Proposed Rule2023-12799
Section 6418 Transfer of Certain Credits
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Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 21, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations concerning the election under the Inflation Reduction Act of 2022 to transfer certain Federal income tax credits. The proposed regulations describe the proposed rules for the election to transfer eligible credits in a taxable year, including definitions and special rules applicable to partnerships and S corporations and regarding excessive credit transfer or recapture events. In addition, the proposed regulations describe rules related to an IRS pre-filing registration process that would be required. These proposed regulations affect eligible taxpayers that elect to transfer eligible credits in a taxable year and the transferee taxpayers to which eligible credits are transferred.
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<title>Federal Register, Volume 88 Issue 118 (Wednesday, June 21, 2023)</title>
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[Federal Register Volume 88, Number 118 (Wednesday, June 21, 2023)]
[Proposed Rules]
[Pages 40496-40526]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-12799]
[[Page 40495]]
Vol. 88
Wednesday,
No. 118
June 21, 2023
Part III
Department of the Treasury
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Internal Revenue Service
26 CFR Part 1
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Section 6418 Transfer of Certain Credits; Proposed Rule
Federal Register / Vol. 88, No. 118 / Wednesday, June 21, 2023 /
Proposed Rules
[[Page 40496]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-101610-23]
RIN 1545-BQ64
Section 6418 Transfer of Certain Credits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations concerning the
election under the Inflation Reduction Act of 2022 to transfer certain
Federal income tax credits. The proposed regulations describe the
proposed rules for the election to transfer eligible credits in a
taxable year, including definitions and special rules applicable to
partnerships and S corporations and regarding excessive credit transfer
or recapture events. In addition, the proposed regulations describe
rules related to an IRS pre-filing registration process that would be
required. These proposed regulations affect eligible taxpayers that
elect to transfer eligible credits in a taxable year and the transferee
taxpayers to which eligible credits are transferred.
DATES: Written or electronic comments must be received by August 14,
2023. The public hearing on these proposed regulations is scheduled to
be held on August 23, 2023, at 10 a.m. ET. Requests to speak and
outlines of topics to be discussed at the public hearing must be
received by August 14, 2023. If no outlines are received by August 14,
2023, the public hearing will be cancelled. Requests to attend the
public hearing must be received by 5 p.m. ET on August 21, 2023. The
public hearing will be made accessible to people with disabilities.
Requests for special assistance during the hearing must be received by
August 18, 2023.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and
REG-101610-23) by following the online instructions for submitting
comments. Once submitted to the Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The Department of Treasury (Treasury
Department) and the IRS will publish for public availability any
comments submitted, whether electronically or on paper, to the IRS's
public docket. Send paper submissions to: CC:PA:LPD:PR (REG-101610-23),
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations,
Jeremy Milton at (202) 317-5665 and James Holmes at (202) 317-5114 (not
a toll-free number); concerning submissions of comments and requests
for a public hearing, Vivian Hayes at (202) 317-6901 (not a toll-free
number) or by email to <a href="/cdn-cgi/l/email-protection#65151007090c060d0004170c0b0216250c17164b020a13"><span class="__cf_email__" data-cfemail="87f7f2e5ebeee4efe2e6f5eee9e0f4c7eef5f4a9e0e8f1">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
Section 6418 was added to the Internal Revenue Code (Code) on
August 16, 2022, by section 13801(b) of Public Law 117-169, 136 Stat.
1818, 2009, commonly referred to as the Inflation Reduction Act of 2022
(IRA). Section 6418 allows ``eligible taxpayers'' to elect to transfer
certain credits to unrelated taxpayers rather than using the credits
against their Federal income tax liabilities. Section 6418 also
provides special rules relating to partnerships and S corporations and
directs the Secretary of the Treasury or her delegate (Secretary) to
provide rules for making elections under section 6418 and to require
information or registration necessary for purposes of preventing
duplication, fraud, improper payments, or excessive payments under
section 6418. Section 13801(g) of the IRA provides that section 6418
applies to taxable years beginning after December 31, 2022. This
document contains proposed regulations that would amend the Income Tax
Regulations (26 CFR part 1) to implement the statutory provisions of
section 6418.
In the Rules and Regulations section of this issue of the Federal
Register, the Treasury Department and the IRS are issuing temporary
regulations under Sec. 1.6418-4T that implement the pre-filing
registration process described in Sec. 1.6418-4 of the proposed
regulations. The temporary regulations require eligible taxpayers that
want to elect to transfer eligible credits under section 6418 to
register with the IRS through an IRS electronic portal in advance of
the eligible taxpayer filing the return on which the election under
section 6418 is made.
I. Overview of Section 6418
Section 6418(a) provides that, in the case of an eligible taxpayer
that elects to transfer to an unrelated transferee taxpayer all (or any
portion specified in the election) of an eligible credit determined
with respect to the eligible taxpayer for any taxable year, the
transferee taxpayer specified in such election (and not the eligible
taxpayer) is treated as the taxpayer for purposes of the Code with
respect to such credit (or such portion thereof). Under section
6418(b), any amount of consideration paid by the transferee taxpayer to
the eligible taxpayer for the transfer of such credit (or such portion
thereof) is (1) required to be paid in cash, (2) not included in the
eligible taxpayer's gross income, and (3) not allowed as a deduction to
the transferee taxpayer under any provision of the Code.
Section 6418(f)(2) defines the term ``eligible taxpayer'' to mean
any taxpayer that is not described in section 6417(d)(1)(A).
Section 6418(f)(1)(A) defines the term ``eligible credit'' to mean
each of the following 11 credits:
(1) So much of the credit for alternative fuel vehicle refueling
property allowed under section 30C of the Code that, pursuant to
section 30C(d)(1), is treated as a credit listed in section 38(b) of
the Code (section 30C credit);
(2) The renewable electricity production credit determined under
section 45(a) of the Code (section 45 credit);
(3) The credit for carbon oxide sequestration determined under
section 45Q(a) of the Code (section 45Q credit);
(4) The zero-emission nuclear power production credit determined
under section 45U(a) of the Code (section 45U credit);
(5) The clean hydrogen production credit determined under section
45V(a) of the Code (section 45V credit);
(6) The advanced manufacturing production credit determined under
section 45X(a) of the Code (section 45X credit);
(7) The clean electricity production credit determined under
section 45Y(a) of the Code (section 45Y credit);
(8) The clean fuel production credit determined under section
45Z(a) of the Code (section 45Z credit);
(9) The energy credit determined under section 48 of the Code
(section 48 credit);
(10) The qualifying advanced energy project credit determined under
section 48C of the Code (section 48C credit); and
(11) The clean electricity investment credit determined under
section 48E of the Code (section 48E credit).
Under section 6418(f)(1)(B), an election to transfer a section 45
credit, section 45Q credit, section 45V credit,
[[Page 40497]]
or section 45Y credit is made separately with respect to each facility
and for each taxable year during the credit period of the respective
credit. Pursuant to section 6418(f)(1)(C) an eligible credit does not
include any business credit carryforward or business credit carryback.
Section 6418(g)(4) provides that an eligible taxpayer may not make an
election to transfer credits for progress expenditures.
Pursuant to section 6418(e)(1), an eligible taxpayer must make an
election to transfer any portion of an eligible credit on its original
tax return for the taxable year for which the credit is determined by
the due date of such return (including extensions of time) but such an
election cannot be made earlier than 180 days after the date of the
enactment of section 6418 by section 13801(b) of the IRA (that is, in
no event earlier than 180 days after August 16, 2022, which is February
13, 2023). An eligible taxpayer may not revoke an election to transfer
any portion of a credit. Pursuant to section 6418(d), a transferee
taxpayer takes the transferred eligible credit into account in its
first tax year ending with, or after, the eligible taxpayer's tax year
with respect to which the transferred eligible credit was determined.
Section 6418(e)(2) provides that a transferee taxpayer may not make any
additional transfers of a transferred eligible credit under section
6418.
II. Section 6418 Rules for Partnerships and S Corporations
Pursuant to section 6418(c), in the case of a partnership or an S
corporation that directly holds a facility or property for which an
eligible credit is determined: the election to transfer an eligible
credit is made at the entity level and no election by any partner or
shareholder is allowed with respect to such facility or property; any
amount received as consideration for a transferred eligible credit is
treated as tax exempt income for purposes of sections 705 and 1366 of
the Code; and a partner's distributive share of the tax exempt income
is based on the partner's distributive share of the transferred
eligible credit.
III. Special Rules
Section 6418(g) provides special rules regarding the elective
transfer of certain credits. Section 6418(g)(1) provides that, as a
condition of, and prior to, any transfer of any portion of an eligible
credit pursuant to section 6418(a), the Secretary may require such
information (including, in such form or manner as is determined
appropriate by the Secretary, such information returns) or registration
as the Secretary deems necessary for purposes of preventing
duplication, fraud, improper payments, or excessive payments under
section 6418.
Pursuant to section 6418(g)(2), if the Secretary determines that
there is an excessive credit transfer to a transferee taxpayer, then
the tax imposed on the transferee taxpayer by chapter 1 of the Code
(chapter 1) (regardless of whether such entity would otherwise be
subject to tax under chapter 1) is increased in the year of such
determination by the amount of the excessive credit transfer plus 20
percent of such excessive credit transfer. The additional amount of 20
percent of the excessive credit transfer does not apply if the
transferee taxpayer demonstrates to the satisfaction of the Secretary
that the excessive credit transfer resulted from reasonable cause. An
excessive credit transfer is defined in section 6418(g)(2)(C) as, with
respect to a facility or property for which an election is made under
section 6418(a) for any taxable year, an amount equal to the excess of
(i) the amount of the eligible credit claimed by the transferee
taxpayer with respect to such facility or property for such taxable
year; over (ii) the amount of the eligible credit that, without
application of section 6418, would be otherwise allowable under the
Code with respect to such facility or property for such taxable year.
Pursuant to section 6418(g)(3), if a section 48 credit, section 48C
credit, or section 48E credit is transferred, the basis reduction rules
of section 50(c) apply to the applicable investment credit property as
if the transferred eligible credit was allowed to the eligible
taxpayer. Further, if applicable investment credit property is disposed
of, or otherwise ceases to be investment credit property with respect
to the eligible taxpayer, before the close of the recapture period as
described in section 50(a)(1), then certain notification requirements
apply. The eligible taxpayer must notify the transferee taxpayer of a
recapture event in such form and manner as the Secretary may provide.
In addition, the transferee taxpayer must notify the eligible taxpayer
of the recapture amount, if any, in such form and manner as the
Secretary may provide.
Section 6418(h) directs the Secretary to issue regulations or other
guidance as may be necessary to carry out the purposes of section 6418,
including guidance providing rules for determining a partner's
distributive share of the tax exempt income described in section
6418(c)(1).
IV. Notice 2022-50
On October 24, 2022, the Treasury Department and the IRS published
Notice 2022-50, 2022-43 I.R.B. 325, to, among other things, request
feedback from the public at large on potential issues with respect to
the transfer election provisions under section 6418 that may require
guidance. Over 200 comment letters were received in response to Notice
2022-50. Based in part on the feedback received, the Treasury
Department and the IRS are issuing these proposed regulations regarding
the transfer election provisions under section 6418. The major areas
with respect to which public stakeholders provided letters are
discussed in the following Explanation of Provisions.
Explanation of Provisions
I. Transfers of Eligible Credits
Proposed Sec. 1.6418-1(a) would provide generally that an eligible
taxpayer may make a transfer election under proposed Sec. 1.6418-2 to
transfer any specified portion of an eligible credit determined with
respect to any eligible credit property of such eligible taxpayer for
any taxable year to a transferee taxpayer in accordance with section
6418 of the Code and Sec. Sec. 1.6418-1 through 1.6418-5 (``the
section 6418 regulations''). The remainder of proposed Sec. 1.6418-1
would then provide definitions for terms used throughout the section
6418 regulations, including definitions of eligible taxpayer, eligible
credit, eligible credit property, paid in cash, specified credit
portion, transferred specified credit portion, transfer election,
transferee taxpayer, transferee partnership, transferee S corporation,
transferor partnership, and transferor S corporation.
Proposed Sec. 1.6418-1(b) would define the term ``eligible
taxpayer'' to mean any taxpayer (as defined in section 7701(a)(14) of
the Code), other than one described in section 6417(d)(1)(A) and
proposed Sec. 1.6417-1(b). The term ``taxpayer'' in section
7701(a)(14) means ``any person subject to any internal revenue tax''
and generally, includes entities that have a United States employment
tax or excise tax obligation even if they do not have a United States
income tax obligation.
Proposed Sec. 1.6418-1(c) would define the term ``eligible
credit'' consistent with section 6418(f)(1)(A), and include all 11 of
the credits listed in such section. Further, the definition would
include a rule that an eligible credit does not include any business
credit carryforward or business credit carryback determined under
section 39
[[Page 40498]]
of the Code, which is consistent with section 6418(f)(1)(C). The
regulations also would clarify that the entire amount of any eligible
credit is separately determined with respect to each single eligible
credit property of the eligible taxpayer and includes any bonus credit
amounts (described in proposed Sec. 1.6418-2(c)(3)) determined with
respect to that single eligible credit property.
Consistent with the proposed rules described later in this
Explanation of Provisions related to the manner of making the transfer
election, proposed Sec. 1.6418-1(d) would generally define the term
``eligible credit property'' as the unit of property of an eligible
taxpayer with respect to which the amount of an eligible credit is
determined. While the proposed regulations reference the statutory
rules for each eligible credit to determine the appropriate unit of
measurement for section 6418 registrations and election, the following
additional information is relevant for each of the 11 eligible credits:
(1) For the section 30C credit, a taxpayer would be required to
register and make an election on a property-by-property basis. For this
purpose, a property means a ``qualified alternative fuel vehicle
refueling property'' as defined in section 30C(c).\1\
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\1\ These proposed regulations under section 6418 do not impact
the ability of tax-exempt entities to transfer a section 30C credit
to the seller of the qualified alternative fuel vehicle refueling
property under section 30C(e)(2).
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(2) For the section 45 credit, a taxpayer would be required to
register and make an election on a facility-by-facility basis. For this
purpose, a facility means a ``qualified facility'' as defined in
section 45(d).
(3) For the section 45Q credit, a taxpayer would be required to
register and make an election on the basis of a unit of carbon capture
equipment. The regulations under Sec. 1.45Q-2(c)(3) state that all
components that make up an independently functioning process train
capable of capturing, processing, and preparing carbon oxide for
transport (single process train) will be treated as a single ``unit of
carbon capture equipment.''
(4) For the section 45U credit, a taxpayer would be required to
register and make an election on a facility-by-facility basis. For this
purpose, a facility means a ``qualified nuclear power facility'' as
defined in section 45U(b)(1).
(5) For the section 45V credit, a taxpayer would be required to
register and make an election on a facility-by-facility basis. For this
purpose, a facility means a ``qualified clean hydrogen production
facility'' as defined in section 45V(c)(3).
(6) For the section 45X credit, a taxpayer would be required to
register and make an election on a facility-by-facility basis. For this
purpose, a facility means one that produces eligible components, as
described in guidance under sections 48C and 45X.
(7) For the section 45Y credit, a taxpayer would be required to
register and make an election on a facility-by-facility basis. For this
purpose, a facility means a ``qualified facility'' as defined in
section 45Y(b)(1).
(8) For the section 45Z credit, a taxpayer would be required to
register and make an election on a facility-by-facility basis. For this
purpose, a facility means a ``qualified facility'' as defined in
section 45Z(d)(4).
(9) For the section 48 credit, a taxpayer would be required to
register and make an election on a property-by-property basis. For this
purpose, a property means an energy property, which generally includes
all components of property that are functionally interdependent (unless
such equipment is an addition or modification to an energy property).
See Notice 2018-59, 2018-28 I.R.B. 196. Components of property are
functionally interdependent if the placing in service of each component
is dependent upon the placing in service of each of the other
components in order to generate electricity. Functionally-
interdependent components of property that can be operated and metered
together and can begin producing electricity separately from other
components of property within a larger energy project will be
considered an energy property. See Id. (Section 7.01 of Notice 2018-59
describes energy property generally and also cites Rev. Rul. 94-31,
1994-1 C.B. 16.) Energy property is comprised of all components of
property necessary to generate electricity up to the point of
transmission or distribution. However, an eligible taxpayer would have
the option, to the extent consistently applied for purposes of the pre-
filing registration requirements of proposed Sec. 1.6418-4 and the
election requirements of proposed Sec. Sec. 1.6418-2 through 1.6418-3,
to make the section 6418 registrations and election for an energy
project, as defined in forthcoming guidance. See section
48(a)(9)(A)(ii).
(10) For the section 48C credit, a taxpayer would be required to
register and make an election on a property-by-property basis. For this
purpose, a property means an ``eligible property'' as defined in
section 48C(c)(2).
(11) For the section 48E credit, a taxpayer would be required to
register and make an election on a facility-by-facility basis if the
credit relates to a qualified investment with respect to a qualified
facility. For this purpose, a facility means a ``qualified facility''
as defined in section 48E(b)(3). However, a taxpayer would be required
to register and make an election with respect to the section 48E credit
on a property-by-property basis if the credit relates to a qualified
investment with respect to energy storage technology. For this purpose,
a property means a unit of ``energy storage technology'' as defined in
section 48E(c)(2).
Proposed Sec. 1.6418-1(j) would define the term ``transfer
election'' as an election under section 6418(a) of the Code to transfer
to a transferee taxpayer a specified portion of an eligible credit
determined with respect to an eligible credit property in accordance
with the section 6418 regulations. This term would be consistent with
the references in section 6418(a) to a taxpayer ``elect[ing] to
transfer'' and transferring ``all (or any specified portion in the
election)'' of an eligible credit.
Also consistent with the language in section 6418(a) requiring the
portion of the credit transferred to be specified, proposed Sec.
1.6418-1(h) would define a ``specified credit portion'' to mean a
proportionate share (including all) of an entire eligible credit
determined with respect to an eligible credit property of the eligible
taxpayer that is specified in a transfer election. A specified credit
portion of an eligible credit would be required to reflect a
proportionate share of each bonus credit amount that is taken into
account in calculating the entire amount of the eligible credit
determined with respect to a single eligible credit property. In
defining this term, the Treasury Department and the IRS considered
questions from stakeholders asking whether it is possible to transfer
bonus credit amounts related to an eligible credit separately from the
``base'' eligible credit determined with respect to the relevant
eligible credit property. As section 6418 does not contemplate such a
transfer, the proposed regulations would not permit this type of
transfer. Thus, an eligible taxpayer would not be permitted to divide
an eligible credit from a single eligible credit property into the
portion from the qualified activity or investment credit property and
one or more bonus amounts of the eligible credit. Instead, an eligible
taxpayer would be permitted to transfer the entire eligible credit (or
portion of the entire eligible credit, which would include a
proportionate amount of any
[[Page 40499]]
component part of the entire eligible credit) determined with respect
to a single eligible credit property.
Proposed Sec. 1.6418-1(p) would define the term ``transferred
specified credit portion'' to mean the specified credit portion that is
transferred from an eligible taxpayer to a transferee taxpayer pursuant
to a transfer election.
