[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]



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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  

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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)

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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

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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

[[Page 34784]]

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

[[Page 34785]]

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

[[Page 34789]]

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

[[Page 34793]]

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

[[Page 34794]]

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

[[Page 34796]]

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,

[[Page 34797]]

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