Rule2024-26944
Election To Exclude Certain Unincorporated Organizations Owned by Applicable Entities From Application of the Rules on Partners and Partnerships
Primary source
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
November 20, 2024
Effective
January 19, 2025
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document sets forth final regulations that modify existing regulations to allow certain unincorporated organizations that are owned in whole or in part by applicable entities to be excluded from the application of partnership tax rules. These regulations affect unincorporated organizations and their members, including tax-exempt organizations, the District of Columbia, State and local governments, Indian Tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, rural electric cooperatives, and certain agencies and instrumentalities. The final regulations also update certain outdated language in the existing regulations.
Full Text
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<title>Federal Register, Volume 89 Issue 224 (Wednesday, November 20, 2024)</title>
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[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Rules and Regulations]
[Pages 91552-91563]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-26944]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10012]
RIN 1545-BR09
Election To Exclude Certain Unincorporated Organizations Owned by
Applicable Entities From Application of the Rules on Partners and
Partnerships
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document sets forth final regulations that modify
existing regulations to allow certain unincorporated organizations that
are owned in whole or in part by applicable entities to be excluded
from the application of partnership tax rules. These regulations affect
unincorporated organizations and their members, including tax-exempt
organizations, the District of Columbia, State and local governments,
Indian Tribal governments, Alaska Native Corporations, the Tennessee
Valley Authority, rural electric cooperatives, and certain agencies and
instrumentalities. The final regulations also update certain outdated
language in the existing regulations.
DATES:
Effective date: These regulations are effective on January 19,
2025.
Applicability date: For the date of applicability, see Sec. 1.761-
2(f).
FOR FURTHER INFORMATION CONTACT: Concerning these final regulations,
contact Cameron Williamson at (202) 317-6684 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 761(a) of the Internal Revenue Code (Code)
issued by the Secretary of the Treasury (Secretary) pursuant to the
authority granted under sections 761(a), 6031(a), 6417(d) and (h), and
7805(a) of the Code (final regulations).
Section 761(a) provides, in part, an express grant of regulatory
authority for section 761(a) stating, ``[u]nder regulations the
Secretary may, at the election of all the members of an unincorporated
organization, exclude such organization from the application of all or
a part of this subchapter.''
Section 6031(a) provides an express grant of regulatory authority
for the Secretary to prescribe in forms or regulations partnership
reporting information required ``for the purpose of carrying out the
provisions of subtitle A.''
Section 6417(d) provides several express delegations of authority
to the Secretary to enforce requirements for elective payments of
applicable credits under section 6417 and recapture excessive payments.
Section 6417(h) provides an express delegation of authority with
respect to elective payments under section 6417, stating, in part, that
``[t]he Secretary shall issue such regulations or other guidance as may
be necessary to carry out the purposes of this section.''
Finally, section 7805(a) authorizes the Secretary to ``prescribe
all needful rules and regulations for the enforcement of [the Code],
including all rules and regulations as may be necessary by reason of
any alteration of law in relation to internal revenue.''
Background
I. Elective Payment of Applicable Credits
Section 6417 was added to the Code by section 13801(a) of Public
Law 117-169, 136 Stat. 1818, 2003 (August 16, 2022), commonly referred
to as the Inflation Reduction Act of 2022 (IRA). Section 6417 allows an
``applicable entity'' (including tax-exempt organizations, the District
of Columbia, State and local governments, Indian Tribal governments,
Alaska Native Corporations, the Tennessee Valley Authority, rural
electric cooperatives, and certain agencies and instrumentalities) to
make an election to treat an ``applicable credit'' (as defined in
section 6417(b)) determined with respect to such entity as making a
payment by such entity against the tax imposed by subtitle A of the
Code, for the taxable year with respect to which such credit is
determined, equal to the amount of such credit. Section 6417 also
provides special rules relating to partnerships and directs the
Secretary to provide rules for making elections under section 6417.
Section 13801(g) of the IRA provides that section 6417 applies to
taxable years beginning after December 31, 2022.
On March 11, 2024, the Department of the Treasury (Treasury
Department) and the IRS published in the Federal Register (88 FR 40528)
final regulations (TD 9988) providing guidance on the section 6417
elective payment election (section 6417 regulations). Section 1.6417-
2(a)(1)(iv) provides that partnerships are not applicable entities
described in section 6417(d)(1)(A) or Sec. 1.6417-1(c), regardless of
how many of their partners are themselves applicable entities.
Accordingly, any partnership making an elective payment election must
be an electing taxpayer (as defined in Sec. 1.6417-1(g)), and, as
such, the only applicable credits with respect to which the partnership
could make an elective payment election would be credits determined
under sections 45Q, 45V, and 45X for the time periods allowed in
section 6417(d). However, Sec. 1.6417-2(a)(1)(iii) provides that if an
applicable entity is a co-owner in an applicable credit property (as
defined in Sec. 1.6417-1(e)), through an organization that has made a
valid election under section 761(a) (section 761(a) election) to be
excluded from the application of the partnership tax rules of
subchapter K of chapter 1 of the Code (subchapter K), then the
applicable entity's undivided ownership share of the applicable credit
property is treated as a separate applicable credit property owned by
such applicable entity. As a result, the applicable entity may make an
elective payment election for the applicable credit(s) determined with
respect to such applicable credit property.
Also on March 11, 2024, the Treasury Department and the IRS
published in the Federal Register (89 FR 17613) proposed amendments
(REG-101552-24) to the regulations under section 761(a) to carry out
the purposes of section 6417 (proposed regulations). Generally, the
proposed regulations would have amended certain provisions of Sec.