Section 6418(b)(1) and proposed Sec. 1.6418-2(a)(4)(ii)
(disallowing transfer elections for non-cash consideration) and
proposed Sec. 1.6418-2(e)(1) (treatment of payments made in connection
with a transfer election) would require that any amounts paid by a
transferee taxpayer in connection with the transfer of a specified
credit portion be paid in cash. Proposed Sec. 1.6418-1(f) would define
``paid in cash'' as a payment made in United States dollars. The
definition of ``paid in cash'' contemplates limiting the manner in
which United States dollars may be transferred in connection with a
transfer election to payments by cash, check, cashier's check, money
order, wire transfer, ACH transfer, or other bank transfer of
immediately available funds. The proposed regulations also would
provide a safe harbor timing rule to allow for certainty as to the
treatment of such payments of United States dollars made during a
prescribed time period. The proposed regulations would provide that a
payment does not violate the paid in cash requirement if the cash
payment is made within the period beginning on the first day of the
eligible taxpayer's taxable year during which a specified credit
portion is determined and ending on the due date for completing a
transfer election statement (as provided in proposed Sec. 1.6418-
2(b)(5)(iii)). The proposed regulations also address an issue raised by
stakeholders regarding advanced commitments and would provide that a
contractual commitment to purchase eligible credits in advance of the
date a specified credit portion is transferred satisfies the paid in
cash requirement, so long as all cash payments are made during the time
period described in proposed Sec. 1.6418-1(f)(1)(ii).
Proposed Sec. 1.6418-1(m) would define the term ``transferee
taxpayer'' by incorporating the requirement in section 6418(a) that an
eligible taxpayer only transfer eligible credits to a taxpayer that is
not related (within the meaning of section 267(b) or 707(b)(1)) to the
eligible taxpayer. Thus, the proposed regulations would define a
transferee taxpayer as any taxpayer that is not related (within the
meaning of section 267(b) or 707(b)(1) of the Code) to the eligible
taxpayer making the transfer election to which the eligible taxpayer
transfers a specified credit portion of an eligible credit. Further,
consistent with the proposed definitions of transferee taxpayer and
eligible taxpayer, proposed Sec. 1.6418-1(k), (l), (n), and (o) would
define the terms ``transferee partnership,'' ``transferee S
corporation,'' ``transferor partnership,'' and ``transferor S
corporation,'' respectively.
II. Rules for Making Transfer Elections
The rules in proposed Sec. 1.6418-2 would describe the general
requirements for making a transfer election, including clarifying when
a transfer election can be made in certain ownership situations,
situations where no transfer election may be made, the manner and due
date for the election, limitations related to a transfer election, the
determination of an eligible credit, the treatment of payments related
to a transfer of eligible credits, and the treatment of a transferred
specified credit portion by a transferee taxpayer.
A. Transfer Elections in General
Proposed Sec. 1.6418-2(a) would provide rules generally applicable
to a transfer election. Consistent with the language in section
6418(a), the proposed rules would provide that if a valid transfer
election is made by an eligible taxpayer for any taxable year, the
transferee taxpayer specified in such election (and not the eligible
taxpayer) is treated as the taxpayer for purposes of the Code with
respect to the specified credit portion.
Proposed Sec. 1.6418-2(a)(2) would clarify the rule related to
multiple transfer elections. Stakeholders requested clarification on
whether an eligible taxpayer can make multiple elections to transfer an
eligible credit to multiple transferees. Proposed Sec. 1.6418-2(a)(2)
would provide that an eligible taxpayer may make multiple transfer
elections to transfer one or more specified credit portion(s) to
multiple transferee taxpayers, provided that the aggregate amount of
specified credit portions transferred with respect to a single eligible
credit property does not exceed the amount of the eligible credit
determined with respect to the eligible credit property. In other
words, section 6418 does not, and therefore these proposed regulations
would not, limit the number of transfer elections or number of
transferee taxpayers for which an eligible taxpayer can make a transfer
election, unless the transfer of a specified credit portion would
exceed the available eligible credit to be transferred.
Proposed Sec. 1.6418-2(a)(3) would address when eligible taxpayers
are permitted to make a transfer election in certain ownership
situations. The situations addressed are based on requests from
stakeholders for clarification. Rules are proposed for disregarded
entities, undivided ownership interests, members of a consolidated
group, and partnerships and S corporations. For a disregarded entity
wholly owned (directly or indirectly) by an eligible taxpayer, the
eligible taxpayer makes a transfer election. For undivided ownership
interests, if eligible credit property is directly owned through an
arrangement properly treated as a tenancy-in-common for Federal income
tax purposes, or through an organization that has made a valid election
under section 761(a) of the Code, each co-owner's or member's undivided
ownership share of the eligible credit property will be treated for
purposes of section 6418 as a separate eligible credit property owned
by such co-owner or member, and each makes a separate transfer
election. For members of a consolidated group, a member is required to
make a transfer election. Finally, for a partnership or S corporation,
with respect to any eligible credit property held directly by such
partnership or S corporation, the partnership or S corporation makes a
transfer election, not the partners or shareholders.
Proposed Sec. 1.6418-2(a)(4) would describe three circumstances
where no transfer election can be made.
First, consistent with section 6418(g)(4), the proposed regulations
preclude any election with respect to any amount of an eligible credit
determined based on progress expenditures that is allowed pursuant to
rules similar to the rules of section 46(c)(4) and (d) (as in effect on
the day before the date of the enactment of the Revenue Reconciliation
Act of 1990).
Second, the proposed rules would preclude a transfer election when
an eligible taxpayer receives any amount not paid in cash (as defined
in Sec. 1.6418-1(f)) as consideration in connection with the transfer
of a specified credit portion. Section 6418(b)(1) requires that ``any''
consideration paid in connection with a transfer be paid in cash. Thus,
if any consideration is other than cash, the transfer election is
disallowed.
Third, no election is allowed when eligible credits are not
determined with respect to an eligible taxpayer. As further explained
later in this preamble, an eligible credit is determined with respect
to an eligible taxpayer in cases where the eligible taxpayer owns the
underlying eligible credit property or, if ownership is not required,
otherwise
[[Page 40500]]
conducts the activities giving rise to the underlying eligible credit.
As examples, the proposed regulations describe two situations where a
credit is allowable to an eligible taxpayer, but the eligible taxpayer
is not permitted to transfer the credit under section 6418. First, the
proposed regulations provide that a section 45Q credit allowable to a
person that disposes of qualified carbon oxide, utilizes qualified
carbon oxide, or uses qualified carbon oxide as a tertiary injectant
due to an election made under section 45Q(f)(3)(B) is not transferable
under section 6418. Second, the proposed regulations provide that a
section 48 credit allowable to a lessee of property under section
50(d)(5) and an election under Sec. 1.48-4 is not transferable under
section 6418. In both cases, the taxpayer is only allowed to claim the
credit as a result of an election by another taxpayer, and does not own
the eligible credit property to which the credit was determined. These
situations can be contrasted with a sale-leaseback transaction under
section 50(d)(4) where a purchaser/lessor of investment credit property
owns the underlying property to which an eligible credit is determined.
In that case, provided all of the rules are met, because the eligible
credit is determined with respect to eligible credit property owned and
treated as originally placed in service by the purchaser/lessor, the
purchaser/lessor can elect to transfer eligible credits determined with
respect to the property under section 6418.
B. Manner and Due Date of Making a Transfer Election
Section 6418(a) allows an eligible taxpayer to transfer an eligible
credit (or portion thereof) determined with respect to such taxpayer to
a transferee taxpayer. Generally, section 6418 does not expressly
provide for the relevant unit of measurement for an election to
transfer eligible credits. Proposed Sec. 1.6418-2(b) would provide
generally that an eligible taxpayer is required to make a transfer
election to transfer a specified credit portion on the basis of a
single eligible credit property. For example, an eligible taxpayer that
determines eligible credits with respect to two eligible credit
properties would need to make a separate transfer election with respect
to any specified credit portion determined with respect to each
eligible credit property. This approach would provide eligible
taxpayers with flexibility in determining the credit to transfer and
aligns with how an excessive credit transfer is defined in section
6418(g)(2)(C).
In requiring the election to be made on the basis of a single
eligible credit property, the Treasury Department and the IRS request
comments on two issues. First, whether more specific guidance with
respect to any eligible credit property is needed to allow eligible
taxpayers to make the election as required. If such guidance is needed,
suggestions for further defining the relevant eligible credit property
are requested. Second, whether to adopt a grouping rule that allows
taxpayers to make an election with respect to certain groups of
eligible credit properties. If such a rule is recommended, discussion
of the eligible credits that a rule should apply to, the appropriate
circumstances for grouping, as well as specific rules for determining a
group with respect to an eligible credit is requested.
Consistent with section 6418(f)(1)(B)(i), proposed Sec. 1.6418-
2(b)(2) would provide specific rules in the case of any section 45
credit, section 45Q credit, section 45V credit, or section 45Y credit
that is an eligible credit. The proposed rules would provide that a
transfer election is made with respect to each eligible credit property
for which an eligible credit is determined. Consistent with section
6418(f)(1)(B)(ii), the proposed rules also would provide that a
transfer election would be required to be made for each taxable year an
eligible taxpayer elects to transfer a specified credit portion with
respect to such eligible credit property during the 10-year period
beginning on the date such eligible credit property was originally
placed in service (or, in the case of a section 45Q credit, for each
taxable year during the 12-year period beginning on the date the
eligible credit property was originally placed in service).
Proposed Sec. 1.6418-2(b)(3) would provide the manner of making a
valid transfer election. Stakeholders asked for clarity regarding the
manner of making a valid election and provided suggestions for how an
election should be effectuated and potential information to be
included. Proposed Sec. 1.6418-2(b)(3) outlines the requirements for
making a transfer election for eligible taxpayers other than
partnerships or S corporations (those rules are in proposed Sec.
1.6418-3(d)). While described in more detail in the proposed
regulations, to make a valid transfer election, an eligible taxpayer as
part of filing a return (or a return for a short year within the
meaning of section 443 of the Code (short year return)), generally
would be required to include the following--(A) a properly completed
relevant source credit form for the eligible credit; (B) a properly
completed Form 3800, General Business Credit (or its successor),
including reporting the registration number received during the
required pre-filing registration (as described in proposed Sec.
1.6418-4); (C) a schedule attached to the Form 3800 (or its successor)
showing the amount of eligible credit transferred for each eligible
credit property; (D) a transfer election statement as described later
in this preamble; and (E) any other information related to the election
specified in guidance (as defined in proposed Sec. 1.6418-1(e)).
A transfer election statement is described in proposed Sec.
1.6418-2(b)(5) and would be generally defined as a written document
that describes the transfer of a specified credit portion between an
eligible taxpayer and transferee taxpayer. Election statements are used
in similar situations to a transfer election under section 6418 (for
example, an election under section 50(d)(5) and Sec. 1.48-4, section
45G, or section 45J all require a written document between the
parties). A transfer election statement that is completed by both the
eligible taxpayer and the transferee taxpayer would be necessary to
allow the transferee taxpayer the opportunity to file a return without
needing to wait for the eligible taxpayer to file. A transfer election
statement, which is described in more detail in the proposed
regulations, would be required to generally include (1) information
related to the transferee taxpayer and the eligible taxpayer; (2) a
statement that provides the necessary information and amounts to allow
the transferee taxpayer to take into account the specified credit
portion with respect to the eligible credit property; (3) a statement
that the parties are not related (within the meaning of section 267(b)
or 707(b)(1)); (4) a representation from the eligible taxpayer that it
has complied with all relevant requirements to make a transfer
election; (5) a statement from the eligible taxpayer and the transferee
taxpayer acknowledging the notification of recapture requirements under
section 6418(g)(3) and the section 6418 regulations (if applicable);
and (6) a statement or representation from the eligible taxpayer that
the eligible taxpayer has provided the required minimum documentation
to the transferee taxpayer. Required minimum documentation is specified
in proposed Sec. 1.6418-2(b)(3)(iv). Required minimum documentation
would be the minimum documentation that the eligible taxpayer is
required to provide to a transferee taxpayer, and is more fully
described in the proposed regulations, but is generally documentation
to validate the existence of the eligible credit property, any bonus
credits amounts, and the
[[Page 40501]]
evidence of credit qualification. This requirement is consistent with a
stakeholder suggestion that such information should be required to be
provided by the eligible taxpayer. Proposed Sec. 1.6418-2(b)(5)(v)
would specify that a transferee taxpayer, consistent with Sec. 1.6001-
1(e), would be required to retain the requirement minimum documentation
provided by the eligible taxpayer so long as the contents thereof may
become material in the administration of any internal revenue law.
Proposed Sec. 1.6418-2(b)(5)(iii) would provide a rule on the
timing of the transfer election statement. The proposed rule generally
allows a transfer election statement to be completed any time after the
eligible taxpayer and transferee taxpayer have sufficient information
to prepare a transfer election statement. However, a transfer election
statement cannot be completed for any taxable year after the earlier of
(A) the filing of the eligible taxpayer's return for the taxable year
for which the specified credit portion is determined with respect to
the eligible taxpayer, or (B) the filing of the return of the
transferee taxpayer for the year in which the specified credit portion
is taken into account. This proposed rule is intended to provide
flexibility but places an outer limit on the timing of the transfer
election statement because both the eligible taxpayer and the
transferee taxpayer would be required to include a transfer election
statement as part of filing a return, and therefore, the transfer
election statement would need to be completed before a return is filed
by either party.
Consistent with section 6418(e)(1), proposed Sec. 1.6418-2(b)(4)
would provide that an election to transfer any specified credit portion
would need to be made not later than the due date (including
extensions) for the tax return for the taxable year for which the
eligible credit is determined. The proposed regulations would also
clarify that an election would need to be filed on an original return
and may not be made or revised on an amended return or by filing a
request for an administrative adjustment under section 6227 of the
Code. An original return includes a superseding return filed on or
before the due date (including extensions). The proposed regulations
would also provide that there is no relief available under Sec. Sec.
301.9100-1 through 301.9100-3 for a late transfer election.
C. Limitations on the Election
Proposed Sec. 1.6418-2(c) would include rules that describe
certain limitations with respect to making an election under section
6418. First, consistent with section 6418(e)(1), the proposed
regulations would provide that once made, an election to transfer an
eligible credit is irrevocable. Second, consistent with section
6418(e)(2), the proposed regulations would prohibit a transferee
taxpayer of any specified credit portion from making a second transfer
under section 6418 with respect to any amount of such transferred
credit.
Stakeholders asked whether a passthrough transferee taxpayer that
allocates purchased eligible credits to its direct or indirect owners
violates the no second transfer rule in section 6418(e)(2). An
allocation of a transferred specified credit portion to a direct or
indirect owner of a passthrough entity would not be considered a
transfer under section 6418. As a result, an allocation of a
transferred specified credit portion to a direct or indirect owner of a
passthrough transferee taxpayer does not violate the no second transfer
rule in section 6418(e)(2). However, certain rules would apply to
allocations of a transferred specified credit portion from passthrough
entities as further described in proposed Sec. 1.6418-3.
Stakeholders also inquired whether eligible credits can be
transferred through dealer arrangements. Any arrangement where the
Federal income tax ownership of a specified credit portion transfers
first, from an eligible taxpayer to a dealer or intermediary and then,
ultimately, to a transferee taxpayer is in violation of the no second
transfer rule in section 6418(e)(2). In contrast, an arrangement using
a broker to match eligible taxpayers and transferee taxpayers should
not violate the no second transfer rule, assuming the arrangement at no
point transfers the Federal income tax ownership of a specified credit
portion to the broker or any taxpayer other than the transferee
taxpayer.
D. Determining the Eligible Credit
Proposed Sec. 1.6418-2(d) would provide rules to clarify how to
determine the amount of an eligible credit that is transferable. Any
rules that relate to the determination of an eligible credit, such as
rules in sections 49 and 50(b), would apply to the eligible taxpayer
and therefore can limit the amount of transferable eligible credits
determined with respect to a single eligible credit property owned by
the eligible taxpayer. Section 6418(a) states that an eligible taxpayer
can elect to transfer all (or any portion specified in the election) of
an eligible credit determined with respect to such eligible taxpayer.
The inclusion of the word ``determined'' is instructive, and the
proposed regulations would draw a distinction between rules that impact
the amount of credit determined or the credit base (and thus, the
amount of eligible credit that can be transferred) versus rules that
impact a taxpayer's ability to claim a particular eligible credit
against its tax liability. Rules that impact the ability of a taxpayer
to claim a particular eligible credit against its tax liability do not
limit the amount of an eligible credit that an eligible taxpayer can
transfer. Providing a limitation based on an eligible taxpayer's
ability to claim an eligible credit would undercut one of the purposes
of section 6418, which is to provide an alternative monetization
mechanism to eligible taxpayers that would be unable to utilize credits
in the current taxable year.
As previously stated, section 49 generally impacts the amount of a
credit determined with respect to an investment credit property that an
eligible taxpayer can transfer. The proposed regulations would provide
rules for the application of section 49 to a partnership or S
corporation that is an eligible taxpayer and elects under section 6418
to transfer an eligible credit (a transferor partnership or transferor
S corporation). The proposed regulations would provide that any amount
of eligible credit determined with respect to investment credit
property held directly by a transferor partnership or transferor S
corporation (or held directly by an entity disregarded as separate from
such transferor partnership or transferor S corporation) is determined
by the transferor partnership or transferor S corporation by taking
into account the section 49 at-risk rules at the partner or shareholder
level as of the close of the taxable year in which the investment
credit property is placed in service. Thus, if the credit base of the
investment credit property is limited to a partner or shareholder by
section 49, then the amount of the eligible credit determined by the
transferor partnership or transferor S corporation is also limited. The
proposed regulations would provide that a transferor partnership or
transferor S corporation that transfers any specified credit portion
with respect to an investment credit property must request from each of
its partners or shareholders, respectively, that is subject to section
49, the amount of such partner's or shareholder's nonqualified
nonrecourse financing with respect to the investment credit
[[Page 40502]]
property as of the close of the taxable year in which the property is
placed in service. Additionally, the transferor partnership or
transferor S corporation would attach to its tax return for the taxable
year in which the property is placed in service, the amount of each
partner's or shareholder's section 49 limitation with respect to any
specified credit portion transferred with respect to the investment
credit property. The Treasury Department and the IRS request comments
as to whether (1) any information or reporting requirements are needed
for transferor partnerships or transferor S corporations to apply these
rules when determining the amount of an eligible credit that can be
transferred or (2) any additional clarifications are needed regarding
how the at-risk rules apply to the determination of an eligible credit
by an eligible taxpayer.
E. Treatment of Payments Made in Connection With Transfer
Proposed Sec. 1.6418-2(e) would include rules to clarify the
treatment of payments made by a transferee taxpayer to an eligible
taxpayer in connection with the transfer of an eligible credit. The
proposed regulations relate to the rules provided in section 6418(b)(1)
through (3) and include a rule clarifying when a payment is considered
to be made in connection with a transfer election.
Proposed Sec. 1.6418-2(e)(1) would provide that an amount paid by
a transferee taxpayer to an eligible taxpayer is consideration for a
transfer of a specified credit portion only if it is paid in cash (as
defined in Sec. 1.6418-1(f)), directly relates to the specified credit
portion, and is not described in Sec. 1.6418-5(a)(3) (describing
payments related to an excessive credit transfer). These proposed rules
would provide objective criteria for eligible taxpayers and transferee
taxpayers that seek certainty as to the timing of payments and
acceptable forms of payment. General tax rules apply to any payments
made or received outside of the requirements described in proposed
Sec. 1.6418-2(e)(1). Additionally, the requirements of proposed Sec.
