of section 45Y credit on its credit source forms. As a result of the
$40X decrease in the credit determined, C reduces the $20X of section
45Y retained by C to $0X, and reduces the amount of section 45Y credit
transferred to D, E, and F to $30X, $24X, and F $6X, respectively
(their respective pro rata shares of the reduced amount). Each of D, E,
and F should file a qualified amended return under Sec. 1.6664-2(c)(3)
reducing the amount of the credit claimed on their returns to avoid a
determination of an excessive credit transfer.
(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. Unless otherwise provided in guidance, 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'' before attaching such labeled document to their
respective returns. 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
[[Page 34805]]
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, 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.
(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. The eligible taxpayer must
provide to a transferee taxpayer the following minimum documentation--
(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
cannot 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). An eligible credit is
determined with respect to an eligible taxpayer if the eligible
taxpayer owns the underlying eligible credit property and conducts the
activities giving rise to the credit or, in the case of section 45X
(under which ownership of eligible credit property is not required), is
considered (under the regulations under section 45X) the taxpayer with
respect to which the section 45X credit is determined. 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 sections 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 an 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
[[Page 34806]]
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, when the parties to the transaction
have engaged in the transaction or a series of transactions with a
principal purpose of avoiding any Federal tax liability beyond the
intent of section 6418. For example, 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 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 an arm's
length price of the eligible credit without regard to other commercial
relationships is $80 paid in cash for $100 of the eligible credit.
Taxpayer A is engaged in a transaction in which 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 an arm's length price of the
eligible credit without regard to other commercial relationships 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--(i) In general. 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.
(ii) Rule for 52-53-week taxable years. For purposes of determining
the taxable year in which a credit is taken into account under section
6418(d) and paragraph (f)(1)(i) of this section, a 52-53-week taxable
year of an eligible taxpayer and transferee taxpayer is deemed to end
on or close on the last day of the calendar month nearest to the last
day of the 52-53-week taxable year, as the case may be.
(2) No gross income for a transferee taxpayer upon claiming a
transferred specified credit portion. A transferee taxpayer does not
have gross income upon 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 sections 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
[[Page 34807]]
credit portion is subject to the rules in section 469. In applying
section 469, unless a transferee taxpayer owns an interest in the
eligible taxpayer's trade or business at the time the work was done,
the fact that the specified credit portion is treated as determined in
connection with the conduct of a trade or business does not cause the
transferee taxpayer to be considered to own an interest in the eligible
taxpayer's trade or business at the time the work was done and does not
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 April 30, 2024. For taxable years ending before
April 30, 2024, taxpayers, however, may choose to apply the rules of
this section and Sec. Sec. 1.6418-1, -3, and -5, provided the
taxpayers apply the rules in their entirety and in a consistent manner.
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 an 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 an 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 or an 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 an 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 an 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 is
not required to 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 an 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
[[Page 34808]]
corporation is not required to 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 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 cannot
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
[[Page 34809]]
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's distributive share of the
transferred specified credit portion is treated as an extraordinary
item to the upper-tier partnership and must be allocated among the
partners of the upper-tier partnership as of the time the transfer of
the specified credit portion to the transferee partnership is treated
as occurring in accordance with paragraph (b)(4)(iv) of this section
and Sec. 1.706-4(e)(1) and (e)(2)(ix), regardless of whether the
transferee partnership and upper-tier partnership have different
taxable years under section 706(b). The upper-tier partnership 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 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 an S corporation--(1) In
general. A partnership or an 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 for the first time on an amended return, withdrawn on an
amended return, or made or withdrawn by filing an administrative
adjustment request under section 6227 of the Code. A numerical error
with respect to a properly claimed transfer election may be corrected
on an amended return or by filing an administrative adjustment request
under section 6227 if necessary; however, the partnership or S
corporation's original return, which must be signed under penalties of
perjury, must contain all of the information, including a registration
number, required by these final regulations. In order to correct an
error on an amended return or administrative adjustment request under
section 6227, a partnership or an S corporation must have made an error
in the information included on the original return such that there is a
substantive item to correct; a partnership or an S corporation cannot
correct a blank item or an item that is described as being ``available
upon request.'' There is no late-election relief available under
Sec. Sec. 301.9100-1 or 301.9100-3 of this chapter for a transfer
election that is not timely filed; however, relief under Sec.