1.761-2 as in effect and contained in 26 CFR part 1 to provide that
unincorporated organizations meeting certain requirements (applicable
unincorporated organizations) are eligible for certain modifications
(referred to in the proposed regulations as ``exceptions'') to the
existing requirements for making a section 761(a) election. The
provisions of the proposed regulations are explained in greater detail
in the preamble to the proposed regulations.
Concurrently with the publication of these final regulations, the
Treasury Department and the IRS are publishing in the Proposed Rules
section of this edition of the Federal Register a notice of proposed
rulemaking (REG-116017-24) proposing to further add to and revise the
provisions of Sec. 1.761-2 (November 2024 proposed regulations). The
proposed revisions to the provisions of Sec. 1.761-2 by the November
2024 proposed regulations are explained in greater detail in the
preamble to the November 2024 proposed regulations.
[[Page 91553]]
II. Overview of Section 761(a) and Prior Sec. 1.761-2(a)(3)
Section 761(a) provides, in part, that under regulations the
Secretary may, at the election of all of the members of an
unincorporated organization, exclude such organization from the
application of all or part of subchapter K if the organization is
availed of: (1) for investment purposes only and not for the active
conduct of a business, (2) for the joint production, extraction, or use
of property, but not for the purpose of selling services or property
produced or extracted, or (3) by dealers in securities for a short
period for the purpose of underwriting, selling, or distributing a
particular issue of securities, provided that the income of the members
of the organization may be adequately determined without the
computation of partnership taxable income.
As discussed in the preamble to the proposed regulations,
unincorporated organizations seeking to be excluded from the
application of subchapter K so that one or more of their members can
make an election under section 6417 are likely to be availed of for the
purposes listed in section 761(a)(2), that is, for the joint
production, extraction, or use of property, but not for the purpose of
selling services or property produced or extracted. Pursuant to the
authority in section 761(a), prior Sec. 1.761-2(a)(3) provides
additional requirements for an unincorporated organization to elect to
be excluded from the application of subchapter K under section
761(a)(2). Specifically, prior Sec. 1.761-2(a)(3) requires that the
participants in the joint production, extraction, or use of property:
(i) own the property as co-owners, either in fee or under lease or
other form of contract granting exclusive operating rights (co-
ownership requirement), (ii) reserve the right separately to take in
kind or dispose of their shares of any property produced, extracted, or
used (severance requirement), and (iii) do not jointly sell services or
the property produced or extracted (joint marketing requirement),
although each separate participant may delegate authority to sell the
participant's share of the property produced or extracted for the time
being for the participant's account, but not for a period of time in
excess of the minimum needs of the industry, and in no event for more
than one year (one-year exception). These additional regulatory
requirements are hereinafter referred to as the ``existing regulatory
requirements'' and, along with the previously discussed statutory
requirements, are referred to herein as the ``existing requirements''
to be eligible to elect out of the application of subchapter K.
As discussed in the Summary of Comments and Explanation of
Revisions, the proposed regulations would have modified some of the
existing regulatory requirements for unincorporated organizations that
meet certain requirements.
Summary of Comments and Explanation of Revisions
The Treasury Department and the IRS received 11 written comments in
response to the proposed regulations. The comments are available for
public inspection at <a href="http://www.regulations.gov">www.regulations.gov</a> or upon request. A public
hearing on the proposed regulations was scheduled for May 20, 2024.
There were no requests to speak at the scheduled public hearing.
Consequently, the public hearing was cancelled. See Election To Exclude
Certain Unincorporated Organizations Owned by Applicable Entities From
Application of the Rules on Partners and Partnerships; Hearing
Cancellation, 89 FR 43349 (May 17, 2024). After full consideration of
the comments received, these final regulations adopt the proposed
regulations with modifications in response to the comments described in
this Summary of Comments and Explanation of Revisions. The provisions
of Sec. 1.761-2 as amended by the final regulations are referred to as
``revised Sec. 1.761-2'' in this Summary of Comments and Explanation
of Revisions.
Comments merely summarizing the statute or proposed regulations,
recommending statutory revisions to section 761 or other statutes,
addressing unrelated issues, or recommending changes to IRS forms or
procedures are generally not addressed in this Summary of Comments and
Explanation of Revisions or adopted in these final regulations. These
comments included recommendations and questions regarding fact patterns
specific to section 6417, the domestic content rules of section
45(b)(10), the credit for qualified commercial clean vehicles of
section 45W, and the credit for alternative fuel vehicle refueling
property of section 30C. While the Treasury Department and the IRS are
studying some of those issues and intend to issue future guidance on
those provisions, those recommendations and questions are unrelated to
the purpose of these final regulations. Unless otherwise indicated in
this Summary of Comments and Explanation of Revisions, provisions of
the proposed regulations with respect to which no comments were
received are adopted without substantive change.
I. Overview
Proposed Sec. 1.761-2(a)(4)(ii) would have defined ``applicable
unincorporated organizations'' as unincorporated organizations that
meet several requirements. Proposed Sec. 1.761-2(a)(4)(iii) would have
modified the regulatory requirements in prior Sec. 1.761-2(a)(3)(i)
and (iii) for an applicable unincorporated organization that also met
the regulatory requirements of prior Sec. 1.761-2(b) and (e).
Part II of this Summary of Comments and Explanation of Revisions
discusses comments received concerning the general effects of a section
761(a) election. Part III of this Summary of Comments and Explanation
of Revisions discusses the comments received on the definition of an
applicable unincorporated organization. Part IV of this Summary of
Comments and Explanation of Revisions discusses the comments received
on the modifications to the existing regulatory requirements. Part V of
this Summary of Comments and Explanation of Revisions discusses the
applicability date of these final regulations, the elimination of
certain obsolete language, and certain administrative requirements that
are under consideration for organizations taking advantage of the
modifications to the existing regulatory requirements. Part VI of this
Summary of Comments and Explanation of Revisions summarizes two
comments not addressed in these final regulations.