1.6418-2(e)(1) would not be satisfied where a specified credit portion
is not ultimately transferred to a transferee taxpayer.
Pursuant to section 6418(b), the proposed regulations also include
rules that would clarify that amounts paid in connection with a
transfer election by a transferee taxpayer are not includible in the
gross income of an eligible taxpayer and are not deductible by the
transferee taxpayer.
In addition to these rules, the proposed regulations would include
an anti-abuse provision. The intent of the anti-abuse provision is to
disallow the election and transfer of an eligible credit under section
6418, or otherwise recharacterize a transaction's income tax
consequences, in circumstances where the parties to the transaction
have engaged in the transaction or a series of transactions with the
principal purpose of avoiding tax liability beyond the intent of
section 6418. This could include transactions that are intended to
decrease the eligible taxpayer's gross income or increase a transferee
taxpayer's deductions. For example, a transaction where an eligible
taxpayer undercharges or overcharges for services to a customer who is
also purchasing credits from the eligible taxpayer as a transferee
taxpayer may violate the anti-abuse rule. The proposed regulations
include two examples to illustrate application of the anti-abuse rule.
The proposed regulations do not address (1) the Federal income tax
treatment of transaction costs, either for the eligible taxpayer or the
transferee taxpayer, and (2) whether a transferee taxpayer is permitted
to deduct a loss if the amount paid to an eligible taxpayer exceeds the
amount of the eligible credit that the transferee taxpayer can
ultimately claim. The Treasury Department and the IRS are currently
developing rules on these general issues and seek comments as part of
that process. Any comments should also consider the specific matters
described in the following paragraphs.
Generally, gain or loss is recognized on the sale or other
disposition of property. See section 1001 of the Code. If a seller
incurs costs to facilitate the sale of property, such costs are
generally required to be capitalized and reduce the amount realized
from the sale. See Sec. 1.263(a)-1(e). If a buyer incurs costs to
facilitate the acquisition of property (for example, legal fees to
draft the purchase agreement), such costs are generally required to be
capitalized and included in the basis of property acquired. See, for
example, Sec. Sec. 1.263(a)-2(f)(1) and 1.263(a)-4(b)(1)(v).
It is a longstanding principle that courts should construe Federal
tax laws in harmony with the legislative intent and seek to carry out
the legislative purpose. Foster v. U.S., 303 U.S. 118 (1938).
Furthermore, it is a well-established principle of statutory
interpretation that a tax law should not be interpreted to allow the
practical equivalent of a double benefit absent a clear declaration of
intent by Congress (no double benefit principle). See generally U.S. v.
Skelly Oil Co. 394 U.S. 678, 684 (1969); cf. Hillsboro Nat. Bank v.
Commissioner, 460 U.S. 370 (1983). A double tax benefit could arise in
situations of a double deduction, a deduction and a credit, a credit or
a deduction from amounts that are excluded from gross income, or
credits from expenditures made to generate other credits. Cf. Hintz v.
Commissioner, 712 F2d 281 (7th Cir. 1983); section 265, Expenses and
Interest Relating to Tax-Exempt Income; S/V Drilling Partners v.
Commissioner, 114 T.C. 83 (2000).
Section 6418 provides specific rules that explicitly or implicitly
supersede certain general Federal income tax rules in whole or in part.
Accordingly, the Treasury Department and the IRS must consider not only
the application of specific provisions of section 6418 but also other
applicable provisions of the Code when developing rules on the general
issues described previously.
With respect to an eligible taxpayer, section 6418(b)(2) provides
that any consideration received from a transferee taxpayer for the
transfer of an eligible credit (or portion thereof) is not includible
in gross income of the eligible taxpayer. Section 6418(c)(1)(A)
provides that in the case of any eligible credit determined with
respect to any facility or property held directly by a partnership or S
corporation, any amount received as consideration for the transfer of
such credit is treated as tax exempt income for purposes of sections
705 and 1366. In developing the rules applicable to transaction costs
of an eligible taxpayer, it will be necessary to determine, among other
things, whether (1) the no double benefit principle applies and, if so,
how it should apply, and (2) the capitalization rules of section 263
and the regulations thereunder apply and, if so, how they interact with
the rules under section 6418(b)(2) and (c)(1)(A).
With respect to a transferee taxpayer, as described herein, the
proposed regulations would provide that there is no gross income to a
transferee taxpayer when claiming an eligible credit if the amount paid
for the eligible credit is less than the amount of the eligible credit
transferred and claimed (transferee gross income exclusion rule).
Similar to the development of rules for transaction costs of an
eligible taxpayer, in developing the rules applicable to transaction
costs of a transferee taxpayer, it will be necessary to determine,
among other things, whether (1) the no double benefit principle applies
and, if so, how it should apply, and (2) the capitalization rules of
section 263 and the regulations thereunder apply and, if so, how they
interact with the transferee gross income exclusion rule in the
proposed regulations.
[[Page 40503]]
Also, with respect to a transferee taxpayer, section 6418(b)(3)
provides that any consideration paid to the eligible taxpayer for an
eligible credit is not deductible under any provision of the Code.
However, it is not clear whether the ``not deductible'' language in
section 6418(b)(3) should be read to preclude capitalization of the
consideration paid to the eligible taxpayer (for example, under section
263). Therefore, it will be necessary for the Treasury Department and
the IRS to determine whether the capitalization rules of section 263
and the regulations thereunder apply to a transferee taxpayer and, if
so, how they should apply. It will also be necessary to interpret the
scope of section 6418(b)(3) and resolve whether it precludes a
deduction for any amount of consideration paid that is otherwise
deductible as a loss under section 165 (for example, where the amount
of consideration paid exceeds the amount of the credit the transferee
taxpayer can ultimately claim).
F. Transferee Taxpayer's Treatment of an Eligible Credit
Proposed Sec. 1.6418-2(f) would provide rules describing the
transferee taxpayer's treatment of a transferred specified credit
portion. Stakeholders sought clarification of whether a transferee
taxpayer has a choice of which year to take an eligible credit into
account. Section 6418(d) provides that in the case of any eligible
credit transferred to a transferee taxpayer pursuant to a transfer
election, the eligible credit is taken into account in the first
taxable year of the transferee taxpayer ending with, or after, the
taxable year of the eligible taxpayer with respect to which the credit
was determined. This language prescribes the specific year the
transferee taxpayer takes the transferred eligible credit into account.
Therefore, no clarification is needed. To the extent the taxable years
of an eligible taxpayer and a transferee taxpayer end on the same date,
the transferee taxpayer will take the specified credit portion into
account in that taxable year. To the extent the taxable years of an
eligible taxpayer and a transferee taxpayer end on different dates, the
transferee taxpayer will take the specified credit portion into account
in the transferee taxpayer's first taxable year that ends after the
taxable year of the eligible taxpayer. Consistent with this rule, the
transferee taxpayer may claim a specified credit portion on an amended
return or, if applicable, a request for administrative adjustment. A
transferee taxpayer may also take into account a specified credit
portion that it has purchased, or intends to purchase, when calculating
its estimated tax payments, though the transferee taxpayer remains
liable for any additions to tax in accordance with sections 6654 and
6655 to the extent the transferee taxpayer has an underpayment of
estimated tax.
Stakeholders also asked whether there are any income tax
consequences to a transferee taxpayer if the amount paid for an
eligible credit is less than the amount of the eligible credit
transferred and claimed. As described earlier, the proposed regulations
would clarify this issue by providing that there is no gross income to
a transferee taxpayer when claiming an eligible credit if the amount
paid for the eligible credit is less than the amount of the eligible
credit transferred and claimed. Under section 6418(a), a transferee
taxpayer is treated as the eligible taxpayer for other purposes of the
Code with respect to a transferred eligible credit. An eligible
taxpayer would not have gross income as a result of claiming an
eligible credit. As such, a transferee taxpayer also should not have
gross income as a result of claiming a transferred eligible credit.
The proposed regulations would also describe the effect of the
language in section 6418(a), which provides that the transferee
taxpayer specified in an election (and not the eligible taxpayer) is
treated as the taxpayer for purposes of the Code with respect to such
credit (or such portion thereof). Consistent with an eligible credit
being determined based on ownership of the underlying eligible credit
property by an eligible taxpayer, or, if ownership is not required,
based on conducting the activities giving rise to the eligible credit,
the proposed regulations would provide that a transferee taxpayer does
not also apply rules that relate to the determination of an eligible
credit, such as rules in section 49 or 50(b) as described in proposed
Sec. 1.6418-2(d)(1). However, a transferee taxpayer would apply rules
that relate to the amount of a transferred eligible credit that is
allowed to be claimed in the taxable year based on a transferee's
particular circumstances, such as the rules in section 38 or 469.
Consistent with applying credit utilization rules to transferee
taxpayers, the proposed regulations would provide a rule that a
transferred specified credit portion is treated as earned in connection
with the conduct of a trade or business, and, if applicable, such
transferred specified credit portion is subject to the passive activity
limitation rules in section 469. However, a transferee taxpayer (or a
direct or indirect owner of a transferee taxpayer that claims a
transferred specified credit portion) that is subject to section 469 is
not, as a result of a transfer election, considered to have owned an
interest in the eligible taxpayer's business at the time the work was
done (as required for material participation in Sec. 1.469-5(f)(1))
and cannot change the characterization of the transferee taxpayer's
participation with respect to generation of the transferred specified
credit portion by using any of the grouping rules in Sec. 1.469-4(c).
This proposed rule would be consistent with the result that the
transferee taxpayer does not apply rules that relate to the
determination of an eligible credit because the transferee does not own
the underlying eligible credit property to which the credit is
determined or conduct the activity directly. Further, allowing a
transferee taxpayer to try to change the characterization of an
eligible credit based on grouping with its own activities under Sec.
1.469-4(c) would conflict with the conclusion that the eligible credit
has already been determined. In contrast, an eligible credit generated
through the conduct of a trade or business does not lose such attribute
through a transfer under section 6418 for purposes of determining
whether a transferee taxpayer is allowed the credit. Likewise, a
section 38 business credit does not become an individual (non-business)
credit if transferred to an individual. If such attributes did not
transfer under section 6418, eligible credits earned and used by
eligible taxpayers would be subject to different limitations than
transferred eligible credits used by transferee taxpayers. The impact
of this rule for a transferee taxpayer that is subject to section 469
is that such transferee taxpayer will be considered to earn eligible
credits through the conduct of a trade or business related to the
eligible credit but will not materially participate in such business
for purposes of section 469. Thus, a transferee taxpayer subject to
section 469 would be required to treat the credits making up the
specified credit portion as passive activity credits (as defined in
section 469(d)(2)) to the extent the specified credit portion exceeds
passive tax liability. The Treasury Department and the IRS request
comments on whether there are circumstances in which it would be
appropriate to not apply the passive activity rules under section 469
to a transferee taxpayer or to attribute the participation of an
eligible taxpayer to a transferee taxpayer.
Lastly, proposed Sec. 1.6418-2(f)(4) would provide rules for how a
[[Page 40504]]
transferee taxpayer can take into account a transferred specified
credit portion. Section 6418(d) provides the taxable year that a
transferee taxpayer takes a transferred eligible credit into account
but does not provide further procedures applicable to a transferee
taxpayer. In determining the proposed procedures, consideration was
given to the requirements for any taxpayer when taking into account a
general business credit, with additional information required that is
necessary for tracking the transfer of specified credit portions. The
proposed rules would provide that in order for a transferee taxpayer to
take into account a specified credit portion, the transferee taxpayer
would be required to include certain information as part of filing a
return (or short year return). The proposed regulations would require
(A) a properly completed Form 3800, General Business Credit (or its
successor), taking into account a transferred eligible credit as a
current general business credit, including all registration number(s)
related to the transferred eligible credit; (B) the transfer election
statement described earlier in this preamble attached to the return;
and (C) any other information related to the transfer election
specified in guidance.
III. Partnerships and S Corporations
A. Overview
The proposed regulations would provide general rules related to
transfers of eligible credits by transferor partnerships and transferor
S corporations and purchases of eligible credits by transferee
partnerships and transferee S corporations. As a preliminary matter,
the proposed regulations would clarify that a partnership or an S
corporation may qualify as an eligible taxpayer or a transferee
taxpayer, assuming all other relevant requirements in section 6418 are
met. The proposed regulations would also clarify that the language in
section 6418(c) requiring an eligible credit property to be ``held
directly'' by a transferor partnership or transferor S corporation
allows for such eligible credit property to be owned by an entity
disregarded as separate from the transferor partnership or transferor S
corporation for Federal income tax purposes.
In addition, the proposed regulations would clarify that any tax
exempt income resulting from the receipt of consideration for the
transfer of a specified credit portion by a transferor partnership or
transferor S corporation is treated as arising from an investment
activity and not from the conduct of a trade or business within the
meaning of section 469(c)(1)(A). As a result, such tax exempt income is
not treated as passive income to any partners or shareholders who do
not materially participate within the meaning of section 469(c)(1)(B).
Because a transfer of a specified credit portion does not involve the
transfer of any assets used in a trade or business, it is more
appropriate to treat any tax exempt income resulting from the transfer
as arising from an investment activity.
B. Special Recapture Rules for Transferor Partnerships and S
Corporations
Stakeholders requested clarification on whether indirect
disposition events result in recapture of transferred investment tax
credits to a transferee taxpayer under section 6418(g)(3)(B). Section
1.47-4(a)(2) provides that if an S corporation shareholder's interest
in an S corporation is reduced as a result of certain events during the
recapture period by a certain percentage of the shareholder's interest
for the taxable year of the S corporation in which the investment
credit property is placed in service, recapture can occur to such S
corporation shareholder. Likewise, Sec. 1.47-6(a)(2) provides that if
a partner's interest in the general profits of a partnership is reduced
as a result of certain events during the recapture period by a certain
percentage of the partner's interest in general profits for the taxable
year of the partnership in which the investment credit property is
placed in service, recapture can occur to such partner. As explained
later in part V of this Explanation of Provisions, the proposed
regulations would provide generally that if an applicable investment
credit property is disposed of, or otherwise ceases to be investment
credit property with respect to the eligible taxpayer, a transferee
taxpayer bears the recapture tax associated with any transferred
eligible investment tax credit transferred to such transferee taxpayer.
The recapture events described in Sec. Sec. 1.47-4(a)(2) and 1.47-
6(a)(2) are applicable with respect to the specific shareholder or
partner to which the recapture event occurs and not with respect to the
transferor S corporation or transferor partnership. As a result, such
recapture events should not result in recapture of a transferred
eligible investment tax credit to a transferee taxpayer under section
6418(g)(3)(B). Instead, the recapture tax liability resulting from the
reduction of an S corporation shareholder's interest or a partner's
interest in general profits should continue to result in recapture to
the applicable disposing shareholder or partner. The proposed
regulations would clarify that ``indirect'' dispositions under
Sec. Sec. 1.47-4(a)(2) and 1.47-6(a)(2) do not result in recapture tax
liability to a transferee taxpayer under section 6418. Instead, these
rules continue to apply to a disposing partner or shareholder in a
transferor partnership or transferor S corporation, respectively. Any
recapture to a disposing partner is calculated based on the partner's
share of the basis (or cost) of the section 38 property to which the
eligible credits were determined in accordance with Sec. 1.46-3(f).
Any recapture to a disposing shareholder is calculated based on the
shareholder's pro rata share of the basis (or cost) of the section 38
property to which the eligible credits were determined in accordance
with Sec. 1.48-5.
The Treasury Department and the IRS request comments on whether
additional rules or clarifications are needed with respect to how the
indirect disposition recapture rules under Sec. Sec. 1.47-6(a)(2) and
1.47-4(a)(2) apply to partners or shareholders in transferor
partnerships or transferor S corporations, respectively.
As previously stated, the proposed regulations would provide that
any amount of eligible credit determined with respect to investment
credit property held directly by a partnership or S corporation would
be required to be determined by the partnership or S corporation taking
into account the section 49 at-risk rules at the partner or shareholder
level as of the close of the taxable year in which the investment
credit property is placed in service. The proposed regulations also
would provide that any net increase in the amount of nonqualified
nonrecourse financing during the recapture period for a partner or
shareholder in a transferor partnership or transferor S corporation
with respect to such partner's or shareholder's credit base for a
transferred eligible investment tax credit does not result in recapture
to a transferee taxpayer under section 6418(g)(3). Similar to the
indirect disposition recapture rules described above, the recapture
rules under section 49(b) for partners or shareholders in a transferor
partnership or transferor S corporation apply with respect to a
disposition or change in financing at the partner or shareholder level
and not at the eligible taxpayer (i.e., the partnership or S
corporation) level. As such, these rules would continue to apply to
partners or shareholders in transferor partnerships or transferor S
corporations that increase their nonqualified nonrecourse financing
[[Page 40505]]
amount during the recapture period. Any recapture to a disposing
partner is calculated based on the partner's share of the basis (or
cost) of the section 38 property to which the eligible credits were
determined in accordance with Sec. 1.46-3(f). Any recapture to a
disposing shareholder is calculated based on the shareholder's pro rata
share of the basis (or cost) of the section 38 property to which the
eligible credits were determined in accordance with Sec. 1.48-5.
The Treasury Department and the IRS request comments on whether
additional rules or clarifications are needed with respect to how the
recapture rules under section 49(b) apply to partners or shareholders
in transferor partnerships or transferor S corporations. As a
clarification, recapture under section 49(b) applicable directly to an
eligible taxpayer (for example, to an eligible taxpayer that is an
individual) results in recapture to a transferee taxpayer under section
6418(g)(3).
The proposed regulations would also provide that any net decrease
in the amount of nonqualified nonrecourse financing during the
recapture period with respect to a partner's or shareholder's credit
base for a transferred specified credit portion determined with respect
to investment credit property does not result in additional eligible
credit that can be transferred by the applicable partner, shareholder
or transferor partnership or transferor S corporation. Instead, any net
decrease in the amount of nonqualified nonrecourse financing and
resulting increase in the credit base to a partner or shareholder
results in additional investment tax credit that can be used by the
applicable partner or shareholder. The Treasury Department and the IRS
request comments on whether additional rules or clarifications are
needed with respect to how decreases in nonqualified nonrecourse
amounts under section 49(a)(2) that increase the credit base for which
eligible credits have previously been transferred apply to partners or
shareholders in a transferor partnership or transferor S corporation,
respectively.
C. Rules Solely Applicable to Transferor and Transferee Partnerships
The proposed regulations include special rules applicable to
transferor and transferee partnerships and their direct and indirect
partners. Section 6418(c)(1)(A) provides that any amount received as
consideration for a transfer of eligible credits by a transferor
partnership is treated as tax exempt income for purposes of section
705. Section 6418(c)(1)(B) provides that a partner's distributive share
of such tax exempt income is based on such partner's distributive share
of the otherwise eligible credit for each taxable year. Stakeholders
asked for clarity as to how this determination should be made.