301.9100-2(b) may apply if the partnership or S corporation has not
received an extension of time to file a return after the original due
date, has timely filed a return, takes corrective action under Sec.
301.9100-2(c) within the six-month extension period, and meets the
procedural requirements outlined in Sec. 301.9100-2(d).
(3) Irrevocable election. A transfer election by a partnership or
an 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
[[Page 34810]]
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 $45X. 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 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
[[Page 34811]]
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 eligible credits 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 U.S. C corporation for Federal tax purposes (as
defined in section 1361(a)(2) of the Code).
(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. Y's distributive share of the transferred specified
credit portion is treated as an extraordinary item to Y and must be
allocated among the partners of Y as of date X in year 1, which is when
the item is deemed to occur to YZ partnership, regardless of whether Y
and YZ partnership have the same taxable years under section 706(b).
(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 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 the S corporation's
year 1 tax return (with extension), the 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 $45X. The tax exempt income received or
accrued by the 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 an S corporation for the purpose of
purchasing eligible section 48 credits under section 6418. At the
beginning of year 2, the 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 the S
corporation and the
[[Page 34812]]
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 April 30, 2024. For taxable years ending before
April 30, 2024, taxpayers, however, may choose to apply the rules of
this section and Sec. Sec. 1.6418-1, -2, and -5, provided the
taxpayers apply the rules in their entirety and in a consistent manner.
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 an 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 (as defined in
Sec. 1.1502-1) 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) 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
(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 with respect 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
[[Page 34813]]
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 a transfer election
as ineffective if an eligible taxpayer fails to include the
registration number of the eligible credit property on the eligible
taxpayer's 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 April 30, 2024.
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 during which the excessive credit transfer determination
is made and not the taxable year during which 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), section
6418(b)(3), or Sec. 1.6418-2(e). The amount of a payment that directly
relates to the excessive credit transfer is equal to the total
consideration paid in cash by the transferee taxpayer for the specified
credit portion multiplied by the ratio of the amount of the excessive
credit transferred to the transferee taxpayer to the amount of the
transferred specified credit portion claimed by the transferee
taxpayer.
(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 is 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 if 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),
49(b), or 50(a) is not an excessive credit transfer.
(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 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 ratio of
the transferee taxpayer's portion of the total specified credit to 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 1--No excessive credit transfer. Taxpayer A claims $40x
of an eligible credit and transfers $60x of an eligible credit to
Transferee Taxpayer B related to a single facility that was expected to
generate $100x of such
[[Page 34814]]
eligible credit. In a subsequent year it is determined that the
facility only generated $60x 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 $60x 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 $40x of the eligible credit claimed.
(ii) Example 2--Excessive credit transfer. Same facts as in
paragraph (b)(3)(i) of this section (Example 1) except that Taxpayer A
transfers $75x of the $100x of eligible credit to Transferee Taxpayer B
in exchange for a cash payment of $67.5x. Taxpayer A claims $25x of the
eligible credit and Transferee Taxpayer B claims $75x of the eligible
credit. In this situation, a $40x reduction in credit results in a $15x
excessive credit transfer to Transferee Taxpayer B because the amount
of the credit claimed by Transferee Taxpayer B ($75x) exceeds the
amount of credit otherwise allowable with respect to the facility
($60x) by $15x. Therefore, Transferee Taxpayer B's tax is increased for
the determination year by $18x, 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 $15x.