II. Effects of an Election Under Section 761(a)
A. General
Subchapter K provides rules governing the taxation of partners and
partnerships. When an unincorporated organization makes a valid section
761(a) election out of subchapter K, the rules of subchapter K no
longer apply to that organization. As a result, for purposes of
subchapter K, the unincorporated organization ceases to be a
partnership and each member of the unincorporated organization is
generally treated as a co-owner, that is, as directly owning its
proportionate share of the organization's assets.
For example, an unincorporated organization that has made a valid
section 761(a) election is not subject to section 704, which provides
the rules for determining a partner's distributive share of a
partnership's tax items. Instead, each member of an unincorporated
organization that has
[[Page 91554]]
made a valid section 761(a) election takes into account directly its
ownership share of the organization's tax items. Accordingly, if an
unincorporated organization with a valid section 761(a) election
purchases depreciable property, an owner of a 30 percent interest in
the organization may claim depreciation deductions as if it owned an
undivided 30 percent interest in the organization's property (provided
the owner is otherwise eligible for such deductions). That member
cannot claim depreciation deductions beyond that member's ownership
interest in the organization's property. Thus, any agreement among the
members to specially allocate one member's depreciation deductions to
another member would make the organization ineligible for a section
761(a) election.
One commenter asked for clarification of whether the following fact
pattern is compatible with an election under section 761(a). A church
(an applicable entity) forms a partnership with a nonprofit investor
and a for-profit developer. The church contributes a site for energy
property, which generates electricity and reduces the church's energy
bill. The nonprofit investor makes grants and loans to the organization
and is repaid by virtue of renewable energy credits or net metering
from the clean energy property. The for-profit developer enters into a
contract to maintain the system in exchange for a fee.
The facts described in the comment letter do not provide sufficient
information to determine whether this situation is compatible with a
section 761(a) election. If the investor receives all payments in its
capacity as a lender and the for-profit developer receives its profits
in its capacity as a third-party service provider, there might not be
an unincorporated organization at all. If there is an unincorporated
organization and it intends to make a section 761(a) election, each of
its members must reserve the right separately to take in kind or
dispose of their shares of any property produced, extracted, or used.
If the investor or developer receives payments in excess of its pro
rata ownership interests, this requirement will not be met. Moreover,
if the contributions mentioned in this situation are intended to be
non-recognition transfers for Federal income tax purposes, the
contributing members would generally need to make such contributions
under section 721(a), which is part of subchapter K. However, if a
section 761(a) election is made, the organization is not subject to
subchapter K, and thus, section 721(a) is inapplicable to transfers to
the organization. Without section 721(a), the transfers would generally
be taxable events.
One commenter asked how certain capital stacking combinations
(including loans, forgivable loans, and grants) affect an
organization's eligibility to make a section 761(a) election. To make a
valid section 761(a) election, an unincorporated organization must
comply with the requirements of section 761(a) and revised Sec. 1.761-
2. Provided that those requirements are met, the structure of an
organization's capital stack would not appear to preclude it from
making a valid section 761(a) election. Federal income tax law governs
the treatment of these arrangements for purposes of determining whether
an arrangement violates the requirements of section 761(a). For
example, loans between members of the organization will be treated as
debt to the extent they are treated as debt under Federal income tax
law. Likewise, loans by a member to an organization would not be
treated as a partnership liability under section 752, but a loan to
each member of the organization in proportion to the member's ownership
interest.
One commenter asked that applicable entities who are members in an
applicable unincorporated organization that makes a 761(a) election be
permitted to claim all applicable tax credit bonuses and adders. Bonus
credit amounts, such as amounts for applicable credit properties
located in energy communities, apply to property co-owned through an
applicable unincorporated organization. The Treasury Department and the
IRS have determined that no change to the final regulations is required
to clarify this issue.
B. Effect of a Section 761(a) Election on Sections of the Code Outside
of Subchapter K
One commenter requested a discussion of the effects of a section
761(a) election on provisions of the Code outside of subchapter K that
reference partnerships, including section 6417. A detailed discussion
of the effects of a section 761(a) election on provisions of the Code
outside of subchapter K would require a careful examination of numerous
provisions of the Code apart from those relevant to these final
regulations and is not necessary for purposes of these final
regulations. However, the application of a section 761(a) election to
section 6417 is fundamental to the purpose of these final regulations,
which is to carry out the purposes of section 6417 and thus, is
addressed herein.
An organization with a valid section 761(a) election may be treated
as a partnership for purposes of sections of the Code outside of
subchapter K. In Bryant v. Commissioner, 46 T.C. 848 (1966), aff'd, 399
F.2d 800 (5th Cir. 1968), the Tax Court concluded that an organization
that made a section 761(a) election was still a partnership for
purposes of other parts of the Code, including the $50,000 investment
tax credit limit on partnership assets provided by then section
48(c)(2)(D) of the Code. See also Cokes v. Commissioner, 91 T.C. 222
(1988) (section 761 election did not affect partnership status under
the self-employment tax provisions of section 1402(a) of the Code);
Madison Gas and Electric Company v. Commissioner, 72 T.C. 521 (1979),
aff'd, 633 F.2d 512 (7th Cir. 1980) (notwithstanding a section 761
election, the startup costs of a joint venture were attributable to the
partnership business and were not deductible under section 162(a) of
the Code as the ordinary and necessary business expenses of the
individual partners).