The proposed regulations would provide generally that a partner's
distributive share of tax exempt income resulting from the receipt of
cash by a transferor partnership for a transferred specified credit
portion is based on the partner's proportionate distributive share of
the otherwise eligible credit as determined under Sec. Sec. 1.46-3(f)
and 1.704-1(b)(4)(ii). The proposed regulations further clarify that
any tax exempt income resulting from the receipt of cash by a
transferor partnership for a transferred specified credit portion is
treated as received or accrued, including for purposes of section 705,
as of the date the specified credit portion is determined with respect
to the transferor partnership. In effect, this means that tax exempt
income resulting from the receipt of cash by a transferor partnership
in exchange for a transferred specified credit portion should be
allocated to the same partners and in the same proportionate amount, as
the specified credit portion would have been allocated if not
transferred.
The proposed regulations would provide a special rule for
allocations of tax exempt income resulting from a transfer of a
specified credit portion of less than all eligible credit(s) determined
with respect to an eligible credit property held by a transferor
partnership. This special rule permits tax exempt income resulting from
the receipt of cash for a transfer of one or more specified credit
portion(s) of less than all eligible credits from an eligible credit
property to, generally, be allocated to those partners that desired to
transfer their distributive share of the underlying credits. To take
advantage of this special rule, a transferor partnership would first
determine each partner's distributive share of the otherwise eligible
credits determined with respect to such eligible credit property in
accordance with Sec. Sec. 1.46-3(f) and 1.704-1(b)(4)(ii). This amount
is referred to as a ``partner's eligible credit amount.'' Thereafter,
the transferor partnership may determine, either in a manner described
in the partnership agreement or as the partners may agree, the portion
of each partner's eligible credit amount to be transferred and the
portion of each partner's eligible credit amount to be retained and
allocated to such partner. Following the transfer of the specified
credit portion(s), the transferor partnership may allocate to each
partner its agreed upon share of eligible credits, tax exempt income
resulting from the receipt of consideration for the transferred
specified credit portion(s), or both, as the case may be; provided
that, the amount of eligible credits allocated to each partner may not
exceed such partner's eligible credit amount and the amount of tax
exempt income allocated to each partner would equal such partner's
proportionate share of tax exempt income resulting from the
transfer(s). Each partner's proportionate share of tax exempt income
resulting from the transfer(s) is equal to the total tax exempt income
resulting from the transfer(s) of the specified credit portion(s)
multiplied by a fraction, (i) the numerator of which is a partner's
total eligible credit amount minus the amount of eligible credits
actually allocated to the partner with respect to the eligible credit
property for the taxable year, and (ii) the denominator of which is the
total amount of the specified credit portion(s) transferred by the
partnership with respect to the eligible credit property for the
taxable year. The proposed regulations provide examples of this rule.
The Treasury Department and the IRS request comments on whether
additional rules or clarifications are needed with respect to when
allocations of tax exempt income and eligible credits under section
6418 will be respected under section 704(b).
The proposed regulations would clarify that a partnership that is
an indirect or direct partner of a transferor partnership (an upper-
tier partnership) is not an eligible taxpayer with respect to an
eligible credit allocated by a transferor partnership. The proposed
regulations also would clarify that for any tax exempt income allocated
to an upper-tier partnership as a result of the receipt of
consideration for a transfer of a specified credit portion by a
transferor partnership, the upper-tier partnership would determine its
partners' distributive shares of the tax exempt income in proportion to
the partners' distributive shares of the otherwise eligible credit. In
effect, this means that the upper-tier partnership would allocate any
tax exempt income resulting from a transfer of a specified credit
portion by a lower-tier partnership among its partners as of the same
time, and in the same proportionate amount, as the eligible credit
would have been allocated if not transferred by the transferor
partnership.
Stakeholders asked for confirmation that cash payments received by
a
[[Page 40506]]
transferor partnership as consideration for a transfer of eligible
credits can be distributed in a manner different from the partners'
distributive shares of the tax exempt income resulting from the receipt
of the cash payment. A transferor partnership that receives a cash
payment from a transfer of a specified credit portion is under no
restriction on how it can use such cash payment (including on how it
makes distributions to its partners). Such cash payment is treated in
the same manner as the transferor partnership's other cash flows.
The proposed regulations would provide rules for transferee
partnerships and clarify that allocations of a transferred specified
credit portion by a transferee partnership are not a violation of the
no additional transfer rule in Sec. 1.6418-2(c)(2). The proposed
regulations also would provide that cash payments by a transferee
partnership for a transferred specified credit portion are treated as a
section 705(a)(2)(B) expenditure. Each partner's distributive share of
any transferred specified credit portion is based on such partner's
distributive share of the section 705(a)(2)(B) expenditures used to
fund the purchase of such transferred specified credit portion. Each
partner's distributive share of the section 705(a)(2)(B) expenditures
used to fund the purchase of any transferred specified credit portion
is determined by the partnership agreement. Or, if the partnership
agreement does not provide for the allocation of such nondeductible
expenditures, then each partner's distributive share is based on the
transferee partnership's general allocation of nondeductible
expenditures.
To prevent avoidance of the no additional transfer rule in proposed
Sec. 1.6418-2(c)(2) through transfers of interests in transferee
partnerships, the proposed regulations in proposed Sec. 1.6418-
3(b)(4)(iv) would provide that a transferred specified credit portion
purchased by a transferee partnership is treated as an extraordinary
item under Sec. 1.706-4(e) (including also a proposed addition to
Sec. 1.706-4(e) confirming a transferred specified portion is an
extraordinary item). The proposed regulations further provide that if
the transferee partnership and eligible taxpayer have the same taxable
years, such extraordinary item is deemed to occur on the date the
transferee partnership first makes a cash payment to an eligible
taxpayer for any transferred specified credit portion. If the
transferee partnership and eligible taxpayer have different taxable
years, the extraordinary item is deemed to occur on the later of the
first date the transferee partnership takes the transferred specified
credit portion into account under section 6418(d), or the first date
that the transferee partnership made a cash payment to the eligible
taxpayer for the transferred specified credit portion. For example, if
an eligible taxpayer is a calendar year taxpayer and a transferee
partnership is a fiscal year taxpayer with its tax year beginning on
June 1st, and the transferee partnership makes its first cash payment
before June 1st for a transferred specified credit portion determined
with respect to the eligible taxpayer during year 1, then the
transferred specified credit portion is deemed to occur to the
transferee partnership on June 1st. However, if the transferee
partnership makes its first cash payment at any point from June 1st to
December 31st, the transferred specified credit portion is deemed to
occur on the cash payment date. The Treasury Department and the IRS
continue to study whether additional rules are required under section
6418 to prevent avoidance of the no additional transfer rule through
transfers of interests in transferee partnerships.
Finally, for transferee partnerships, the proposed regulations
would clarify that an upper-tier partnership that is a direct or
indirect partner in a transferee partnership and that is allocated a
transferred specified credit portion is not an eligible taxpayer with
respect to such transferred specified credit portion. The upper-tier
partnership would determine each partner's distributive share of the
transferred specified credit portion in accordance with the same rules
the transferee partnership determines its partners' distributive shares
of the transferred specified credit portion.
The Treasury Department and the IRS request comments on whether
additional rules or clarifications are needed with respect to when
allocations of a transferred specified credit portion will be respected
under section 704(b). The Treasury Department and the IRS also request
comments on whether additional rules or clarifications are needed with
respect to transfers of partnership interests that are made after the
transferring partner has contributed capital to a transferee
partnership for the purpose of purchasing eligible credits, but before
the transferee partnership has made any cash payments to an eligible
taxpayer.
D. Rules Solely Applicable to Transferor and Transferee S Corporations
The proposed regulations would include special rules applicable to
transferor and transferee S corporations and their shareholders.
Section 6418(c)(1)(A) provides that any amount received as
consideration for a transfer of eligible credits by a transferor S
corporation is treated as tax exempt income for purposes of section
1366. The proposed regulations would provide that each shareholder
would take into account such shareholder's pro rata share (as
determined under section 1377(a) of the Code) of any tax exempt income
resulting from the receipt of cash for the transfer of a specified
credit portion by a transferor S corporation. The proposed regulations
would further clarify that any tax exempt income resulting from the
receipt of cash for the transfer of a specified credit portion by a
transferor S corporation is treated as received or accrued, including
for purposes of section 1366, as of the date the transferred specified
credit portion is determined with respect to the transferor S
corporation. In effect, this means that any tax exempt income resulting
from the receipt of cash by a transferor S corporation for a
transferred specified credit portion should be allocated to the same
shareholders and in the same proportionate amount as the specified
credit portion would have been allocated if not transferred.
The proposed regulations would also provide rules for transferee S
corporations and indicate that allocations of a transferred specified
credit portion by a transferee S corporation are not a violation of the
no additional transfer rule in Sec. 1.6418-2(d)(2).
The proposed regulations would clarify that cash payments by a
transferee S corporation for a transferred specified credit portion are
treated as an expenditure under section 1367(a)(2)(D) of the Code since
such payments are nondeductible. The proposed regulations would also
provide rules for how shareholders of a transferee S corporation
account for a transferred specified credit portion. Each shareholder of
a transferee S corporation would take into account its pro rata share
(as determined under section 1377(a)) of any transferred specified
credit portion. If the transferee S corporation and eligible taxpayer
have the same taxable years, the transfer of a specified credit portion
is treated as occurring to a transferee S corporation during the
transferee S corporation's permitted year (as defined under sections
444 and 1378(b)) that the transferee S corporation first makes a cash
payment as consideration to an eligible taxpayer for the transferred
specified credit portion. If the transferee S corporation and eligible
taxpayer have
[[Page 40507]]
different taxable years, then the transfer of a specified credit
portion is treated as occurring to a transferee S corporation during
the transferee S corporation's first permitted year (as defined under
sections 444 and 1378(b)) ending with, or after, the taxable year of
the eligible taxpayer to which the transferred specified credit portion
was determined.
E. Elections for Transferor Partnerships and Transferor S Corporations
Finally, the proposed regulations would provide specific rules
relating to elections for transferor partnerships or transferor S
corporations. Consistent with the rules for other eligible taxpayers,
partnerships and S corporations would generally make a transfer
election for a specified credit portion in the manner provided in
proposed Sec. 1.6418-2(b)(1) through (3) described earlier in this
preamble. The proposed regulations would also clarify that all
documents required in Sec. 1.6418-2(b)(1) through (3) would need to be
attached to the partnership or S corporation return for the taxable
year during which the transferred specific credit portion was
determined. For the transfer election to be valid, the return would
need to be filed not later than the time prescribed by Sec. Sec.
1.6031(a)-1(e) and 1.6037-1(b) (including extensions of time) for
filing the return for such taxable year.
IV. Registration Under Section 6418(g)(1)
Section 6418(g)(1) provides that as a condition of, and prior to,
any transfer of any portion of an eligible credit under section 6418,
the Secretary may require such information (including, in such form or
manner as is determined appropriate by the Secretary, such information
returns) or registration as the Secretary deems necessary for purposes
of preventing duplication, fraud, improper payments, or excessive
payments under this section.
In general, consistent with section 6417, stakeholders requested
additional information about this provision and requested that the
regulations balance the need to prevent fraud and abuse with the burden
on taxpayers. Stakeholders recommended a registration system that
assigns a transfer number to an eligible taxpayer that can be used by
transferee taxpayers to claim transferred credits and allows the IRS to
track transfers of eligible credits. Stakeholders also recommended that
information or registration requirements should be as consistent as
possible across sections 48D(d)(1), 6417(d)(5), and 6418(g)(1). In
order to meet the purpose of section 6418(g)(1), the Treasury
Department and the IRS believe that it is necessary to establish a
mandatory registration process that is in place before the end of the
2023 calendar year, which is the first full taxable year during which a
transfer election under section 6418 is available.
Proposed Sec. 1.6418-4 generally provides rules requiring that
eligible taxpayers register before filing the return on which a
transfer election is made and provide information related to each
eligible credit property for which the eligible taxpayer intends to
transfer a specified credit portion. Proposed Sec. 1.6418-4(a),
consistent with section 6418(g)(1), requires that, as a condition of,
and prior to, making an election to transfer a specified credit
portion, an eligible taxpayer satisfy the pre-filing registration
requirements in proposed Sec. 1.6418-4(b). After the required pre-
filing registration process is successfully completed, an eligible
taxpayer will receive a unique registration number from the IRS for
each registered eligible credit property for which the eligible
taxpayer intends to transfer a specified credit portion. The Treasury
Department and the IRS intend for this pre-filling registration process
to occur through an IRS electronic portal (unless otherwise allowed in
guidance). An eligible taxpayer that does not obtain a registration
number and report the registration number on its return with respect to
an eligible credit property is ineligible to make a transfer election.
However, completion of the pre-filing registration requirements and
receipt of a registration number does not, by itself, mean the eligible
taxpayer is eligible to transfer any specified credit portion
determined with respect to the eligible credit property. The
registration number also must be reported on the eligible taxpayer's
return.
Proposed Sec. 1.6418-4(b) provides the following pre-filing
registration requirements.
First, an eligible taxpayer must complete the pre-filing
registration process electronically through an IRS electronic portal in
accordance with the instructions provided therein, unless otherwise
provided in guidance. If the election is by a member of a consolidated
group, the member must complete the pre-filing registration process as
a condition of, and prior to, making an elective payment election. See
Sec. 1.1502-77 (providing rules regarding the status of the common
parent as agent for its members).
Second, an eligible taxpayer must satisfy the registration
requirements and receive a registration number prior to making a
transfer election for a specified credit portion on the eligible
taxpayer's return for the taxable year at issue.
Third, an eligible taxpayer is required to obtain a registration
number for each eligible credit property with respect to which a
transfer election of a specified credit portion is made.
Finally, an eligible taxpayer must provide the specific information
required to be provided as part of the pre-filing registration process.
The provision of such information, which includes information about the
taxpayer, about the eligible credits, and about the eligible credit
property, will allow the IRS to prevent duplication, fraud, improper
payments, or excessive transfers under section 6418. For example,
verifying information about the taxpayer will allow the IRS to mitigate
the risk of fraud or improper transfers. Information about eligible
credit properties, including their address and coordinates (longitude
and latitude), supporting documentation, beginning of construction
date, and placed in service date will allow the IRS to mitigate the
risk of duplication, fraud, and improper transfers for properties that
are not eligible credit properties.
Proposed Sec. 1.6418-4(c) provides rules related to the
registration number that is obtained after the IRS has reviewed and
approved the taxpayer's submitted information. First, these rules
provide that a registration number is valid for an eligible taxpayer
only for the taxable year for which it is obtained, and for a
transferee taxpayer's taxable year in which the specified credit
portion is taken into account. Second, proposed Sec. 1.6418-4(c)
provides rules for the renewal of a registration number that has been
previously obtained. The eligible taxpayer is required to renew the
registration with respect to an eligible credit property each year in
accordance with guidance, including attesting that all the facts are
still correct or updating any facts. Third, the proposed regulations
provide that, if facts change with respect to an eligible credit
property for which a registration number has been previously obtained,
an eligible taxpayer is required to amend the registration to reflect
these new facts. Lastly, the proposed regulations provide that an
eligible taxpayer is required to include the registration number of the
eligible credit property on the eligible taxpayer's return for the
taxable year, as provided in proposed Sec. 1.6418-2(b), for an
election to be effective with respect to any eligible credit determined
with respect to any eligible credit property. The IRS will treat a
transfer election as ineffective with respect to an eligible credit
determined with respect to an
[[Page 40508]]
eligible credit property for which the eligible taxpayer does not
include a valid registration number on its return.
A transferee taxpayer is also required to report the registration
number received from an eligible taxpayer on its return for the taxable
year that the transferee taxpayer takes the transferred eligible credit
into account.
V. Special Rules
The proposed regulations would provide special rules relating to
the determination of an excessive credit transfer, reasonable cause for
a transferee taxpayer, the difference between an excessive credit
transfer and recapture under section 50(a) or 45Q(f)(4), the mechanics
for basis reduction and recapture notification, and rules for
ineffective elections. The proposed regulations also would provide
special rules relating to the carryback and carryforward of transferred
eligible credits.
The proposed regulations describe the rules related to an excessive
credit transfer consistent with section 6418(g)(2)(A). Section
6418(g)(2)(A) provides in the case of any specified credit portion that
is transferred to a transferee taxpayer pursuant to section 6418(a)
that the Secretary determines constitutes an excessive credit transfer,
the tax imposed on the transferee taxpayer by chapter 1, regardless of
whether such entity would otherwise be subject to chapter 1 tax, for
the taxable year in which such determination is made will be increased
by an amount equal to the sum of (i) the amount of such excessive
credit transfer, plus (ii) an amount equal to 20 percent of such
excessive credit transfer.
Consistent with section 6418(g)(2)(B), the proposed regulations
would provide that the 20 percent penalty related to an excessive
credit transfer does not apply if the transferee taxpayer demonstrates
to the satisfaction of the IRS that the excessive credit transfer
resulted from reasonable cause. Under the proposed regulations,
reasonable cause would be generally determined based on the relevant
facts and circumstances of a transaction. The proposed regulations
would further provide that the determination of reasonable cause
includes an evaluation of a transferee taxpayer's efforts to determine
that the amount of eligible credit transferred by the eligible taxpayer
to the transferee taxpayer is not more than the eligible credit that
was determined with respect to the eligible credit property for the
taxable year in which the eligible credit was determined and has not
been transferred to any other taxpayer. Further, based on a review of
suggestions by stakeholders, the proposed regulations would provide a
list of factors that a transferee taxpayer could show to demonstrate
reasonable cause. The list of factors is not exhaustive and is also not
intended as a list of required actions in all transfers. Instead, the
list of factors, which includes a review of the eligible taxpayer's
records with respect to the determination of the eligible credit
(including documentation evidencing eligibility for bonus credit
amounts), would be intended to provide more clarity with respect to
reasonable cause in these circumstances for eligible taxpayers,
transferee taxpayers and the IRS in administration of the provision.
The proposed regulations also would define the term ``excessive
credit transfer'' consistent with section 6418(g)(2)(C) to mean, with
respect to an eligible credit property for which an election is made
under proposed Sec. 1.6418-2 or Sec. 1.6418-3 for any taxable year,
an amount equal to the excess of--(i) the amount of the specified
credit portion claimed by the transferee taxpayer with respect to such
eligible credit property for such taxable year; over (ii) the amount of
the eligible credit that, without the application of section 6418,
would be otherwise allowable under the Code with respect to such
eligible credit property for such taxable year. In the second part of
the definition of the term, the Treasury Department and the IRS are
interpreting the phrase ``amount of such credit . . . which would be
otherwise allowable'' with respect to such eligible credit property for
the taxable year to have the same meaning as the amount of the eligible
credit properly determined with respect to such eligible credit
property for such taxable year in the hands of the eligible taxpayer.
See Joint Committee on Taxation, Description Of Energy Tax Changes Made
By Public Law 117-169, JCX-5-23, 98 (April 17, 2023).
The proposed regulations would also provide a rule for determining
an excessive credit transfer when there are multiple transferees. The
proposed regulations would provide that all transferee taxpayers are
considered one transferee for calculating whether there was an
excessive credit transfer and the amount of the excessive credit
transfer. If there was an excessive credit transfer, then the amount of
excessive credit transferred to a specific transferee taxpayer is equal
to the total excessive credit transferred multiplied by the
transferee's portion of the total credit transferred to all
transferees. This rule is applied on an eligible credit property basis.