Taxpayer A is disallowed the $25x of the eligible credit claimed. Under
paragraph (a)(3) of this section, the portion of the cash payment of
$67.5x made by Transferee Taxpayer B that is attributable to the
excessive credit transfer is $13.5x and is equal to Transferee Taxpayer
B's cash payment of $67.5x multiplied by the ratio of the excessive
credit transfer ($15x) to the transferred specified credit portion
claimed by Transferee Taxpayer B ($75x). Pursuant to paragraph (a)(3)
of this section, the payments of $13.5x made to Taxpayer A from
Transferee Taxpayer B that directly relate to the excessive credit
transfer are not subject to section 6418(b)(2), 6418(b)(3), or Sec.
1.6418-2(e).
(iii) Example 3--Excessive credit with multiple transferees. Same
facts as in paragraph (b)(3)(i) of this section (Example 1) except that
Taxpayer A transfers $50x of the eligible credit to Transferee Taxpayer
B and $30x of the eligible credit to Transferee Taxpayer C. In exchange
for transfer of the credit, Transferee Taxpayer B made a cash payment
of $45x and Transferee Taxpayer C made a cash payment of $27x. Taxpayer
A claims $20x of the eligible credit, Transferee Taxpayer B claims $50x
of the eligible credit, and Transferee Taxpayer C claims $30x 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 $20x
because the amount of the credit claimed by the transferees in total
($80x) exceeds the amount of credit otherwise allowable with respect to
the facility ($60x) by $20x. The excessive credit transfer to Taxpayer
B is equal to ($50x/$80x * $20x) = $12.5x, and the excessive credit
transfer to Taxpayer C is equal to ($30x/$80x * $20x) = $7.5x.
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 for the determination
year by the respective excessive credit transfer amount and 20 percent
of the excessive credit transfer amount ($15x for Transferee Taxpayer B
and $9x 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 $12.5x or $7.5x, respectively. Taxpayer A is
disallowed the $20x of eligible credit claimed. Under paragraph (a)(3)
of this section, the portion of the cash payment of $45x made by
Transferee Taxpayer B that is attributable to its portion of the
excessive credit transfer is $11.25x and is equal to Transferee
Taxpayer B's cash payment of $45x multiplied by the ratio of the
excessive credit transfer ($12.5x) to the transferred specified credit
portion claimed by Transferee Taxpayer B ($50x). Similarly, the portion
of the cash payment of $27x made by Transferee Taxpayer C that is
attributable to its portion of the excessive credit transfer is $6.75x
and is equal to Transferee Taxpayer C's cash payment of $27x multiplied
by the ratio of the excessive credit transfer ($7.5x) to the
transferred specified credit portion claimed by Transferee Taxpayer B
($30x). Pursuant to paragraph (a)(3) of this section, the payments made
to Taxpayer A by Transferee Taxpayer B ($11.25x) and Transferee
Taxpayer C ($6.75x) that directly relate to the excessive credit
transfer are not subject to section 6418(b)(2), 6418(b)(3), 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)--(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), 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. Rules similar to the rules of this paragraph
(d) apply in determining the amount of and liability for any section
49(b) recapture as between an eligible taxpayer and the transferee
taxpayer.
(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
[[Page 34815]]
taxpayer. This must occur in sufficient time to allow the eligible
taxpayer to calculate any basis adjustment with 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) Section 50(a) recapture event. Except
as provided in paragraph (d)(3)(iii) of this section, the transferee
taxpayer is responsible for any amount of tax increase under section
50(a) upon the occurrence of a recapture event, provided that if an
eligible taxpayer retains any amount of an eligible credit determined
with respect to an investment credit property directly held by the
eligible taxpayer, the amount of the tax increase under section 50(a)
that the eligible taxpayer is responsible for is equal to the recapture
amount multiplied by a fraction, the numerator of which is the total
credit amount that the eligible taxpayer retained, and the denominator
of which is the total credit amount determined for the eligible credit
property. The amount of the tax increase under section 50(a) that the
eligible transferee is responsible for is equal to the recapture amount
multiplied by a fraction, the numerator of which is the specified
credit portion transferred to the transferee taxpayer, and the
denominator of which is the total credit amount determined for the
eligible credit property.