Though section 6417 is not in subchapter K, a section 761(a)
election affects whether an entity is treated as a partnership for
purposes of section 6417. Section 6417(h) provides that the Secretary
shall issue such regulations or other guidance as may be necessary to
carry out the purposes of section 6417. Pursuant to this broad
authority, the Treasury Department and the IRS published Sec. 1.6417-
2(a)(1)(iii), which provides that if an applicable entity is a co-owner
in an applicable credit property through an organization that has made
a valid section 761(a) election, then the applicable entity's undivided
ownership share of the applicable credit property will be treated as a
separate applicable credit property owned by such applicable entity,
and the applicable entity may make an elective payment election for the
applicable credits determined with respect to such applicable credit
property. This means that a section 761(a) election effectively causes
an unincorporated organization not to be treated as a partnership for
purposes of section 6417, including section 6417(c). Thus, the effect
of a valid section 761(a) election for purposes of section 6417 is that
each member of the organization is treated as directly owning its
proportionate share of the applicable credit property. As a result,
each applicable entity member of the organization may make an elective
payment election (or, if not an applicable entity member, a transfer
election under section 6418) with
[[Page 91555]]
respect to its proportionate share of the applicable credit property.
Another commenter requested confirmation that a Tribal Energy
Development Organization that makes a section 761(a) election is not a
partnership for purposes of sections 168(h)(5) and (6) and 50(b)(3).
Section 168(h) describes tax-exempt use property (generally,
certain property leased to a tax-exempt entity), the cost recovery of
which is subject to special rules. Section 168(h)(5) generally provides
that the determination of whether property leased to a partnership is
tax-exempt use property shall be made by treating each tax-exempt
entity partner's proportionate share as being leased to such partner.
Section 168(h)(6) generally provides that, if any property which is not
tax-exempt use property is owned by a partnership that has as partners
both a tax-exempt entity and a person who is not a tax-exempt entity,
an amount equal to such tax-exempt entity's proportionate share of such
property is treated as tax-exempt use property. This rule applies only
if any allocation to the tax-exempt entity of partnership items is not
a ``qualified allocation,'' which (i) is consistent with such entity's
being allocated the same distributive share of each item of income,
gain, loss, deduction, credit, and basis and such share remains the
same during the entire period the entity is a partner in the
partnership, and (ii) has substantial economic effect within the
meaning of section 704(b)(2). See section 168(h)(6)(B). Section
50(b)(3) and (4) preclude certain property used by tax-exempt
organizations, governmental entities, and foreign persons from
qualifying for an investment tax credit. For these purposes, section
50(b)(4)(D) provides that rules similar to those in section 168(h)(5)
and (6) apply.
The existence of a partnership for purposes of these sections does
not change the amount of depreciation deductions attributable to each
member of an unincorporated organization that has validly made a
section 761(a) election. A valid section 761(a) election requires the
shares of property leased to or owned by an organization to be treated
as leased to or owned by the members of the organization in proportion
to their shares of the organization. This is how partnership property
would be treated under section 168(h)(5) and would cause all
allocations to the partners to be treated as ``qualified allocations''
for purposes of section 168(h)(6). Similarly, the IRS has determined in
other areas of the law that co-owners of property may make independent
elections with respect to deductions affecting their taxable income.
See Rev. Rul. 83-129, 1983-2 C.B. 105, in which the IRS ruled that the
co-owners of mineral leases that make a section 761(a) election may
independently elect to deduct or capitalize their shares of mining
development costs under section 616 of the Code; see also Rev. Rul. 81-
261, 1981-2 C.B. 60, where the IRS noted that if a partnership makes a
section 761(a) election, each partner is deemed to own directly its
proportionate share of the partnership property for purposes of
computing depreciation. Moreover, in the case of an applicable entity
that makes an election under section 6417(a), section 6417(d)(2)(A)
provides that applicable credits are determined without regard to
section 50(b)(3) and (4)(A)(i).
III. Applicable Unincorporated Organizations
A. Applicable Entity Owner
Proposed Sec. 1.761-2(a)(4)(ii)(A) would have required an
applicable unincorporated organization to be owned, in whole or in
part, by one or more applicable entities, as defined in section
6417(d)(1)(A) and Sec. 1.6417-1(c). The Treasury Department and the
IRS received no comments related to this section and adopt the proposed
language without changes.
B. Joint Operating Agreements
Proposed Sec. 1.761-2(a)(4)(ii)(B) would have provided that an
applicable unincorporated organization must be an organization the
members of which enter into a joint operating agreement (JOA) in which
the members reserve the right separately to take in kind or dispose of
their pro rata shares of the electricity produced, extracted, or used,
and any associated renewable energy credits or similar credits.
Proposed Sec. 1.761-2(a)(4)(ii)(C) would also have provided, in part,
that an applicable unincorporated organization must be organized
pursuant to a JOA.
1. General
Commenters requested more information about the types of JOAs
required by these provisions. Some commenters requested examples of
permissible JOAs, and another commenter requested identification of any
JOA provisions that would ``create issues'' for a JOA. One commenter
asked whether JOAs that satisfy the requirements of Sec. 1.761-2(a)(3)
would also satisfy the requirements of proposed Sec. 1.761-
2(a)(4)(ii)(B) and (C) and requested that any specific rules applicable
to JOAs solely for purposes of the proposed regulations apply
prospectively so as to avoid any uncertainty with respect to existing
JOAs.
As used in the proposed regulations, the term ``joint operating
agreement'' is intended to refer to agreements similar to those used by
organizations that made an election under section 761(a) prior to the
proposed regulations. Such agreements typically provide the terms by
which the members of the unincorporated organization will meet the
existing requirements to make a section 761(a) election. JOAs should
continue to serve this purpose under the final regulations, regardless
of whether an applicable unincorporated organization holds its property
in an entity organized under local law. Accordingly, as a general
matter, a JOA that satisfies the requirements of revised Sec. 1.761-
2(a)(1) and (3) will satisfy the requirements in revised Sec. 1.761-
2(a)(4)(ii)(B) and (C), provided that the organization to which that
JOA applies satisfies the existing regulatory requirements, as modified
by revised Sec. 1.761-2(a)(4)(iii), if applicable. Because the final
regulations do not change the rules currently applicable to JOAs, these
final regulations do not need to make such rules apply prospectively.