Finally, with respect to excessive credit transfers, the proposed
regulations provide three examples to illustrate when there is no
excessive credit transfer, when there is an excessive credit transfer,
and when there is an excessive credit transfer as to multiple
transferees.
Stakeholders asked whether a recapture event under section 50(a)
would be treated as an excessive credit transfer under section
6418(g)(2). The excessive credit transfer rules operate separately from
the recapture rules. The excessive credit transfer rules apply where
the credit amount reported on the original credit source form by the
eligible taxpayer and transferred to a transferee taxpayer was
excessive. Recapture of a tax credit occurs when the original tax
credit reported would have been correct without the occurrence of a
subsequent recapture event. The proposed regulations therefore would
provide a rule that recapture events under section 45Q(f)(4) or 50(a)
do not result in an excessive credit transfer.
Stakeholders asked for clarification whether the recapture tax
under section 50(a) is imposed on the eligible taxpayer or the
transferee taxpayer. Section 6418(g)(3)(B) provides that if, during any
taxable year, the applicable investment credit property (as defined in
section 50(a)(5)) is disposed of, or otherwise ceases to be investment
credit property with respect to the eligible taxpayer, before the close
of the recapture period (as described in section 50(a)(1))--(i) such
eligible taxpayer must provide notice of such occurrence to the
transferee taxpayer (in such form and manner as the Secretary
prescribes), and (ii) the transferee taxpayer must provide notice of
the recapture amount (as defined in section 50(c)(2)), if any, to the
eligible taxpayer (in such form and manner as the Secretary
prescribes). The proposed regulations include a rule that the recapture
amount is calculated and taken into account by the transferee taxpayer.
This interpretation is consistent with the statutory framework for
recapture tax under section 50, which generally imposes recapture tax
on the taxpayer who claimed the credit, regardless of whether such
taxpayer owns the underlying property to which the credit is
determined. This interpretation is also consistent with section
6418(a), which treats the transferee taxpayer (and not the eligible
taxpayer) as the taxpayer for purposes of the Code with respect to a
specified credit portion, and with section 6418(g)(3)(B)(ii), which
requires the transferee taxpayer to provide notice of
[[Page 40509]]
the recapture amount, if any, to the eligible taxpayer.
Consistent with recapture tax liability being imposed on the
transferee taxpayer, as a requested clarification, there is no
prohibition under section 6418 for an eligible taxpayer and a
transferee taxpayer to contract between themselves for indemnification
of the transferee taxpayer in the event of a recapture event.
The proposed regulations would also provide guidance on the
notifications that are required by the eligible taxpayer and the
transferee taxpayer after a recapture event, as described in section
6418(g)(3)(B)(i) and (ii). The proposed regulations would provide that
an eligible taxpayer would be required to provide notification of a
recapture event to a transferee taxpayer, with such notification
including all of the information necessary for the transferee taxpayer
to calculate the recapture amount (as defined under section 50(c)(2)).
This notification would need to be provided in a timely manner so that
a transferee taxpayer can calculate the recapture amount by the due
date of the transferee taxpayer's return (without extensions). Beyond
these requirements, the parties can contract as to the form the notice
must take and to any additional time periods for providing the notice,
provided the terms of the contract do not otherwise conflict with the
terms of the proposed regulations. The IRS would also be permitted to
provide further information requirements or more specific time periods
if required through instructions to forms or further guidance. The
proposed regulations contain similar requirements as to the
notification required by the transferee taxpayer of the recapture
amount, with the difference being the type of information that is
provided. Together, these notification rules seek to inform parties of
the minimum information required in a notice and the outer limits on
time periods, but still allow for parties to agree to other terms as
needed.
Section 6418(g)(3) does not specifically address recapture under
section 45Q(f)(4). Instead, section 6418(g)(3) only addresses recapture
under section 50(a), which occurs when an investment credit property
for which an eligible credit was determined is disposed of, or
otherwise ceases to be investment credit property with respect to the
eligible taxpayer before the end of the recapture period. However,
applying rules consistent with section 6418(g)(3) to eligible section
45Q credits is appropriate. Section 45Q has similar requirements in
that carbon oxide that has been sequestered, utilized, or used and to
which a section 45Q credit has been determined is generally intended to
remain sequestered, utilized or used for the entire recapture period.
Addressing this issue is also consistent with the authority granted in
section 6418(h) to issue regulations necessary to carry out the
purposes of section 6418. As such, the proposed regulations would
clarify that the rules under proposed Sec. Sec. 1.6418-5(d) and 1.45Q-
5 apply to a transferee taxpayer to the extent any eligible section 45Q
is transferred under section 6418. The proposed regulations would also
clarify that an eligible taxpayer would be required to provide notice
to a transferee taxpayer of a recapture event, the amount of leaked
qualified carbon oxide, the amount of qualified carbon oxide subject to
recapture and the recapture amount in accordance with Sec. 1.45Q-5(c)
through (e). Such notice would be required to be provided in a timely
manner so that a transferee taxpayer can calculate the recapture amount
by the due date of the transferee taxpayer's tax return (without
extensions).
The proposed regulations would also provide a clarification that an
ineffective election is not considered an excessive credit transfer to
the transferee taxpayer. An ineffective election to transfer an
eligible credit means that no transfer has occurred for purposes of
section 6418. This means that section 6418 would not apply to the
transaction, and the tax consequences are determined under any other
relevant provisions of the Code. For example, an ineffective election
results if an eligible taxpayer tries to elect to transfer an eligible
credit, but the eligible taxpayer did not complete or receive a
registration number with respect to the eligible credit property to
which the credit is determined or if an eligible taxpayer attempts to
transfer an eligible credit to a related party.
Stakeholders asked whether eligible credits are subject to new
section 39(a)(4), regarding additional carryback and carryforward
years. The proposed regulations would provide that a transferee
taxpayer can use section 39(a)(4) to the extent an eligible credit is
also listed in section 6417(b). Section 39(a)(4) generally allows a 3-
year carryback period (as opposed to a 1-year) in the case of any
applicable credit (as defined in section 6417(b)). This issue has two
parts, the first of which is broader than these proposed regulations.
The first issue is whether the reference in section 39(a)(4) to
applicable credit is only referring to an applicable credit determined
by an applicable entity under section 6417(a), or, if the reference is
only referring to the list of credits in section 6417(b). The proposed
regulations would provide that the language in section 39(a)(4) is
referring to the list of credits in section 6417(b). Regardless of the
taxpayer determining the credit, if the credit is listed in section
6417(b), then the credit is an applicable credit. The second issue is
whether there is any prohibition against a transferee taxpayer using
section 39(a)(4). No statutory language prohibits a transferee taxpayer
from using the rule in section 39(a)(4) with respect to an eligible
credit. All of the eligible credits would meet the definition in
section 6417(b), although there are placed in service dates under
section 6417(b)(2), (3), and (5) that may impact application of section
39(a)(4), which must be taken into consideration.
With respect to real estate investment trusts (REITs), stakeholders
requested that the proposed regulations clarify that eligible credits
that have not yet been transferred are treated as a real estate asset,
cash, or cash item and thus, will not potentially cause a REIT to fail
the asset test for REITs under section 856(c)(4). The proposed
regulations do not directly adopt this comment; however, the Treasury
Department and the IRS believe that the proposed regulations,
particularly with respect to the paid in cash and timing of sale
requirements, will assist REITs in managing issues with the REIT asset
test. Further comments are requested with respect to whether the
proposed regulations provide sufficient guidance to enable REITs to
manage the potential REIT asset test issues.
Stakeholders also requested that the proposed regulations clarify
that the transfer of an eligible credit pursuant to section 6418 is not
considered a dealer sale under the REIT prohibited transactions rules
of section 857(b)(6). The proposed regulations do not include a rule
addressing this question. The Treasury Department and the IRS do not
believe that a prohibited transaction tax issue arises from the
transfer of eligible tax credits. Section 6418 provides that the cash
amount received as consideration for the transfer of an eligible credit
from an eligible taxpayer to a transferee taxpayer is not includible in
the eligible taxpayer's gross income. Section 857(b)(6) imposes a tax
equal to 100% of the net income derived from a REIT's prohibited
transactions. Since cash received by an eligible REIT as consideration
for the transfer of an eligible tax credit would not be includible in
any calculation of the eligible taxpayer's gross income, the
transaction cannot result in any net
[[Page 40510]]
income and, consequently, there is no prohibited transaction tax issue
regarding the transfer of an eligible credit.
Stakeholders also requested confirmation that receipt of (or the
right to receive) an eligible credit does not result in income to an
eligible taxpayer that is also a REIT. Generally, Federal income tax
rules do not treat as gross income a person's becoming entitled under
the Code to a credit against Federal income tax. This general principle
equally applies to an eligible taxpayer--including a REIT--becoming
entitled to an eligible credit that it may transfer under section 6418.
Accordingly, the proposed regulations do not include the requested rule
specifically addressing REITs.
Lastly, stakeholders sought confirmation that the sale of energy
under sections 45 and 45Y is not a dealer sale under the REIT
prohibited transactions rules of section 857(b)(6). The proposed
regulations do not address this issue. However, in the preamble to TD
9784 (81 FR 59849, 59856 (August 31, 2016)), the Treasury Department
and the IRS noted that until additional guidance is published in the
Internal Revenue Bulletin, in any taxable year in which (1) the
quantity of excess electricity transferred to the utility company
during the taxable year from energy producing distinct assets that
serve an inherently permanent structure does not exceed (2) the
quantity of electricity purchased from the utility company during the
taxable year to serve the inherently permanent structure, the IRS will
not treat any net income resulting from the transfer of such excess
electricity as constituting net income derived from a prohibited
transaction under section 857(b)(6). The Treasury Department and the
IRS believe that any sale of electricity that is not within the scope
of the statement in the 2016 preamble should be analyzed on a facts and
circumstances basis to determine whether the sale is subject to the
prohibited transaction rules of section 857(d)(6).
Proposed Applicability Dates
These regulations are proposed to apply to taxable years ending on
or after the date the final regulations are published in the Federal
Register Taxpayers may rely on these proposed regulations for taxable
years beginning after December 31, 2022, and before the date the final
regulations are published in the Federal Register, provided the
taxpayers follow the proposed regulations in their entirety and in a
consistent manner.
Special Analyses
I. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (``PRA'')
generally requires that a Federal agency obtain the approval of the
Office of Management and Budget (OMB) before collecting information
from the public, whether such collection of information is mandatory,
voluntary, or required to obtain or retain a benefit. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays
a valid control number.
The collections of information in these proposed regulations
contain reporting and recordkeeping requirements. The recordkeeping
requirements mentioned within these proposed regulations are considered
general tax records under Sec. 1.6001-1(e). These records are required
for the IRS to validate that transferee taxpayers have met the
regulatory requirements and are entitled to the transferred specified
credit portions. For PRA purposes, general tax records are already
approved by OMB under 1545-0074 for individuals and under 1545-0123 for
business entities.
These proposed regulations also mention reporting requirements
related to making transfer elections as detailed in proposed Sec. Sec.
1.6418-2 and 1.6418-3. These transfer elections will be made by
eligible taxpayers as part of filing a return (such as the appropriate
Form 1040, Form 1120, Form 1120-S, or Form 1065), including filling out
the relevant source credit form and completing the Form 3800. The
proposed regulation in proposed Sec. 1.6418-2(b)(5) describes third-
party disclosures, which require eligible taxpayers and transferee
taxpayers to complete transfer election statements and also require
eligible taxpayers to provide required minimum documentation to
transferee taxpayers as part of making a transfer election. These forms
and third-party disclosures are approved under 1545-0074 for
individuals and 1545-0123 for business entities.
These proposed regulations also describe recapture procedures as
detailed in proposed Sec. 1.6418-5 that are required by section
6418(g)(3). The reporting of a recapture event will still be required
to be reported using Form 4255, Recapture of Investment Credit. This
form is approved under 1545-0074 for individuals and 1545-0123 for
business entities. The proposed regulation is not changing or creating
new collection requirements not already approved by OMB.
These proposed regulations mention the reporting requirement to
complete pre-filing registration with IRS to be able to transfer
eligible credits to a transferee taxpayer as detailed in proposed Sec.
1.6418-4. For further information concerning the registration and where
to submit comments on the collection of information and the accuracy of
the estimated burden, and suggestions for reducing this burden, please
refer to the preamble to the corresponding temporary regulations (T.D.
9975) published in the Rules and Regulations section of this issue of
the Federal Register. For burden estimates associated with the pre-
filing registration requirement as detailed in proposed Sec. 1.6418-4,
see the preamble to the corresponding temporary regulations. This
proposed regulation is not changing or creating new collection
requirements beyond the requirements that are being reviewed and
approved by OMB under the temporary regulations.
II. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely
to have a significant economic impact on a substantial number of small
entities. Unless an agency determines that a proposal is not likely to
have a significant economic impact on a substantial number of small
entities, section 603 of the RFA requires the agency to present an
initial regulatory flexibility analysis (IRFA) of the proposed rule.
The Treasury Department and the IRS have not determined whether the
proposed rule, when finalized, will likely have a significant economic
impact on a substantial number of small entities. This determination
requires further study. However, because there is a possibility of
significant economic impact on a substantial number of small entities,
an IRFA is provided in these proposed regulations. The Treasury
Department and the IRS invite comments on both the number of entities
affected and the economic impact on small entities. Pursuant to section
7805(f), this notice of proposed rulemaking has been submitted to the
Chief Counsel of Advocacy of the Small Business Administration for
comment on its impact on small business.
1. Need for and Objectives of the Rule
The proposed regulations would provide guidance to taxpayers that
[[Page 40511]]
intend to make an election under section 6418 to transfer eligible
credits. The proposed regulations would also provide guidance to
transferee taxpayers as to the treatment of transferred eligible
credits under section 6418. The proposed rules would include needed
definitions, the time and manner to make a transfer election, and
information about the pre-filing registration process, among other
items. The Treasury Department and the IRS intend and expect that
providing taxpayers guidance that allows them to effectively use
section 6418 to transfer eligible credits will beneficially impact
various industries, deliver benefits across the economy, and reduce
economy wide greenhouse gas emissions.
In particular, section 6418 allows eligible taxpayers to transfer
an eligible credit (or portion thereof) to a transferee taxpayer.
Allowing eligible taxpayers without sufficient Federal income tax
liability to use a business tax credit to instead transfer the tax
credit to a taxpayer that has sufficient tax liability to use the
credit will increase the incentive for taxpayers to invest in clean
energy projects that generate eligible credits. It will also increase
the amount of cash available to such taxpayers, thereby reducing the
amount of financing needed for clean energy projects.
2. Affected Small Entities
The RFA directs agencies to provide a description of, and where
feasible, an estimate of, the number of small entities that may be
affected by the proposed rules, if adopted. The Small Business
Administration's Office of Advocacy estimates in its 2023 Frequently
Asked Questions that 99.9 percent of American businesses meet its
definition of a small business. The applicability of these proposed
regulations does not depend on the size of the business, as defined by
the Small Business Administration. As described more fully in the
preamble to this proposed regulation and in this IRFA, section 6418 and
these proposed regulations may affect a variety of different entities
across several different industries as there are 11 different eligible
credits that may be transferred pursuant to a transfer election.
Although there is uncertainty as to the exact number of small
businesses within this group, the current estimated number of
respondents to these proposed rules is 50,000 taxpayers as described in
the Paperwork Reduction Act section of the preamble. The Treasury
Department and the IRS expect to receive more information on the impact
on small businesses through comments on this proposed rule and again
when taxpayers start to make the transfer election using the guidance
and procedures provided in these proposed regulations.
3. Impact of the Rules
The proposed regulations provide rules for how taxpayers can take
advantage of the section 6418 credit monetization regime. Taxpayers
that elect to take advantage of transferability will have
administrative costs related to reading and understanding the rules in
addition to recordkeeping and reporting requirements because of the
pre-filing registration and tax return requirements. The costs will
vary across different-sized taxpayers and across the type of project(s)
in which such taxpayers are engaged.
The pre-filing registration process requires a taxpayer to register
itself as intending to make a transfer election, to list all eligible
credits it intends to transfer, and to list each eligible credit
property that contributed to the determination of such credits. This
process must be completed to receive a registration number for each
eligible credit property with respect to which the eligible taxpayer
intends to transfer an eligible credit. On filing the return, to make a
valid transfer election, the eligible taxpayer and transferee taxpayer
would be required to complete and attach a transfer election statement.
The transfer election statement is generally a written document that
describes the transfer of a specified credit portion between an
eligible taxpayer and transferee taxpayer. Further, the eligible
taxpayer is required to provide certain required minimum documentation
to the transferee taxpayer, and the transferee taxpayer is required to
retain the documentation for as long as it may be relevant. Many of the
other requirements, such as completing the relevant source credit form
and completing the Form 3800 would be required for any taxpayer that is
claiming a general business credit, regardless of whether the taxpayer
was transferring the credit under section 6418. Although the Treasury
Department and the IRS do not have sufficient data to determine
precisely the likely extent of the increased costs of compliance, the
estimated burden of complying with the recordkeeping and reporting
requirements are described in the Paperwork Reduction Act section of
the preamble.
4. Alternatives Considered
The Treasury Department and the IRS considered alternatives to the
proposed regulations. The proposed regulations requirements of pre-
filing registration and the additional requirements to make a valid
transfer election were designed to minimize burden while also
minimizing the opportunity for duplication, fraud, improper payments,
or excessive payments under section 6418. For example, in adopting
these requirements, the Treasury Department and the IRS considered
whether such information could be obtained strictly at filing of the
relevant return. However, the Treasury Department and IRS decided that
such an option would increase the opportunity for duplication, fraud,
improper payments or excessive payments under section 6418. Section
6418(g)(1) specifically authorizes the IRS to require such information
or registration as the Secretary deems necessary for purposes of
preventing duplication, fraud, improper payments, or excessive payments
under section 6418 as a condition of, and prior to, any transfer of any
portion of an eligible credit. As described in the preamble to these
proposed regulations, these proposed rules carry out that Congressional
intent as pre-filing registration allows for the IRS to verify certain
information in a timely manner and then process the annual tax return
of the eligible taxpayer and the transferee taxpayer with minimal
delays. Having a distinction between eligible taxpayers that are small
businesses versus others making a transfer election would create a
scenario where a subset of taxpayers seeking to transfer eligible
credits would not have been verified or received registration numbers,
potentially delaying return processing for both eligible taxpayers and
transferee taxpayers.
Another example is the proposed requirement that eligible taxpayers
and transferee taxpayers complete a transfer election statement. In
determining to adopt this proposal, the Treasury Department and the IRS
considered that such a statement would again minimize opportunity for
fraud and decrease the chance of duplication but would also benefit a
transferee taxpayer by allowing the filing of its return without having
to wait for an eligible taxpayer to file in all cases. Further, the
contents of the transfer election statement were intended to be
available to eligible taxpayers, such that the size of the business
should not impact greatly the time needed to prepare such statements.
The Treasury Department and the IRS also considered whether any
required documentation was needed to be provided by eligible taxpayers
to transferee taxpayers, which the transferee taxpayers are then
required to
[[Page 40512]]
keep for so long as the contents thereof may become material in the
administration of any internal revenue law. Again, this requirement was
considered consistent with the goal of minimizing fraud, as the
information is generally documentation to validate the existence of the
eligible credit property, any bonus credits amounts, and the evidence
of credit qualification. Any size business generating an eligible
credit should have access to such information. Further the
recordkeeping duration is consistent with general recordkeeping rules
under Sec. 1.6001-1(e). This proposed requirement also will benefit
small businesses that are transferee taxpayers as it provides a
mechanism to receive such information from the eligible taxpayer.