(ii) Impact of section 50(a) recapture event on basis of investment
credit property held by 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 the recapture
amount on any credit amounts retained by the eligible taxpayer in
accordance with section 50.
(iii) Impact of partner or shareholder recapture under Sec.
1.6418-3(a)(6). To the extent that a partner in a transferor
partnership or a shareholder in a transferor S corporation recognizes
an amount of tax increase under section 50(a) or section 49(b) (that
is, a recapture amount) for an investment tax credit determined with
respect to investment credit property held directly by the transferor
partnership or transferor S corporation that does not result in
recapture liability to a transferee taxpayer pursuant to Sec. 1.6418-
3(a)(6), that amount reduces the remaining recapture amount under
paragraph (d)(3)(i) of this section with respect to the investment
credit property, and thus reduces the remaining recapture amounts to
which a transferee taxpayer and eligible taxpayer (to the extent of
retained credit amounts that have not be previously recaptured) is
liable. The amount of the reduction to the transferee taxpayer is
proportionate to the amount of the tax increase for the transferred
specified credit portion (based on the partner's or shareholder's
distributive share or pro rata share of tax exempt income,
respectively, resulting from the transfer).
(iv) Example (1). Impact of transferor partner recapture event to
transferee taxpayer--(A) Facts. A, B, C, and D are equal partners in
ABCD partnership, a partnership for Federal tax purposes that accounts
for tax items on a calendar year basis. The partnership agreement
provides that A, B, C and D share equally in all items of income, gain,
loss, deduction, and credit of ABCD partnership. ABCD partnership
invests $1,000x in an energy property in accordance with section 48 and
places the energy property in service on September 30, 2024. As of the
end of 2024, ABCD partnership has $300x of eligible credits under
section 48 with respect to energy property. Under Sec. 1.6418-
3(b)(2)(iv), each of A's, B's, C's, and D's distributive shares of the
otherwise eligible section 48 credits is determined under Sec. Sec.
1.46-3(f) and 1.704-1(b)(4)(ii) and is equal to $75x (based on each of
A, B, C and D being allocated $250x of basis). Before the due date for
ABCD partnership's 2024 tax return (with extension), A, B, C, and D
agree that with respect to A's $75x distributive share of the otherwise
eligible section 48 credits, $60x of eligible credits will be
transferred and $15x of eligible credits (or $50x basis) will be
allocated to A. A, B, C and D also agree that B, C, and D will each be
allocated their respective $75x of the $250x of section 48 eligible
credits (or basis). On November 15, 2024, ABCD partnership transfers
$60x of its eligible section 48 investment credits to Y, an unrelated
taxpayer. On January 1, 2025, A sells 50 percent of its interest in
ABCD partnership, which results in recapture under Sec. 1.47-6(a)(2).
(B) Analysis--recapture from partner A's disposition. Pursuant to
Sec. 1.6418-3(a)(6)(i), A is subject to the rules relating to
recapture caused by the disposition of its interest under Sec. 1.47-
6(a)(2), and A calculates recapture based on half of its share of the
basis of the investment credit property ($125x of basis) because A
disposed of 50 percent of its interest in ABCD partnership. This
results in a recapture amount of $37.5x to A (that is, the amount of
the tax increase that A is responsible for due to the recapture event).
Of the $37.5x recapture amount, $7.5x relates to $15x of credits
retained by A, and $30x relates to the $60x of A's distributive share
of the otherwise eligible section 48 credits that were transferred.
This recapture event reduces the total potential recapture with respect
to the investment credit property from $300x to $262.5x. Y is not
subject to recapture because of partner A's disposition, but, if a
recapture event with respect to the energy property takes place at a
later date, the rules in Sec. 1.6418-5(d)(3)(i) will take partner A's
disposition and recapture amount into account when determining Y's
recapture amount at that date.
(v) Example (2). Impact of recapture from ABCD partnership's
disposition of the investment credit property--(A) Facts. Same facts as
Example (1), except that on October 15, 2025, ABCD partnership sells
the investment credit property to an unrelated third party.