For the same reason, further clarification of the JOA requirements is
unnecessary.
2. Right to Pro Rata Share
Commenters requested clarification of how credits and ownership
interests would be allocated when members of an unincorporated
organization reserve the right separately to take in kind or dispose of
their pro rata shares of the electricity produced, extracted, or used,
and any associated renewable energy credits or similar credits.
Pursuant to proposed Sec. 1.761-2(a)(4)(ii)(B), each member of an
applicable unincorporated organization would have been required to
reserve the right separately to take in kind or dispose of their pro
rata shares of any property produced, extracted, or used, and any
associated renewable energy credits or similar credits. The
determination of each member's ownership interest of an unincorporated
organization (and, accordingly, each member's proportionate share of
property produced, extracted, or used) must be made by the members and
based on their ownership interests in the same manner as if they were
co-owners in the underlying properties.
To illustrate, a co-owner of 40 percent of an unincorporated
organization that has made a section 761(a) election must reserve the
right separately to take in
[[Page 91556]]
kind or dispose of its 40 percent pro rata share of the property
produced, extracted, or used by the co-owners. This is true even when
the members of an applicable unincorporated organization own property
through an entity, as permitted by revised Sec. 1.761-2(a)(4)(iii)(A).
Example 1 has been added in revised Sec. 1.761-2(a)(5)(i) to
illustrate the general rule.
One commenter requested clarification that renewable energy
certificates (RECs) produced through the generation of clean energy
qualify as ``similar credits'' for these purposes. The Treasury
Department and the IRS clarify that RECs are included as ``renewable
energy credits or similar credits'' pursuant to revised Sec. 1.761-
2(a)(4)(ii)(B) and thus, each member of an unincorporated organization
must reserve the right separately to take in kind or dispose of their
pro rata shares of any RECs generated as a result of the organization's
activities.
3. Joint Marketing
Some commenters asked whether specific JOA provisions or activities
would violate requirements that apply to applicable unincorporated
organizations, including that the organization's members do not jointly
sell services or property produced or extracted. One commenter asked
whether appointing a manager, creating an ownership committee, having
expense-sharing agreements or incurring project-level debt would
violate the existing requirements to make a section 761(a) election.
Another commenter requested clarification that a managing member or
general partner-equivalent (presumably, if the unincorporated
organization takes advantage of the modification in proposed Sec.
1.761-2(a)(4)(iii)(A)) can conduct normal project management functions
for an unincorporated organization without violating the joint
marketing requirement. That commenter requested, in the alternative, a
``roadmap'' setting forth how a managing member or general partner can
comply with the joint marketing requirement in a practical manner. The
same commenter also requested allowing representatives of an
unincorporated organization to perform pre-filing and other ministerial
services on behalf of the entities jointly owning applicable credit
property.
An applicable unincorporated organization must meet all applicable
requirements, including the existing requirements with the
modifications contained in these final regulations, to elect out of
subchapter K under section 761(a) and to maintain a section 761(a)
election. Generally, the members of an unincorporated organization are
permitted to have a representative handle management and ministerial
duties typical of a managing member of a limited liability company
(LLC) or general partner of a limited partnership without violating
these requirements. The Treasury Department and the IRS understand that
representatives with such duties may be required by local law for
entities that may hold the organization's property under Sec. 1.761-
2(a)(4)(iii)(A) of these final regulations. These final regulations,
however, do not provide a ``roadmap'' for permissible arrangements or
rights and duties of such representatives as the list would not be
exhaustive and could cause unintentional inferences to be drawn.
One commenter proposed allowing an applicable entity to direct some
or all of its elective payments of applicable credit amounts under
section 6417 to a separate account jointly owned by the applicable
entity and other members of an applicable unincorporated organization
to pay expenses directly related to the underlying applicable credit
property's co-ownership. The commenter suggested applying rules similar
to those applicable to assignments of payments under section 1603
(regarding grants for specified energy properties in lieu of tax
credits) of the American Recovery and Reinvestment Act of 2009, Public
Law 111-5, 123 Stat. 115 (2009), including that each payment be
assigned to a bank or other financing institution, that the assignment
cover all amounts payable and not be subject to further assignment
(except that any assignment may be made to one party acting as an agent
or trustee for the co-owners), and that the assignee file a Notice of
Assignment.
As already discussed, Sec. 1.6417-2(a)(1)(iii) provides that if an
applicable entity is a co-owner in an applicable credit property
through an organization that has made a valid section 761(a) election,
then the applicable entity's undivided ownership share of the
applicable credit property will be treated as a separate applicable
credit property owned by such applicable entity, and the applicable
entity may make an election under section 6417(a) for the applicable
credits determined with respect to such applicable credit property.
When an applicable entity makes an election under section 6417(a), such
entity is treated as making a payment against the tax imposed by
subtitle A of the Code. If this payment causes the entity to have an
``overpayment'' of tax in a taxable year, section 6402(a) generally
provides that the entity may receive a refund equal to the amount of
the overpayment over the entity's tax liability. This refund must be
made to the person who made the overpayment (i.e., the applicable
entity). If that applicable member is a partnership or S corporation,
section 6417(c)(1)(A) specifies that the payment for such election is
made to the partnership or S corporation that made the section 6417(a)
election. Accordingly, similar to the general rule under section
6417(a), refunds or payments under section 6417(c) generally cannot be
paid to accounts in the name of someone other than the entity making
the election. A valid section 761(a) election does not affect the
application of this general rule and, therefore, these final
regulations do not adopt the commenter's proposal.