Comments are requested on the requirements in the proposed regulations,
including specifically, whether there are less burdensome alternatives
that do not increase the risk of duplication, fraud, improper payments,
or excessive payments under section 6418.
5. Duplicative, Overlapping, or Conflicting Federal Rules
The proposed rule would not duplicate, overlap, or conflict with
any relevant Federal rules. As discussed above, the proposed rule would
merely provide procedures and definitions to allow taxpayers to take
advantage of the ability to transfer eligible credits. The Treasury
Department and the IRS invite input from interested members of the
public about identifying and avoiding overlapping, duplicative, or
conflicting requirements.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandate Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a state,
local, or tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). These
proposed regulations do not include any Federal mandate that may result
in expenditures by state, local, or tribal governments, or by the
private sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These proposed regulations do not
have federalism implications and do not impose substantial, direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive order.
VI. Executive Order 13175: Consultation and Coordination With Indian
Tribal Governments
Executive Order 13175 (Consultation and Coordination With Indian
Tribal Governments) prohibits an agency from publishing any rule that
has tribal implications if the rule either imposes substantial, direct
compliance costs on Indian tribal governments, and is not required by
statute, or preempts tribal law, unless the agency meets the
consultation and funding requirements of section 5 of the Executive
order. This proposed rule does not have substantial direct effects on
one or more federally recognized Indian tribes and does not impose
substantial direct compliance costs on Indian tribal governments within
the meaning of the Executive order.
VII. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to comments that are submitted timely to
the IRS as prescribed in the preamble under the ADDRESSES section. The
Treasury Department and the IRS request comments on all aspects of the
proposed regulations. Any electronic comments submitted, and any paper
comments submitted, will be made available at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon request.
Announcement 2023-16, 2023-20 I.R.B. 854 (May 15, 2023), provides
that public hearings will be conducted in person, although the IRS will
continue to provide a telephonic option for individuals who wish to
attend or testify at a hearing by telephone. Any telephonic hearing
will be made accessible to people with disabilities.
A public hearing has been scheduled for August 23, 2023, beginning
at 10:00 a.m. ET, in the Auditorium at the Internal Revenue Building,
1111 Constitution Avenue NW, Washington, DC, unless no outlines are
received by August 14, 2023. Due to building security procedures,
visitors must enter at the Constitution Avenue entrance. In addition,
all visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing
starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to comment by telephone at the hearing must submit written or
electronic comments and an outline of the topics to be discussed as
well as the time to be devoted to each topic by August 14, 2023, as
prescribed in the preamble under the ADDRESSES section.
A period of ten minutes will be allocated to each person for making
comments. After the deadline for receiving outlines has passed, the IRS
will prepare an agenda containing the schedule of speakers. Copies of
the agenda will be made available at <a href="https://www.regulations.gov">https://www.regulations.gov</a>,
search IRS and REG-101610-23. Copies of the agenda will also be
available by emailing a request to <a href="/cdn-cgi/l/email-protection#205055424c494348454152494e4753604952530e474f56"><span class="__cf_email__" data-cfemail="6e1e1b0c02070d060b0f1c0700091d2e071c1d40090118">[email protected]</span></a>. Please put
``REG-101610-23 Agenda Request'' in the subject line of the email.
Individuals who want to testify in person at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#45353027292c262d2024372c2b2236052c37366b222a33"><span class="__cf_email__" data-cfemail="deaeabbcb2b7bdb6bbbfacb7b0b9ad9eb7acadf0b9b1a8">[email protected]</span></a> to have your name added to
the building access list. The subject line of the email must contain
the regulation number REG-101610-23 and the language TESTIFY In Person.
For example, the subject line may say: Request to TESTIFY In Person at
Hearing for REG-101610-23.
Individuals who want to testify by telephone at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#4f3f3a2d23262c272a2e3d2621283c0f263d3c61282039"><span class="__cf_email__" data-cfemail="f08085929c999398959182999e9783b0998283de979f86">[email protected]</span></a> to receive the telephone
number and access code for the hearing. The subject line of the email
must contain the regulation number REG-101610-23 and the language
TESTIFY Telephonically. For example, the subject line may say: Request
to TESTIFY Telephonically at Hearing for REG-101610-23.
Individuals who want to attend the public hearing in person without
testifying must also send an email to <a href="/cdn-cgi/l/email-protection#b7c7c2d5dbded4dfd2d6c5ded9d0c4f7dec5c499d0d8c1"><span class="__cf_email__" data-cfemail="720207101e1b111a1713001b1c1501321b00015c151d04">[email protected]</span></a> to have
your name added to the building access list. The subject line of the
email must contain the regulation number REG-101610-23 and the language
ATTEND In Person. For example, the subject line may say: Request to
ATTEND Hearing In Person for REG-101610-23. Requests to attend the
public hearing must be received by 5:00 p.m. EST on August 21,
[[Page 40513]]
2023. Individuals who want to attend the public hearing by telephone
without testifying must also send an email to <a href="/cdn-cgi/l/email-protection#93e3e6f1fffaf0fbf6f2e1fafdf4e0d3fae1e0bdf4fce5"><span class="__cf_email__" data-cfemail="d9a9acbbb5b0bab1bcb8abb0b7beaa99b0abaaf7beb6af">[email protected]</span></a> to
receive the telephone number and access code for the hearing. The
subject line of the email must contain the regulation number REG-
101610-23 and the language ATTEND Hearing Telephonically. For example,
the subject line may say: Request to ATTEND Hearing Telephonically for
REG-101610-23. Requests to attend the public hearing must be received
by 5:00 p.m. EST on August 21, 2023.
Hearings will be made accessible to people with disabilities. To
request special assistance during a hearing please contact the
Publications and Regulations Branch of the Office of Associate Chief
Counsel (Procedure and Administration) by sending an email to
<a href="/cdn-cgi/l/email-protection#09797c6b65606a616c687b60676e7a49607b7a276e667f"><span class="__cf_email__" data-cfemail="e19194838d888289848093888f8692a1889392cf868e97">[email protected]</span></a> (preferred) or by telephone at (202) 317-6901
(not a toll-free number) at least August 18, 2023.
Statement of Availability of IRS Documents
IRS notices and other guidance cited in this preamble are published
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website
at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal authors of these proposed regulations are James
Holmes and Jeremy Milton, Office of the Associate Chief Counsel
(Passthroughs and Special Industries), IRS. However, other personnel
from the Treasury Department and the IRS participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order for Sec. Sec. 1.6418-0 through 1.6418-5 to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.6418-0 through 1.6418-5 also issued under 26 U.S.C.
6418(g)(1) and (h).
* * * * *
0
Par. 2. Section 1.706-4 is amended as follows:
0
1. Redesignate paragraphs (e)(2)(ix) through (xi) as paragraphs
(e)(2)(x) through (xii).
0
2. Add new paragraph (e)(2)(ix).
0
3. Revise the heading of paragraph (g).
0
4. Redesignate the text of paragraph (g) as paragraph (g)(1).
0
5. Add paragraph (g)(2).
The addition and revisions read as follows:
Sec. 1.706-4 Determination of distributive share when a partner's
interest varies.
* * * * *
(e) * * *
(2) * * *
(ix) Any specified credit portion transferred pursuant to section
6418 and Sec. Sec. 1.6418-1 through 1.6418-5;
* * * * *
(g) Applicability date. * * *
(2) Paragraph (e)(2)(ix) of this section applies to taxable years
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 3. Sections 1.6418-0 through 1.6418-5 are added to read as
follows:
Sec.
* * * * *
1.6418-0 Table of contents.
1.6418-1 Transfer of eligible credits.
1.6418-2 Rules for making transfer elections.
1.6418-3 Additional rules for partnerships and S corporations.
1.6418-4 Additional information and registration.
1.6418-5 Special rules.
* * * * *
Sec. 1.6418-0 Table of contents.
This section lists the captions contained in Sec. Sec. 1.6418-1
through 1.6418-5.
Sec. 1.6418-1 Transfer of eligible credits.
(a) Transfer of eligible credits.
(b) Eligible taxpayer.
(c) Eligible credit.
(d) Eligible credit property.
(e) Guidance.
(f) Paid in cash.
(g) Section 6418 regulations.
(h) Specified credit portion.
(i) Statutory references.
(j) Transfer election.
(k) Transferee partnership.
(l) Transferee S corporation.
(m) Transferee taxpayer.
(n) Transferor partnership.
(o) Transferor S corporation.
(p) Transferred specified credit portion.
(q) U.S. territory.
(r) Applicability date.
Sec. 1.6418-2 Rules for making transfer elections.
(a) Transfer election.
(b) Manner and due date of making a transfer election.
(c) Limitations after a transfer election is made.
(d) Determining the eligible credit.
(e) Treatment of payments made in connection with a transfer
election.
(f) Transferee taxpayer's treatment of eligible credit.
(g) Applicability date.
Sec. 1.6418-3 Additional rules for partnerships and S corporations.
(a) Rules applicable to both partnerships and S corporations.
(b) Rules applicable to partnerships.
(c) Rules applicable to S corporations.
(d) Transfer election by a partnership or S corporation.
(e) Examples.
(f) Applicability date.
Sec. 1.6418-4 Additional information and registration.
(a) Pre-filing registration and election.
(b) Pre-filing registration requirements.
(c) Registration number.
(d) Applicability date.
Sec. 1.6418-5 Special rules.
(a) Excessive credit transfer tax imposed.
(b) Excessive credit transfer defined.
(c) Basis reduction under section 50(c).
(d) Notification and impact of recapture under section 50(a) or
49(b).
(e) Notification and impact of recapture under section
45Q(f)(4).
(f) Impact of an ineffective transfer election by an eligible
taxpayer.
(g) Carryback and carryforward.
(h) Applicability date.
Sec. 1.6418-1 Transfer of eligible credits.
(a) Transfer of eligible credits. An eligible taxpayer may make a
transfer election under Sec. 1.6418-2(a) to transfer any specified
portion of an eligible credit determined with respect to any eligible
credit property of such eligible taxpayer for any taxable year to a
transferee taxpayer in accordance with section 6418 of the Code and the
section 6418 regulations (defined in paragraph (g) of this section).
Paragraphs (b) through (q) of this section provide definitions. See
Sec. 1.6418-2 for rules and procedures under which all transfer
elections must be made, limitations to making transfer elections, the
treatment of payments made in connection with transfer elections, and
the treatment of eligible credits transferred to transferee taxpayers.
See Sec. 1.6418-3 for special rules pertaining to transfer elections
made by partnerships or S corporations. See Sec. 1.6418-4 for pre-
filing registration requirements and other information required to make
any transfer election effective. See Sec. 1.6418-5 for special rules
related to the imposition of tax on excessive credit transfers, basis
reductions, required notifications and impacts of the recapture of
transferred credits, and rules regarding carrybacks and carryforwards.
(b) Eligible taxpayer. The term eligible taxpayer means any
taxpayer (as defined in section 7701(a)(14) of the
[[Page 40514]]
Code), other than one described in section 6417(d)(1)(A) and Sec.
1.6417-1(b).
(c) Eligible credit--(1) In general. The term eligible credit is a
credit described in paragraph (c)(2) of this section determined for a
taxable year with respect to a single eligible credit property of an
eligible taxpayer but does not include any business credit carryforward
or business credit carryback determined under section 39 of the Code.
(2) Separately determined credit amounts. The amount of any credit
described in this paragraph (c)(2) is the entire amount of the credit
separately determined with respect to each single eligible credit
property of the eligible taxpayer and includes any bonus credit amounts
described in paragraph (c)(3) of this section determined with respect
to that single eligible credit property. The eligible credits described
in this paragraph (c)(2) are:
(i) Alternative fuel vehicle refueling property. So much of the
credit for alternative fuel vehicle refueling property allowed under
section 30C of the Code that, pursuant to section 30C(d)(1), is treated
as a credit listed in section 38(b) of the Code (section 30C credit).
(ii) Renewable electricity production. The renewable electricity
production credit determined under section 45(a) of the Code (section
45 credit).
(iii) Carbon oxide sequestration. The credit for carbon oxide
sequestration determined under section 45Q(a) of the Code (section 45Q
credit).
(iv) Zero-emission nuclear power production. The zero-emission
nuclear power production credit determined under section 45U(a) of the
Code (section 45U credit).
(v) Clean hydrogen production. The clean hydrogen production credit
determined under section 45V(a) of the Code (section 45V credit).
(vi) Advanced manufacturing production. The advanced manufacturing
production credit determined under section 45X(a) of the Code (section
45X credit).
(vii) Clean electricity production. The clean electricity
production credit determined under section 45Y(a) of the Code (section
45Y credit).
(viii) Clean fuel production. The clean fuel production credit
determined under section 45Z(a) of the Code (section 45Z credit).
(ix) Energy. The energy credit determined under section 48 of the
Code (section 48 credit).
(x) Qualifying advance energy project. The qualifying advanced
energy project credit determined under section 48C of the Code (section
48C credit).
(xi) Clean electricity. The clean electricity investment credit
determined under section 48E of the Code (section 48E credit).
(3) Bonus credit amounts. The bonus credit amounts described in
this paragraph (c)(3) are:
(i) In the case of a section 30C credit, the increased credit
amounts for which the requirements under section 30C(g)(2)(A) and (3)
are satisfied.
(ii) In the case of a section 45 credit, the increased credit
amounts for which the requirements under section 45(b)(7)(A)(8), (9),
and (11) are satisfied.
(iii) In the case of a section 45Q credit, the increased credit
amounts for which the requirements under section 45Q(h)(3) and (4) are
satisfied.
(iv) In the case of a section 45U credit, the increased credit
amount for which the requirements under section 45U(d)(2) are
satisfied.
(v) In the case of a section 45V credit, the increased credit
amounts for which the requirements under section 45V(e)(3) and (4) are
satisfied.
(vi) In the case of a section 45Y credit, the increased credit
amounts for which the requirements under section 45Y(g)(7), (9), (10),
and (11) are satisfied.
(vii) In the case of a section 45Z credit, the increased credit
amounts for which the requirements under section 45Z(f)(6) and (7) are
satisfied.
(viii) In the case of a section 48 credit, the increased credit
amounts for which the requirements under section 48(a)(10), (11), (12),
(14), and (e) are satisfied.
(ix) In the case of a section 48C credit, the increased credit
amounts for which the requirements under section 48C(e)(5) and (6) are
satisfied.
(x) In the case of a section 48E credit, the increased credit
amounts for which the requirements under section 48E(a)(3)(A), (B),
(d)(3), (d)(4), and (h) are satisfied.
(d) Eligible credit property. The term eligible credit property
means each of the units of property of an eligible taxpayer described
in paragraphs (d)(1) through (11) of this section with respect to which
the amount of an eligible credit is determined:
(1) In the case of a section 30C credit, a qualified alternative
fuel vehicle refueling property described in section 30C(c).
(2) In the case of a section 45 credit, a qualified facility
described in section 45(d).
(3) In the case of a section 45Q credit, a single process train of
carbon capture equipment described in Sec. 1.45Q-2(c)(3).
(4) In the case of a section 45U credit, a qualified nuclear power
facility described in section 45U(b)(1).
(5) In the case of a section 45V credit, a qualified clean hydrogen
production facility described in section 45V(c)(3).
(6) In the case of a section 45X credit, a facility that produces
eligible components, as described in guidance under sections 48C and
45X.
(7) In the case of a section 45Y credit, a qualified facility
described in section 45Y(b)(1).
(8) In the case of a section 45Z credit, a qualified facility
described in section 45Z(d)(4).
(9)(i) In general. In the case of a section 48 credit and except as
provided in paragraph (d)(9)(ii) of this section, an energy property
described in section 48.
(ii) Pre-filing registration and elections. At the option of an
eligible taxpayer, and to the extent consistently applied for purposes
of the pre-filing registration requirements of Sec. 1.6418-4 and the
election requirements of Sec. Sec. 1.6418-2 through 1.6418-3, an
energy project as described in section 48(a)(9)(A)(ii) and defined in
guidance.
(10) In the case of a section 48C credit, an eligible property
described in section 48C(c)(2).
(11) In the case of a section 48E credit, a qualified facility as
defined in section 48E(b)(3) or, in the case of a section 48E credit
relating to a qualified investment with respect to energy storage
technology, an energy storage technology described in section
48E(c)(2).
(e) Guidance. The term guidance means guidance published in the
Federal Register or Internal Revenue Bulletin, as well as
administrative guidance such as forms, instructions, publications, or
other guidance on the <a href="http://IRS.gov">IRS.gov</a> website. See Sec. Sec. 601.601 and
601.602 of this chapter.
(f) Paid in cash. The term paid in cash means a payment in United
States dollars that--
(1) Is made by cash, check, cashier's check, money order, wire
transfer, automated clearing house (ACH) transfer, or other bank
transfer of immediately available funds;
(2) Is made within the period beginning on the first day of the
eligible taxpayer's taxable year during which a specified credit
portion is determined and ending on the due date for completing a
transfer election statement (as provided in Sec. 1.6418-2(b)(5)(iii));
and
(3) May include a transferee taxpayer's contractual commitment to
purchase eligible credits with United States dollars in advance of the
date a specified credit portion is transferred to such transferee
taxpayer if all payments of United States dollars are made in a manner
described in paragraph (f)(1) of
[[Page 40515]]
this section during the time period described in paragraph (f)(2) of
this section.
(g) Section 6418 regulations. The term section 6418 regulations
means this section and Sec. Sec. 1.6418-2 through 1.6418-5.
(h) Specified credit portion. The term specified credit portion
means a proportionate share (including all) of an eligible credit
determined with respect to a single eligible credit property of the
eligible taxpayer that is specified in a transfer election. A specified
credit portion of an eligible credit must reflect a proportionate share
of each bonus credit amount that is taken into account in calculating
the entire amount of eligible credit determined with respect to a
single eligible credit property.
(i) Statutory references--(1) Chapter 1. The term chapter 1 means
chapter 1 of the Code.
(2) Code. The term Code means the Internal Revenue Code.
(3) Subchapter K. The term subchapter K means subchapter K of
chapter 1.
(4) Subtitle A. The term subtitle A means subtitle A of the Code.
(j) Transfer election. The term transfer election means an election
under section 6418(a) of the Code to transfer to a transferee taxpayer
a specified portion of an eligible credit determined with respect to an
eligible credit property in accordance with the section 6418
regulations.
(k) Transferee partnership. The term transferee partnership means a
partnership for Federal income tax purposes that is a transferee
taxpayer.
(l) Transferee S corporation. The term transferee S corporation
means an S corporation within the meaning of section 1361(a) that is a
transferee taxpayer.
(m) Transferee taxpayer. The term transferee taxpayer means any
taxpayer that is not related (within the meaning of section 267(b) or
707(b)(1) of the Code) to the eligible taxpayer making the transfer
election to which an eligible taxpayer transfers a specified credit
portion of an eligible credit.
(n) Transferor partnership. The term transferor partnership means a
partnership for Federal income tax purposes that is an eligible
taxpayer that makes a transfer election.