(B) Analysis--recapture event from ABCD partnership's disposition.
As a result of ABCD partnership's disposition of the energy property to
a third party after one year, but before two years after placing the
energy property into service, under section 50(a)(1)(B), the recapture
percentage is 80 percent. This means that 80 percent of the remaining
$262.5x of eligible section 48 credits (or $210x) is subject to
recapture. Because ABCD partnership retained eligible credits related
to the energy property, the $210x recapture amount, which is the amount
of the tax increase under section 50(a), must be split between ABCD
partnership and Y. Under Sec. 1.6418-5(d)(3)(i), ABCD partnership must
recapture $186x of the $210x credit amount, which is determined by
multiplying the $210x by a fraction, the numerator of which is $232.5x
($240x of retained eligible credits less $7.5x of retained eligible
credits already recaptured by A) and the denominator of which is
$262.5x ($300x of total credits determined for the energy property less
$37.5x credits recaptured with respect to A's distributive share of
[[Page 34816]]
the otherwise eligible section 48 credits transferred by ABCD
partnership to Y and A's distributive share of the eligible credits
retained by A). Also under Sec. 1.6418-5(d)(3)(i), Y has a $24x
recapture amount determined by multiplying the $210x recapture amount
by a fraction, the numerator of which is $30x ($60x specified credit
portion transferred to Y less the $30x recaptured by A that relates to
A's distributive share of the otherwise eligible section 48 credits
transferred by ABCD partnership to Y), and the denominator of which is
$262.5x ($300x of total credits determined for the energy property less
$37.5x credits recaptured with respect to A's distributive share of the
otherwise eligible section 48 credits transferred by ABCD partnership
to Y and A's distributive share of the eligible credits retained by A).
(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, provided that if an eligible
taxpayer retains any amount of an eligible credit determined with
respect to a component of carbon capture equipment owned by the
eligible taxpayer within a single process train described in Sec.
1.45Q-2(c)(3), the amount of the tax increase under section 45Q(f)(4)
that the eligible taxpayer is responsible for is equal to the recapture
amount multiplied by a fraction, the numerator of which is the total
credit amount that the eligible taxpayer retained, and the denominator
of which is the total credit amount determined for the eligible credit
property. The amount of the tax increase under section 45Q(f)(4) that
the transferee taxpayer is responsible for is equal to the recapture
amount multiplied by a fraction, the numerator of which is the
specified credit portion transferred to the transferee taxpayer, and
the denominator of which is the total credit amount determined for the
eligible credit property.
(f) [Reserved].
(g) 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.
(h) Carryback and carryforward. A transferee taxpayer can apply the
rules in section 39(a)(4) of the Code (regarding the carryback and
carryforward period for applicable 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)).
(i) Rules applicable to real estate investment trusts--(1)
Treatment of eligible credits prior to transfer. If a real estate
investment trust has eligible credits that it may transfer, the value
of those credits is not included in either the numerator or denominator
in determining the value of the REIT's total assets in section
856(c)(4) of the Code.
(2) Treatment of eligible credit transfer for purposes of section
857 safe harbor rules. The transfer of a specified credit portion
pursuant to a valid transfer election under section 6418 is not a sale
for purposes of section 857(b)(6)(C)(iii) and section 857(b)(6)(D)(iv)
of the Code.
(j) Applicability date. This section applies to taxable years
ending on or after April 30, 2024. For taxable years ending before
April 30, 2024, taxpayers, however, may choose to apply the rules of
this section and Sec. Sec. 1.6418-1 through -3 provided the taxpayers
apply the rules in their entirety and in a consistent manner.
Sec. 1.6418-4T [Removed]
0
Par. 4. Section 1.6418-4T is removed.
Douglas W. O'Donnell,
Deputy Commissioner.
Approved: April 18, 2024
Aviva Aron-Dine,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-08926 Filed 4-25-24; 8:45 am]
BILLING CODE 4830-01-P