C. Purpose of Organization
Proposed Sec. 1.761-2(a)(4)(ii)(C) would have provided that an
organization is an applicable unincorporated organization if it ``is
organized exclusively to produce electricity from its applicable credit
property (as defined in Sec. 1.6417-1(e)) and with respect to which
one or more applicable credits listed in section 6417(b)(2), (4), (8),
(10), and (12) is determined.'' The scope of this rule was intended to
remove certain impediments for these types of applicable unincorporated
organizations that would otherwise comply with existing requirements.
The Treasury Department and the IRS sought comments on the scope and
requirements of the proposed regulations, including whether
modifications similar to those in proposed Sec. 1.761-2(a)(4)(iii) are
needed for applicable entities that own applicable credit properties
that do not produce electricity.
Commenters generally recommended that the modifications in proposed
Sec. 1.761-2(a)(4)(iii) are also needed for organizations organized to
own applicable credit property with respect to which any other
applicable credit listed in section 6417(b) is determined. Some
commenters requested clarity that certain facilities, especially
battery storage facilities, ``produce electricity'' for purposes of the
definition of an applicable unincorporated organization. One commenter
asserted that the ``non-generative'' credits from section 6417(b) that
were not included in proposed Sec. 1.761-2(a)(4)(ii)(C) could be
claimed by organizations ``availed of . . . for the joint . . . use of
property'' and that such organizations should therefore be permitted to
make a section 761(a) election if other existing requirements are met.
The same commenter requested clarification that certain activities with
[[Page 91557]]
respect to applicable credits, including time-limited delegations of
relevant powers, would not violate the existing requirements to make a
section 761(a) election. Another commenter asked for clarification that
common, non-electricity revenue streams related to jointly owned
projects, such as revenues from the sale of capacity and ancillary
services, do not violate the requirement that an organization must be
organized exclusively to produce electricity.
The Treasury Department and the IRS agree that organizations formed
to own applicable credit property with respect to which any applicable
credits (including non-generative credits) are determined should be
permitted to apply the modifications to the existing section 761(a)
rules contained in the proposed regulations. Section 761(a)(2) refers
to organizations availed of ``for the joint production, extraction, or
use of property,'' which is not limited to activities that produce
electricity. Accordingly, pursuant to the authority in sections 761(a)
and 6417(h), the final regulations revise the definition of an
applicable unincorporated organization to include organizations
organized exclusively to own and operate applicable credit property (as
defined in Sec. 1.6417-1(e)). The adoption in the final regulations of
this definition of applicable unincorporated organization should not be
read to imply that any particular factual arrangement permits a valid
section 761(a) election. To make a valid section 761(a) election, an
unincorporated organization, including an applicable unincorporated
organization, must meet all the requirements of section 761(a) and the
regulations thereunder.
D. Section 6417 Election
Proposed Sec. 1.761-2(a)(4)(ii)(D) would have provided that an
unincorporated organization is an applicable unincorporated
organization only if one or more of its applicable entity members will
make an elective payment election under section 6417(a) for the
applicable credits determined with respect to its share of the
applicable credit property.
One commenter recommended extending the modifications in proposed
Sec. 1.761-2(a)(4)(iii) to organizations for which no applicable
entity member will make an election under section 6417. These final
regulations are of limited scope and are promulgated, in part, pursuant
to the authority in section 6417(h) to carry out the purposes of
section 6417 by facilitating joint-ownership arrangements of applicable
credit property by applicable entities. These final regulations do not
adopt this commenter's recommendation because it is not necessary for
purposes of these final regulations.
E. Other Requirements
Proposed Sec. 1.761-2(a)(4)(ii) would have provided that an
applicable unincorporated organization is an unincorporated
organization described in prior Sec. 1.761-2(a)(1) that meets the
requirements of proposed Sec. 1.761-2(a)(4)(ii)(A) through (D). The
reference to prior Sec. 1.761-2(a)(1) was intended to emphasize the
statutory requirements under section 761(a) and prior Sec. 1.761-
2(a)(1) that: (1) the members of the unincorporated organization must
be able to compute their income without the necessity of computing
partnership income, and (2) the unincorporated organization must not be
a syndicate, group, pool, or joint venture which is classifiable as an
association, or operate under an agreement which creates an
organization classifiable as an association. For clarity, the final
regulations remove the reference to prior Sec. 1.761-2(a)(1) in
proposed Sec. 1.761-2(a)(4)(ii) and include the requirements of prior
Sec. 1.761-2(a)(1) as revised Sec. 1.761-2(a)(4)(ii)(E) and (F). In
the final regulations, therefore, an applicable unincorporated
organization is an unincorporated organization that meets the
requirements of revised Sec. 1.761-2(a)(4)(ii)(A) through (F).
One commenter requested that a Tribal Energy Development
Organization (TEDO) be permitted to make an elective payment election
regardless of its partnership status and be permitted to make special
allocations. A TEDO that is formed as a partnership and meets the
requirements may make a 761(a) election. Section 761 does not apply,
however, to entities formed as corporations. In addition, special
allocations are inconsistent with a section 761(a) election, which is
available under the statute only to organizations that satisfy the
severance requirement and the members of which can compute their income
without the necessity of computing partnership taxable income.
Accordingly, the final regulations do not adopt these requested
changes.
Another commenter requested clarity about the eligibility of a
``partnership flip'' structure to make a section 761(a) election.
Generally, these structures involve allocations of income, gains,
losses, deductions, or credits that change at some point after the
partnership has been formed. In the commenter's proposed structure, a
taxable member of an unincorporated organization does not control the
organization but owns a profits interest in the organization that
allows the member to earn preferred returns over the course of its
investment. The commenter suggested that this type of member should be
permitted to individually elect out of partnership tax treatment under
subchapter K, and then elect back into partnership treatment under
subchapter K after it has recouped its investment.