(o) Transferor S corporation. The term transferor S corporation
means an S corporation within the meaning of section 1361(a) that is an
eligible taxpayer that makes a transfer election.
(p) Transferred specified credit portion. The term transferred
specified credit portion means the specified credit portion that is
transferred from an eligible taxpayer to a transferee taxpayer pursuant
to a transfer election.
(q) U.S. territory. The term U.S. territory means the Commonwealth
of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, and the
Commonwealth of the Northern Mariana Islands.
(r) Applicability date. This section applies to taxable years
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
Sec. 1.6418-2 Rules for making transfer elections.
(a) Transfer election--(1) In general. An eligible taxpayer can
make a transfer election as provided in this section. If a valid
transfer election is made by an eligible taxpayer for any taxable year,
the transferee taxpayer specified in such election (and not the
eligible taxpayer) is treated as the taxpayer for purposes of the Code
with respect to the specified credit portion. This paragraph (a)
provides rules on the number of transfers permitted, rules for
determining the eligible taxpayer in certain ownership situations, and
rules describing circumstances where no transfer election is allowed.
Paragraph (b) of this section provides specific rules regarding the
scope, manner, and timing of a transfer election. Paragraph (c) of this
section provides rules regarding limitations applicable to transfer
elections. Paragraph (d) of this section provides rules regarding an
eligible taxpayer's determination of an eligible credit. Paragraph (e)
of this section provides the treatment of payments in connection with a
transfer election. Paragraph (f) of this section provides rules
regarding a transferee taxpayer's treatment of an eligible credit
following a transfer.
(2) Multiple transfer elections permitted. An eligible taxpayer may
make multiple transfer elections to transfer one or more specified
credit portion(s) to multiple transferee taxpayers, provided that the
aggregate amount of specified credit portions transferred with respect
to any single eligible credit property does not exceed the amount of
the eligible credit determined with respect to the eligible credit
property.
(3) Transfer election in certain ownership situations--(i)
Disregarded entities. If an eligible taxpayer is the sole owner
(directly or indirectly) of an entity that is disregarded as separate
from such eligible taxpayer for Federal income tax purposes and such
entity directly holds an eligible credit property, the eligible
taxpayer may make a transfer election in the manner provided in this
section with respect to any eligible credit determined with respect to
such eligible credit property.
(ii) Undivided ownership interests. If an eligible taxpayer is a
co-owner of an eligible credit property through an arrangement properly
treated as a tenancy-in-common for Federal income tax purposes, or
through an organization that has made a valid election under section
761(a) of the Code, then the eligible taxpayer's undivided ownership
share of the eligible credit property will be treated for purposes of
section 6418 as a separate eligible credit property owned by such
eligible taxpayer, and the eligible taxpayer may make a transfer
election in the manner provided in this section for any eligible
credit(s) determined with respect to such eligible credit property.
(iii) Members of a consolidated group. A member of a consolidated
group is required to make a transfer election in the manner provided in
this section to transfer any eligible credit determined with respect to
the member. See Sec. 1.1502-77 (providing rules regarding the status
of the common parent as agent for its members).
(iv) Partnerships and S corporations. A partnership or S
corporation that determines an eligible credit with respect to any
eligible credit property held directly by such partnership or S
corporation may make a transfer election in the manner provided in
Sec. 1.6418-3(d) with respect to eligible credits determined with
respect to such eligible credit property.
(4) Circumstances where no transfer election can be made--(i)
Prohibition on election or transfer with respect to progress
expenditures. No transfer election can be made with respect to any
amount of an eligible credit that is allowed for progress expenditures
pursuant to rules similar to the rules of section 46(c)(4) and (d) (as
in effect on the day before the enactment of the Revenue Reconciliation
Act of 1990).
(ii) No election allowed when non-cash consideration. No transfer
election is allowed when an eligible taxpayer receives any
consideration other than cash (as defined in Sec. 1.6418-1(f)) in
connection with the transfer of a specified credit portion.
(iii) No election allowed when eligible credits not determined with
respect to taxpayer. No transfer election is allowed for eligible
credits that are not determined with respect to an eligible taxpayer as
described in paragraph (d) of this section. For example, a section 45Q
credit allowable to an eligible taxpayer because of an election made
under section 45Q(f)(3)(B), or a section 48 credit allowable to an
eligible taxpayer because of an election made
[[Page 40516]]
under section 50(d)(5) and Sec. 1.48-4, although described in Sec.
1.6418-1(c)(2), is not an eligible credit that can be transferred by
the taxpayer because such credit is not determined with respect to the
eligible taxpayer.
(b) Manner and due date of making a transfer election--(1) In
general. An eligible taxpayer must make a transfer election to transfer
a specified credit portion of an eligible credit on the basis of a
single eligible credit property. For example, an eligible taxpayer that
determines eligible credits with respect to two eligible credit
properties would need to make a separate transfer election with respect
to any specified credit portion of the eligible credit determined with
respect to each eligible credit property. Any transfer election must be
consistent with the eligible taxpayer's pre-filing registration under
Sec. 1.6418-4.
(2) Specific rules for certain eligible credits. In the case of any
section 45 credit, section 45Q credit, section 45V credit, or section
45Y credit that is an eligible credit, the rules in paragraphs
(b)(2)(i) and (ii) of this section apply.
(i) Separate eligible credit property. A transfer election must be
made separately with respect to each eligible credit property described
in Sec. 1.6418-1(d)(2), (3), (5), and (7), as applicable, for which an
eligible credit is determined.
(ii) Time period. A transfer election must be made for each taxable
year an eligible taxpayer elects to transfer specified credit portions
with respect to such an eligible credit property during the 10-year
period beginning on the date such eligible credit property was
originally placed in service (or, in the case of a section 45Q credit,
for each taxable year during the 12-year period beginning on the date
the single process train of carbon capture equipment was originally
placed in service).
(3) Manner of making a valid transfer election. A transfer election
is made by an eligible taxpayer on the basis of each specified credit
portion with respect to a single eligible credit property that is
transferred to a transferee taxpayer. To make a valid transfer
election, an eligible taxpayer as part of filing a return (or a return
for a short year within the meaning of section 443 of the Code (short
year return)), must include the following--
(i) A properly completed relevant source credit form for the
eligible credit (such as Form 7207, Advanced Manufacturing Production
Credit, if making a transfer election for a section 45X credit) for the
taxable year that the eligible credit was determined;
(ii) A properly completed Form 3800, General Business Credit (or
its successor), including reductions necessary because of the
transferred eligible credit as required by the form and instructions
and the registration number received during the required pre-filing
registration (as described in Sec. 1.6418-4) related to the eligible
credit property with respect to which a transferred eligible credit was
determined;
(iii) A schedule attached to the Form 3800 (or its successor)
showing the amount of eligible credit transferred for each eligible
credit property (such as for a section 45X election, the relevant lines
that include the eligible credit property reported on Form 7207),
except as otherwise provided in guidance;
(iv) A transfer election statement as described in paragraph (b)(5)
of this section; and
(v) Any other information related to the election specified in
guidance.
(4) Due date and original return requirement of a transfer
election. A transfer election by an eligible taxpayer with respect to a
specified portion of an eligible credit must be made on an original
return not later than the due date (including extensions of time) for
the original return of the eligible taxpayer for the taxable year for
which the eligible credit is determined. No transfer election may be
made or revised on an amended return or by filing an administrative
adjustment request under section 6227 of the Code. There is no late-
election relief available under Sec. Sec. 301.9100-1 through 301.9100-
3 of this chapter for a transfer election that is not timely filed.
(5) Transfer election statement--(i) In general. A transfer
election statement is a written document that describes the transfer of
a specified credit portion between an eligible taxpayer and transferee
taxpayer. An eligible taxpayer and transferee taxpayer must each attach
a transfer election statement to their respective return as required
under paragraphs (b)(3)(iv) and (f)(4)(ii) of this section, unless
otherwise provided in guidance. An eligible taxpayer and transferee
taxpayer can use any document (such as a purchase and sale agreement)
that meets the conditions in paragraph (b)(5)(ii) of this section but
must label the document a ``Transfer Election Statement'' when
attaching to a return. The information required in paragraph (b)(5)(ii)
of this section does not otherwise limit any other information that the
eligible taxpayer and transferee taxpayer may agree to provide in
connection with the transfer of any specified credit portion. The
statement must be signed under penalties of perjury by an individual
with authority to legally bind the eligible taxpayer. The statement
must also include the written consent of an individual with authority
to legally bind the transferee taxpayer.
(ii) Information required in transfer election statement. A
transfer election statement must, at a minimum, include each of the
following:
(A) Name, address, and taxpayer identification number of the
transferee taxpayer and the eligible taxpayer. If the transferee
taxpayer or eligible taxpayer is a member of a consolidated group (as
defined in Sec. 1.1502-1), then only include information for the group
member that is the transferee taxpayer or eligible taxpayer (if
different from the return filer).
(B) A statement that provides the necessary information and amounts
to allow the transferee taxpayer to take into account the specified
credit portion with respect to the eligible credit property,
including--
(1) A description of the eligible credit (for example, advanced
manufacturing production credit for a section 45X transfer election),
the total amount of the credit determined with respect to the eligible
credit property, and the amount of the specified credit portion;
(2) The taxable year of the eligible taxpayer and the first taxable
year in which the specified credit portion will be taken into account
by the transferee taxpayer;
(3) The amount(s) of the cash consideration and date(s) on which
paid by the transferee taxpayer; and
(4) The registration number related to the eligible credit
property.
(C) Attestation that the eligible taxpayer (or any member of its
consolidated group) is not related to the transferee taxpayer (or any
member of its consolidated group) within the meaning of section 267(b)
or 707(b)(1)).
(D) A statement or representation from the eligible taxpayer that
it has or will comply with all requirements of section 6418, the
section 6418 regulations, and the provisions of the Code applicable to
the eligible credit, including, for example, any requirements for bonus
credit amounts described in Sec. 1.6418-1(c)(3) (if applicable).
(E) A statement or representation from the eligible taxpayer and
the transferee taxpayer acknowledging the notification of recapture
requirements under section 6418(g)(3) and the section 6418 regulations
(if applicable).
(F) A statement or representation from the eligible taxpayer that
the eligible taxpayer has provided the required minimum documentation
(as described in paragraph (b)(5)(iv) of this section) to the
transferee taxpayer.
[[Page 40517]]
(iii) Timing of transfer election statement. A transfer election
statement can be completed at any time after the eligible taxpayer and
transferee taxpayer have sufficient information to meet the
requirements of paragraph (b)(5)(ii) of this section, but the transfer
election statement cannot be completed for any year after the earlier
of:
(A) The filing of the eligible taxpayer's return for the taxable
year for which the specified credit portion is determined with respect
to the eligible taxpayer; or
(B) The filing of the return of the transferee taxpayer for the
year in which the specified credit portion is taken into account.
(iv) Required minimum documentation. Required minimum documentation
is the minimum documentation that the eligible taxpayer is required to
provide to a transferee taxpayer. This documentation consists of--
(A) Information that validates the existence of the eligible credit
property, which could include evidence prepared by a third party (such
as a county board or other governmental entity, a utility, or an
insurance provider);
(B) If applicable, documentation substantiating that the eligible
taxpayer has satisfied the requirements to include any bonus credit
amounts (as defined in Sec. 1.6418-1(c)(3)) in the eligible credit
that was part of the transferred specified credit portion; and
(C) Evidence of the eligible taxpayer's qualifying costs in the
case of a transfer of an eligible credit that is part of the investment
credit or the amount of qualifying production activities and sales
amounts, as relevant, in the case of a transfer of an eligible credit
that is a production credit.
(v) Transferee recordkeeping requirement. Consistent with Sec.
1.6001-1(e), the transferee taxpayer must retain the required minimum
documentation provided by the eligible taxpayer as long as the contents
thereof may become material in the administration of any internal
revenue law.
(c) Limitations after a transfer election is made--(1) Irrevocable.
A transfer election with respect to a specified credit portion is
irrevocable.
(2) No additional transfers. A specified credit portion may only be
transferred pursuant to a transfer election once. A transferee taxpayer
may not make a transfer election of any specified credit portion
transferred to the transferee taxpayer.
(d) Determining the eligible credit--(1) In general. An eligible
taxpayer may only transfer eligible credits determined with respect to
the eligible taxpayer (paragraph (a)(4) of this section disallows
transfer elections in other situations). For an eligible credit to be
determined with respect to an eligible taxpayer, the eligible taxpayer
must own the underlying eligible credit property or, if ownership is
not required, otherwise conduct the activities giving rise to the
underlying eligible credit. All rules that relate to the determination
of the eligible credit, such as the rules in sections 49 and 50(b) of
the Code, apply to the eligible taxpayer and therefore can limit the
amount of eligible credit determined with respect to an eligible credit
property that can be transferred. Rules relating to the amount of an
eligible credit that is allowed to be claimed by an eligible taxpayer,
such as the rules in section 38(c) or 469 of the Code, do not limit the
eligible credit determined, but do apply to a transferee taxpayer as
described in paragraph (f)(3) of this section.
(2) Application of section 49 at-risk rules to determination of
eligible credits for partnerships and S corporations. Any amount of
eligible credit determined with respect to investment credit property
held directly by a transferor partnership or transferor S corporation
that is eligible credit property (eligible investment credit property)
must be determined by the partnership or S corporation taking into
account the section 49 at-risk rules at the partner or shareholder
level as of the close of the taxable year in which the eligible
investment credit property is placed in service. Thus, if the credit
base of an eligible investment credit property is limited to a partner
or S corporation shareholder by section 49, then the amount of the
eligible credit determined by the transferor partnership or transferor
S corporation is also limited. A transferor partnership or transferor S
corporation that transfers any specified credit portion with respect to
an eligible investment credit property must request from each of its
partners or shareholders, respectively, that is subject to section 49,
the amount of such partner's or shareholder's nonqualified nonrecourse
financing with respect to the eligible investment credit property as of
the close of the taxable year in which the property is placed in
service. Additionally, the transferor partnership or transferor S
corporation must attach to its tax return for the taxable year in which
the eligible investment credit property is placed in service, the
amount of each partner's or shareholder's section 49 limitation with
respect to any specified credit portion transferred with respect to the
eligible investment credit property. Changes to at-risk amounts under
section 49 for partners or S corporation shareholders after the close
of the taxable year in which the eligible investment credit property is
placed in service do not impact the eligible credit determined by the
transferor partnership or transferor S corporation, but do impact the
partner(s) or S corporation shareholder(s) as described in Sec.
1.6418-3(a)(6)(ii).
(e) Treatment of payments made in connection with a transfer
election--(1) In general. An amount paid by a transferee taxpayer to an
eligible taxpayer is in connection with a transfer election with
respect to a specified credit portion only if it is paid in cash (as
defined in Sec. 1.6418-1(f)), directly relates to the specified credit
portion, and is not described in Sec. 1.6418-5(a)(3) (describing
payments related to an excessive credit transfer).
(2) Not includible in gross income. Any amount paid to an eligible
taxpayer that is described in paragraph (e)(1) of this section is not
includible in the gross income of the eligible taxpayer.
(3) Not deductible. No deduction is allowed under any provision of
the Code with respect to any amount paid by a transferee taxpayer that
is described in paragraph (e)(1) of this section.
(4) Anti-abuse rule--(i) In general. A transfer election of any
specified credit portion, and therefore the transfer of that specified
credit portion to a transferee taxpayer, may be disallowed, or the
Federal income tax consequences of any transaction(s) effecting such a
transfer may be recharacterized, in circumstances where the parties to
the transaction have engaged in the transaction or a series of
transactions with the principal purpose of avoiding any Federal tax
liability beyond the intent of section 6418. An amount of cash paid by
a transferee taxpayer will not be considered as paid in connection with
the transfer of a specified credit portion under paragraph (e)(1) of
this section if a principal purpose of a transaction or series of
transactions is to allow an eligible taxpayer to avoid gross income.
Conversely, an amount of cash paid by a transferee taxpayer will be
considered paid in connection with the transfer of a specified credit
portion under paragraph (e)(1) of this section if a principal purpose
of a transaction or series of transactions is to increase a Federal
income tax deduction of a transferee taxpayer.
(ii) Example 1. Taxpayer A, an eligible taxpayer, generates $100 of
an eligible credit with respect to an eligible credit property in the
course of its trade or business. Taxpayer A also provides
[[Page 40518]]
services to customers. Taxpayer A offers Customer B, a transferee
taxpayer that cannot deduct the cost of the services, the opportunity
to be transferred $100 of eligible credit for $100 while receiving
Taxpayer A's services for free. Taxpayer A normally charges $20 for the
same services without the purchase of the eligible credit, and the
average transfer price of the eligible credit between unrelated parties
is $80 paid in cash for $100 of the eligible credit. Taxpayer A is
engaged in a transaction where it is undercharging for services to
Customer B to avoid recognizing $20 of gross income. This transaction
is subject to recharacterization under the anti-abuse rule in paragraph
(e)(4) of this section, and Taxpayer A will be treated as transferring
$100 of the eligible credit for $80, and have $20 of gross income from
the services provided to Customer B.
(iii) Example 2. Taxpayer C, an eligible taxpayer, generates $100
of an eligible credit with respect to an eligible credit property in
the course of its trade or business. Taxpayer C also sells property to
customers. Taxpayer C offers Customer D, a transferee taxpayer that can
deduct the purchase of property, the opportunity to receive the $100 of
eligible credit for $20 while purchasing Taxpayer C's property for $80.
Taxpayer C normally charges $20 for the same property without the
transfer of the eligible credit, and the average transfer price of the
eligible credit between unrelated parties is $80 paid in cash for $100
of the eligible credit. Taxpayer C is willing to accept the higher
price for the property because Taxpayer C has a net operating loss
carryover to offset any taxable income from the transaction. This
transaction is subject to recharacterization under the anti-abuse rule
under paragraph (e)(4) of this section, and Taxpayer C will be treated
as selling the property for $20 and transferring $100 of the eligible
credit for $80, and Customer D will have a $20 deduction related to the
purchase of the property instead of $80.
(f) Transferee taxpayer's treatment of eligible credit--(1) Taxable
year in which credit taken into account. In the case of any specified
credit portion transferred to a transferee taxpayer pursuant to a
transfer election under this section, the transferee taxpayer takes the
specified credit portion into account in the transferee taxpayer's
first taxable year ending with or ending after the taxable year of the
eligible taxpayer with respect to which the eligible credit was
determined. Thus, to the extent the taxable years of an eligible
taxpayer and a transferee taxpayer end on the same date, the transferee
taxpayer will take the specified credit portion into account in that
taxable year. To the extent the taxable years of an eligible taxpayer
and a transferee taxpayer end on different dates, the transferee
taxpayer will take the specified credit portion into account in the
transferee taxpayer's first taxable year that ends after the taxable
year of the eligible taxpayer.
(2) No gross income for a transferee taxpayer when claiming a
transferred specified credit portion. A transferee taxpayer does not
have gross income when claiming a transferred specified credit portion
even if the amount of cash paid to the eligible taxpayer was less than
the amount of the transferred specified credit portion, assuming all
other requirements of section 6418 are met. For example, a transferee
taxpayer who paid $9X for $10X of a specified credit portion that the
transferee taxpayer then claims on its return does not result in the
$1X difference being included in the gross income of the transferee
taxpayer.