Partnership flip structures, such as the one described by the
commenter, violate the existing statutory requirements for electing out
of subchapter K, even as modified by proposed Sec. 1.761-2(a)(4)(iii).
This is because such structures provide members with disproportionate
amounts of income, gains, losses, deductions, or credits and thereby
require an unincorporated organization to compute partnership taxable
income to determine each member's share of the organization's income.
These arrangements are also incompatible with the severance
requirement, under which members must reserve the right separately to
take in kind or dispose of their shares of any property produced,
extracted, or used because members do not have a determinate ``share''
of the applicable credit property. For these reasons, the Treasury
Department and the IRS clarify that partnership flip structures are not
eligible to make a section 761(a) election.
IV. Specified Modifications for Applicable Unincorporated Organizations
A. Modified Co-Ownership Requirement
For applicable unincorporated organizations, proposed Sec. 1.761-
2(a)(4)(iii)(A) would have modified the co-ownership requirement such
that the participants in the applicable unincorporated organization
would be permitted to own applicable credit property through an
unincorporated organization that is a legal entity, other than one
treated as a corporation under any provision of the Code (modified co-
ownership requirement).
One commenter requested confirmation whether the following
situation is compatible with an election under section 761(a). A tax-
exempt entity forms an LLC to raise money and serve as a special
purpose vehicle to own and operate a clean energy project. The tax-
exempt entity then sells equity securities in the LLC to investors.
Prior to submitting the pre-filing registration with the IRS, the LLC
makes an election under section 761(a). The tax-exempt entity or
operator then decides if, and when, investors should be paid dividends
based on their fractional ownership.
[[Page 91558]]
This situation is inconsistent with the modified co-ownership
requirement. Organizations that have made a section 761(a) election do
not pay dividends for Federal income tax purposes. Because each member
of such organization is generally treated as directly owning its
proportionate share of the organization's assets, each member is
entitled to payments or credits with respect to the member's share of
property produced, extracted, or used, regardless of whether any other
member would have approved the distribution of such amounts.
B. Joint Marketing Modification and Agent Delegation Rule
For applicable unincorporated organizations, proposed Sec. 1.761-
2(a)(4)(iii)(B) would have modified the joint marketing requirement in
prior Sec. 1.761-2(a)(3)(iii) to provide that a delegation of
authority to sell the participant's share of the property produced may
allow the delegee to enter into contracts the duration of which exceeds
the minimum needs of the industry and may be for longer than one year
(the joint marketing modification), provided that the delegation of
authority to act on behalf of the participant may not be for a period
of time that exceeds the minimum needs of the industry, and in no event
for more than one year (the agent delegation rule). Proposed Sec.
1.761-2(a)(4)(vi) would have provided an example illustrating this
modification to the existing regulatory requirements, in which each
member of an unincorporated organization grants to the same agent a
one-year delegation (not exceeding the minimum needs of the industry)
of the member's authority to sell the member's share of electricity
produced by the organization. The agent commits each member to a 15-
year power purchase agreement (PPA). Because the delegation of
authority is for a period no longer than one year, the requirements of
proposed Sec. 1.761-2(a)(4)(iii)(B) are met.
Commenters requested clarification on several issues relating to
the joint marketing modification. Some commenters asked whether two or
more members of an applicable unincorporated organization that has made
a section 761(a) election may sell their share of the organization's
output in the same contract. Some commenters also asked whether the 15-
year period for the contract in the example is intended to serve as a
safe harbor or limitation on the duration of such agreements.
Provided that the agent delegation rule and all other requirements
under section 761(a) are satisfied, the joint marketing modification
allows members of an applicable unincorporated organization to enter
into contracts of any duration. Multiple members of the same applicable
unincorporated organization may be party to the same contract. Members
can also choose to sell their shares without a multi-year contract. The
example merely illustrates the joint marketing modification and is not
intended to be a safe harbor. No clarification is required to the joint
marketing modification in the final regulations.
Commenters also requested clarification of the agent delegation
rule. One commenter asked whether an agent would be subject to the rule
if it was an Indian Tribal government or other applicable entity. Some
commenters suggested eliminating the one-year limitation on agent
delegations or allowing agent delegations to automatically renew after
each year. One commenter suggested that certain organizations would
need to sell their output into an organized market rather than pursuant
to a fixed PPA. In this situation, according to the commenter,
authority to sell the output for each applicable entity may need to be
pursuant to an agreement that automatically renews annually. Another
commenter suggested that the one-year limitation on agent delegations
will harm applicable entities without technical expertise because non-
applicable entities with their own expertise will not require an agent
and could be able to take advantage of an applicable entity that is
only able to use an agent for one year. Another commenter asked for
clarification that a member of an unincorporated organization may
delegate powers to an agent without limitation as long as no other
member makes such a delegation.
The purpose of the agent delegation rule is to fulfill the
statutory requirement in section 761(a)(2) that no organization making
a section 761(a) election is formed ``for the purpose of selling
services or property produced or extracted.'' This is a prohibition on
joint marketing; accordingly, any member of an unincorporated
organization may have an agent for any duration of time, provided that
the agent does not represent more than one member of the applicable
unincorporated organization. The agent delegation rule applies to any
person or group of people acting on behalf of more than one member of
an unincorporated organization, regardless of their status as an
applicable entity.