(3) Transferee treated as the eligible taxpayer--(i) In general. A
transferee taxpayer (and not the eligible taxpayer) is treated as the
taxpayer for purposes of the Code with respect to the transferred
specified credit portion. An eligible taxpayer must apply the rules
necessary to determine the amount of an eligible credit prior to making
the transfer election for a specified credit portion, and therefore a
transferee taxpayer does not re-apply rules that relate to a
determination of an eligible credit, such as the rules in section 49 or
50(b). However, a transferee taxpayer must apply rules that relate to
computing the amount of the specified credit portion that is allowed to
be claimed in the taxable year by the transferee taxpayer, such as the
rules in section 38 or 469, as applicable.
(ii) Application of section 469. A specified credit portion
transferred to a transferee taxpayer is treated as determined in
connection with the conduct of a trade or business and, if applicable,
such transferred specified credit portion is subject to the rules in
section 469. In applying section 469, a transferee taxpayer is not
considered to own an interest in the eligible taxpayer's trade or
business at the time the work was done (as required for material
participation under Sec. 1.469-5(f)(1)) and cannot change the
characterization of the transferee taxpayer's participation (or lack
thereof) in the eligible taxpayer's trade or business by using any of
the grouping rules under Sec. 1.469-4(c).
(4) Transferee taxpayer requirements to take into account a
transferred specified credit portion. In order for a transferee
taxpayer to take into account in a taxable year (as described in
paragraph (f)(1) of this section) a specified credit portion that was
transferred by an eligible taxpayer, as part of filing a return (or
short year return), an amended return, or a request for an
administrative adjustment under section 6227 of the Code, the
transferee taxpayer must include the following--
(i) A properly completed Form 3800, General Business Credit (or its
successor), to take into account the transferred specified credit
portion as a current general business credit, and including all
registration number(s) related to the transferred specified credit
portion;
(ii) The transfer election statement described in paragraph (b)(5)
of this section attached to the return; and
(iii) Any other information related to the transfer election
specified in guidance.
(g) Applicability date. This section applies to taxable years
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
Sec. 1.6418-3 Additional rules for partnerships and S corporations.
(a) Rules applicable to both partnerships and S corporations--(1)
Partnerships and S corporations as eligible taxpayers and transferee
taxpayers. Under section 6418, a partnership or an S corporation may
qualify as a transferor partnership or a transferor S corporation and
may elect to make a transfer election to transfer a specified credit
portion to a transferee taxpayer. A partnership or S corporation may
also qualify as a transferee partnership or a transferee S corporation.
This section provides rules applicable to transferor partnerships and
transferor S corporations and transferee partnerships and transferee S
corporations. Paragraph (b) of this section provides rules applicable
solely to partnerships. Paragraph (c) of this section provides rules
applicable solely to S corporations. Paragraph (d) of this section
provides guidelines for the manner and due date for which a partnership
or S corporation makes an election under section 6418(a). Paragraph (e)
of this section contains examples illustrating the operation of the
provisions of this section. Except as provided in this section, the
general rules under section 6418 and the section 6418 regulations apply
to partnerships and S corporations.
(2) Treatment of cash received for a specified credit portion. In
the case of any specified credit portion determined with respect to any
eligible credit property held directly by a partnership
[[Page 40519]]
or S corporation, if such partnership or S corporation makes a transfer
election with respect to such specified credit portion--
(i) Any amount of cash payment received as consideration for the
transferred specified credit portion will be treated as tax exempt
income for purposes of sections 705 and 1366 of the Code; and
(ii) A partner's distributive share of such tax exempt income will
be as described in paragraphs (b)(1) and (2) of this section.
(3) No partner or shareholder level transfers. In the case of an
eligible credit property held directly by a partnership or S
corporation, no transfer election by any partner or S corporation
shareholder is allowed under Sec. 1.6418-2 or this section with
respect to any specified credit portion determined with respect to such
eligible credit property.
(4) Disregarded entity ownership. In the case of an eligible credit
property held directly by an entity disregarded as separate from a
partnership or S corporation for Federal income tax purposes, such
eligible credit property will be treated as held directly by the
partnership or S corporation for purposes of making a transfer
election.
(5) Treatment of tax exempt income. Tax exempt income resulting
from the receipt of consideration for the transfer of a specified
credit portion by a transferor partnership or transferor S corporation
is treated as arising from an investment activity and not from the
conduct of a trade or business within the meaning of section
469(c)(1)(A). As such, any tax exempt income is not treated as passive
income to any direct or indirect partners or shareholders who do not
materially participate within the meaning of section 469(c)(1)(B).
(6) Certain recapture events not requiring notice--(i) Indirect
dispositions under section 50--(A) Treatment of transferor partnership
or transferor S corporation and transferee taxpayer. For purposes of
section 6418(g)(3)(B) only, the disposition of a partner's interest
under Sec. 1.47-6(a)(2) or an S corporation shareholder's interest
under Sec. 1.47-4(a)(2) in an eligible taxpayer that is treated as a
transferor partnership or transferor S corporation is disregarded. As
such, provided the investment credit property that is eligible credit
property owned by the transferor partnership or transferor S
corporation is not disposed of, and continues to be investment credit
property with respect to such transferor partnership or transferor S
corporation, a transferor partnership or transferor S corporation
should not provide notice to a transferee taxpayer of an interest
disposition by the partner or shareholder because the disposition does
not result in recapture under section 6418(g)(3)(B) to which the
transferee taxpayer is liable, and thus, the transferee taxpayer does
not have to calculate a recapture amount.
(B) Treatment of partner or shareholder. A partner or S corporation
shareholder that has disposed of an interest in a transferor
partnership or transferor S corporation is subject to the rules
relating to such disposition under Sec. 1.47-6(a)(2) or Sec. 1.47-
4(a)(2), respectively. Any recapture to a disposing partner is
calculated based on the partner's share of the basis (or cost) of the
section 38 property to which the specified credit portion was
determined in accordance with Sec. 1.46-3(f). Any recapture to a
disposing shareholder is calculated based on the shareholder's pro rata
share of the basis (or cost) of the section 38 property to which the
specified credit portion was determined in accordance with Sec. 1.48-
5.
(ii) Changes in at-risk amounts under section 49--(A) Treatment of
transferor partnership or transferor S corporation and transferee
taxpayer. For purposes of section 6418 only, a change in the
nonqualified nonrecourse financing (as defined in section 49(a)(1)(D))
amount of any partner or shareholder of a transferor partnership or
transferor S corporation, respectively, after the close of the taxable
year in which the investment credit property is placed in service and
the specified credit portion is determined, is disregarded. A
transferor partnership or transferor S corporation should not provide
notice to a transferee taxpayer of the change because the change does
not cause recapture under section 6418(g)(3)(B) to which the transferee
taxpayer is liable, and thus, the transferee taxpayer does not have to
calculate a recapture amount.
(B) Treatment of partner or shareholder. A partner or shareholder
in a transferor partnership or transferor S corporation, respectively,
must apply the rules under section 49 at the partner or shareholder
level if there is a change in nonqualified nonrecourse financing with
respect to the partner or shareholder after the close of the taxable
year in which the investment credit property is placed in service and
the specified credit portion is determined. If there is an increase in
nonqualified nonrecourse financing to a partner, any adjustment under
the rules of section 49(b) is calculated based on the partner's share
of the basis (or cost) of the section 38 property to which the
specified credit portion was determined in accordance with Sec. 1.46-
3(f). If there is an increase in nonqualified nonrecourse financing to
a shareholder, any adjustment under the rules of section 49(b) is
calculated based on the shareholder's pro rata share of the basis (or
cost) of the section 38 property to which the specified credit portion
was determined in accordance with Sec. 1.48-5. If there is a decrease
in nonqualified nonrecourse financing, any increase in the credit base
is taken into account by the partner or shareholder as provided under
section 49, and any resulting credit is not eligible for transfer under
section 6418.
(b) Rules applicable to partnerships--(1) Allocations of tax exempt
income amounts generally. A transferor partnership must generally
determine a partner's distributive share of any tax exempt income
resulting from the receipt of consideration for the transfer based on
such partner's proportionate distributive share of the eligible credit
that would otherwise have been allocated to such partner absent the
transfer of the specified credit portion (otherwise eligible credit). A
partner's distributive share of an otherwise eligible credit is
determined under Sec. Sec. 1.46-3(f) and 1.704-1(b)(4)(ii). Tax exempt
income resulting from the receipt of consideration for the transfer of
a specified credit portion by a transferor partnership is treated as
received or accrued, including for purposes of section 705 of the Code,
as of the date the specified credit portion is determined with respect
to the transferor partnership (such as, for investment credit property,
the date the property is placed in service).
(2) Special rule for allocations of tax exempt income amounts and
eligible credits for an election to transfer less than all eligible
credits determined with respect to an eligible credit property. In the
event a transferor partnership elects to transfer one or more specified
credit portions of less than all eligible credits determined with
respect to an eligible credit property held directly by the
partnership, the partnership may allocate any tax exempt income
resulting from the receipt of consideration for the specified credit
portion(s) in accordance with the rules in this paragraph (b)(2).
(i) First, the partnership must determine each partner's
distributive share of the otherwise eligible credits with respect to
such eligible credit property in accordance with paragraph (b)(1) of
this section (partner's eligible credit amount).
(ii) Thereafter, the transferor partnership may determine, in any
manner described in the partnership
[[Page 40520]]
agreement, or as the partners may agree, the portion of each partner's
eligible credit amount to be transferred, and the portion of each
partner's eligible credit amount to be retained and allocated to such
partner. The partnership may allocate to each partner its agreed upon
share of eligible credits, tax exempt income resulting from the receipt
of consideration for the specified credit portion(s), or both, as the
case may be, provided that--
(A) The amount of eligible credits allocated to each partner may
not exceed such partner's eligible credit amount; and
(B) Each partner is allocated its proportionate share of tax exempt
income resulting from the transfer(s).
(iii) Each partner's proportionate share of tax exempt income
resulting from the transfer(s) is equal to the total amount of tax
exempt income resulting from the transfer(s) of the specified credit
portion(s) by the partnership multiplied by a fraction--
(A) The numerator of which is such partner's eligible credit amount
minus the amount of eligible credits actually allocated to such partner
with respect to the eligible credit property for the taxable year; and
(B) The denominator of which is the specified credit portion(s)
transferred by the partnership with respect to the eligible credit
property for the taxable year.
(3) Transferor partnerships in tiered structures. If a partnership
(upper-tier partnership) is a direct or indirect partner of a
transferor partnership and directly or indirectly receives--
(i) An allocation of an eligible credit, the upper-tier partnership
is not an eligible taxpayer under section 6418 with respect to any
eligible credit allocated by a transferor partnership; or
(ii) An allocation of tax exempt income resulting from the receipt
of consideration for the transfer of a specified credit portion by a
transferor partnership, the upper-tier partnership must determine its
partners' distributive shares of such tax exempt income in proportion
to the partners' distributive shares of the otherwise eligible credit
as provided in paragraph (b)(1) of this section.
(4) Partnership as a transferee taxpayer--(i) Eligibility under
section 6418. A partnership may qualify as a transferee partnership to
the extent it is not related (within the meaning of section 267(b) or
707(b)(1)) to an eligible taxpayer. A transferee partnership is subject
to the no additional transfer rule in Sec. 1.6418-2(c)(2), however, an
allocation of a transferred specified credit portion to a direct or
indirect partner of a transferee partnership under section 704(b) is
not a transfer for purposes of section 6418.
(ii) Treatment of a cash payment for a transferred specified credit
portion. A cash payment by a transferee partnership as consideration
for a transferred specified credit portion is treated as an expenditure
described in section 705(a)(2)(B).
(iii) Allocations of transferred specified credit portions. A
transferee partnership must determine each partner's distributive share
of any transferred specified credit portion based on such partner's
distributive share of the nondeductible expenses for the taxable year
used to fund the purchase of such transferred specified credit portion.
Each partner's distributive share of the nondeductible expenses used to
fund the purchase of any transferred specified credit portion is
determined by the partnership agreement, or, if the partnership
agreement does not provide for the allocation of nondeductible expenses
paid pursuant to section 6418, then the allocation of the specified
credit portion is based on the transferee partnership's general
allocation of nondeductible expenses.
(iv) Transferred specified credit portion treated as an
extraordinary item. A transferred specified credit portion is treated
as an extraordinary item and must be allocated among the partners of a
transferee partnership as of the time the transfer of the specified
credit portion to the transferee partnership is treated as occurring in
accordance with this paragraph (b)(4)(iv) and Sec. 1.706-4(e)(1) and
(e)(2)(ix). If the transferee partnership and eligible taxpayer have
the same taxable years, the transfer of a specified credit portion to a
transferee partnership is treated as occurring on the first date that
the transferee partnership makes a cash payment to the eligible
taxpayer as consideration for the specified credit portion. If the
transferee partnership and eligible taxpayer have different taxable
years, the transfer of a specified credit portion to a transferee
partnership is treated as occurring on the later of--
(A) The first date of the taxable year that the transferee
partnership takes the specified credit portion into account under
section 6418(d); or
(B) The first date that the transferee partnership makes a cash
payment to the eligible taxpayer for the specified credit portion.
(v) Transferee partnerships in tiered structures. If an upper-tier
partnership is a direct or indirect partner of a transferee partnership
and directly or indirectly receives an allocation of a transferred
specified credit portion, the upper-tier partnership is not an eligible
taxpayer under section 6418 with respect to the transferred specified
credit portion. The upper-tier partnership must determine each
partner's distributive share of the transferred specified credit
portion in accordance with paragraphs (b)(4)(iii) and (iv) of this
section and must report the credits to its partners in accordance with
guidance.
(c) Rules applicable to S corporations--(1) Pro rata shares of tax
exempt income amounts. Each shareholder of a transferor S corporation
must take into account such shareholder's pro rata share (as determined
under section 1377(a) of the Code) of any tax exempt income resulting
from the receipt of consideration for the transfer. Tax exempt income
resulting from the receipt of consideration for the transfer of a
specified credit portion by a transferor S corporation is treated as
received or accrued, including for purposes of section 1366, as of the
date the specified credit portion is determined with respect to the
transferor S corporation (such as, for investment credit property, the
date the property is placed in service).
(2) S corporation as a transferee taxpayer--(i) Eligibility under
section 6418. An S corporation may qualify as a transferee taxpayer to
the extent it is not related (within the meaning of section 267(b) or
707(b)(1)) to an eligible taxpayer (transferee S corporation). A
transferee S corporation is subject to the no additional transfer rule
in Sec. 1.6418-2(c)(2), however, an allocation of a transferred
specified credit portion to a direct or indirect shareholder of a
transferee S corporation is not a transfer for purposes of section
6418.
(ii) Treatment of a cash payment for a transferred specified credit
portion. A cash payment by a transferee S corporation as consideration
for a transferred specified credit portion is treated as an expenditure
described in section 1367(a)(2)(D) of the Code.
(iii) Pro rata shares of transferred specified credit portions.
Each shareholder of a transferee S corporation must take into account
such shareholder's pro rata share (as determined under section 1377(a))
of any transferred specified credit portion. If the transferee S
corporation and eligible taxpayer have the same taxable years, the
transfer of a specified credit portion is treated as occurring to a
transferee S corporation during the transferee S corporation's
permitted year (as defined under sections 444 and 1378(b)) that the
transferee S
[[Page 40521]]
corporation first makes a cash payment as consideration to the eligible
taxpayer for the specified credit portion. If the transferee S
corporation and eligible taxpayer have different taxable years, then
the transfer of a specified credit portion is treated as occurring to a
transferee S corporation during the transferee S corporation's first
permitted year (as defined under sections 444 and 1378(b)) ending with
or after, the taxable year of the eligible taxpayer to which the
transferred specified credit portion was determined.
(d) Transfer election by a partnership or S corporation--(1) In
general. A partnership or S corporation may make a transfer election to
transfer a specified credit portion under section 6418 if it files an
election in accordance with the rules set forth in this paragraph (d).
A transfer election is made on the basis of an eligible credit property
and only applies to the specified credit portion identified in the
transfer election by such partnership or S corporation in the taxable
year for which the election is made.
(2) Manner and due date of making a transfer election. A transfer
election for a specified credit portion must be made in the manner
provided in Sec. 1.6418-2(b)(1) through (3). All documents required in
Sec. 1.6418-2(b)(1) through (3) must be attached to the partnership or
S corporation return for the taxable year during which the transferred
specific credit portion was determined. For the transfer election to be
valid, the return must be filed not later than the time prescribed by
Sec. Sec. 1.6031(a)-1(e) and 1.6037-1(b) (including extensions of
time) for filing the return for such taxable year. No transfer election
may be made or revised on an amended return or by filing an
administrative adjustment request under section 6227 of the Code. There
is no late-election relief available under Sec. Sec. 301.9100-1
through 301.9100-3 of this chapter for a transfer election that is not
timely filed.
(3) Irrevocable election. A transfer election by a partnership or S
corporation is irrevocable.
(e) Examples. The examples in this paragraph (e) illustrate the
application of paragraphs (a)(6), (b), and (c) of this section.
(1) Example 1. Transfer of all eligible credits by a transferor
partnership--(i) Facts. A and B each contributed $150X of cash to AB
partnership for the purpose of investing in energy property. The
partnership agreement provides that A and B share equally in all items
of income, gain, loss, deduction, and credit of AB partnership. AB
partnership invests $300X in an energy property in accordance with
section 48 and places the energy property in service on date X in year
1. As of the end of year 1, AB partnership has $90X of eligible credits
under section 48 with respect to the energy property. Before AB
partnership files its tax return for year 1, AB partnership transfers
the $90X of eligible credits to an unrelated transferee taxpayer,
Transferee Taxpayer X for $80X and executes a transfer election
statement with Transferee Taxpayer X.
(ii) Analysis. Under Sec. 1.6418-3(b)(1), AB partnership allocates
the tax exempt income resulting from the transfer of the specified
credit portion proportionately among the partners based on each
partner's distributive share of the otherwise eligible section 48
credit as determined under Sec. Sec. 1.46-3(f) and 1.704-1(b)(4)(ii).
Under Sec. 1.46-3(f)(2), each partner's share of the basis of the
energy property is determined in accordance with the ratio in which the
partners divide the general profits (or taxable income) of the
partnership. Under the AB partnership agreement, A and B share
partnership profits equally. Thus, each partner's share of the basis of
the energy property under Sec. 1.46-3(f) and distributive share of the
otherwise eligible credits under Sec. 1.704-1(b)(4)(ii) is 50 percent.
The transfer made pursuant to section 6418(a) causes AB partnership's
eligible credits under section 48 with respect to the energy property
to be reduced to zero, and the consideration of $80X received by AB
partnership for the transferred specified credit portion is treated as
tax exempt income. Because the tax exempt income is allocated in the
same proportion as the otherwise eligible credit would have been
allocated, A and B will each be allocated $40X of tax exempt income.
Each of partner A's and partner B's basis in its partnership interest
and capital account will be increased by $40X. Also in year 1, the
basis in the energy property held by AB partnership and with respect to
which the credit is calculated is reduced under section 50(c)(3) by 50
percent of the amount of the credit so determined, or $45. A's and B's
basis in their partnership interests and capital accounts will be
appropriately adjusted to take into account adjustments made to the
ene
[…truncated; see source link]Indexed from Federal Register on June 21, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.