The longstanding one-year exception to the joint marketing
requirement in the existing regulations reflects a balancing of the
statutory language with commercial necessities, and the proposed
regulations reflected a similar balancing. Section 761(a)(2) does not
permit an electing organization to conduct sales through an agent with
indefinite authority on behalf of multiple members. Such a structure is
necessarily ``availed of . . . for the purpose of selling services or
property produced or extracted'' and is not eligible to elect out of
subchapter K. These final regulations, therefore, do not adopt the
suggestions to eliminate the agent delegation rule or allow agent
delegations to automatically renew. However, in any given year, an
agent may be delegated authority on terms identical to those in a past
year, provided that the delegation of authority to act is not for a
period of time that exceeds the minimum needs of the industry and each
member delegating authority to that agent consents to those terms in
writing at least once per year. Example 3 has been added in revised
Sec. 1.761-2(a)(5)(iii) to illustrate this rule.
One commenter requested that the phrase ``minimum needs of the
industry'' be either clarified or deleted. That phrase is intended to
be fact-sensitive; like the rest of the joint marketing requirement,
the phrase is intended to balance statutory requirements with
commercial necessities. These final regulations, therefore, do not
adopt the commenter's request to clarify or eliminate it.
C. Specific Examples
Several commenters generally asked for more examples showing
applications of the proposed regulations. In response, the Treasury
Department and the IRS have added two examples to the final
regulations.
V. Additional Information
A. Applicability Date
Except as provided in Sec. 1.761-2(d), these final regulations
apply to taxable years ending on or after March 11, 2024, the date on
which the proposed regulations were published in the Federal Register.
An applicable unincorporated organization that validly made a section
761(a) election meeting the requirements of these final regulations for
a taxable year ending on or after March 11, 2024, will be treated as
having made a valid section 761(a) election even if the election was
made prior to the publication of these final regulations in the Federal
Register.
B. Administrative Requirements
The preamble to the proposed regulations noted that the Treasury
Department and the IRS were considering certain rules to prevent
[[Page 91559]]
abuse of the modifications in proposed Sec. 1.761-2(a)(4)(iii). One
rule described in the preamble to the proposed regulations would have
prevented the deemed election rules in prior Sec. 1.761-2(b)(2)(ii)
from applying to any unincorporated organization relying on a
modification in proposed Sec. 1.761-2(a)(4)(iii). One commenter
recommended against adopting such a rule, which the commenter believed
would be inconsistent with the goals of the proposed regulations and
increase the likelihood of inadvertent disallowances of section 761(a)
elections in non-abusive situations.
Although these final regulations do not adopt any rules regarding
deemed elections, more administrative guidance is needed under section
761(a) to fulfill the purposes of section 6417. As a result,
concurrently with the publication of these final regulations, the
Treasury Department and the IRS are publishing in the Proposed Rules
section of this edition of the Federal Register the November 2024
proposed regulations under section 761(a) (REG-116017-24), which would
provide rules affecting the validity of elections under section 761(a)
by applicable unincorporated organizations whose elections would not
have been valid without the application of revised Sec. 1.761-
2(a)(4)(iii).
C. Obsolete Language
Section 1.761-2(b)(3)(i) provides, in part, that an application for
permission to revoke a section 761(a) election must be submitted to the
Commissioner of Internal Revenue, Attention: T:I, Washington, DC 20224,
no later than 30 days after the beginning of the first taxable year to
which the revocation is to apply. This language no longer reflects the
correct procedure for obtaining permission to revoke a section 761(a)
election and is therefore eliminated by these final regulations. The
November 2024 proposed regulations would instead provide that such an
application must be made by submitting a letter ruling request that
complies with the requirements of Rev. Proc. 2024-1 or successor
guidance. Section 1.761-2(b)(3)(i) also provides, in part, that a
section 761(a) will be effective unless a member of the organization
sends proper notice to the Commissioner ``within 90 days after the
formation of the organization (or by October 15, 1956, whichever is
later) . . .''. The final regulations would strike the parenthetical
language to update and streamline the paragraph.
VI. Comments That Are Not Addressed in These Final Regulations
Two comments received were related to section 761 but outside the
scope of these final regulations. These comments are summarized in this
Part VI.
A. Implementation
One commenter asked for clarification of how audits of joint
structures would take place, including by identifying the specific
parts of Treasury and the IRS involved in such audits and the standard
of review for such audits. Another commenter requested the development
of educational materials, ``office hours,'' and other guidance to
improve understanding of the regulations and uptake of applicable
credits. Another commenter requested that the Treasury Department and
the IRS provide clear rules for the pre-registration filing process for
applicable credit property co-owned by taxpayers making transferability
elections. These final regulations do not provide information about
audit procedures or the development of further guidance, but the
Treasury Department and the IRS will continue to monitor the elective
payment process to determine whether there are areas in which more
efficiencies can be created.
B. Tribal Organizations
One commenter noted that wholly owned Tribal corporations appear to
be incapable of making an election under section 761(a) because such
entities are corporations for Federal tax purposes. The treatment of
entities wholly owned by Tribal governments is addressed by a separate
rulemaking and is therefore outside the scope of these final
regulations. For information on how to provide comments in response to
that separate rulemaking, see the notice of proposed rulemaking (REG-
113628-21), Entities Wholly Owned by Indian Tribal Governments,
published in the Federal Register (89 FR 81871) on October 9, 2024.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a federal agency obtain the approval of the
Office of Management and Budget (OMB) before collecting information
from the public, whether such collection of information is mandatory,
voluntary, or required to obtain or retain a benefit. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays
a valid control number.
These final regulations mention reporting and recordkeeping
requirements that must be satisfied for unincorporated organizations to
elect out of subchapter K. These collections of information are
generally used by the IRS for tax compliance purposes and by taxpayers
to facilitate proper reporting and recordkeeping. The likely
respondents to these collections are businesses and tax-exempt
organizations.
Unincorporated entities meeting the requirements outlined in Sec.
1.761-2(a)(4) of these final regulations satisfy relevant reporting
requirements by submitting a statement attached to, or incorporated in,
a properly executed partnership return, Form 1065, U.S. Return of
Partnership Income, containing, in lieu of the information required by
Form 1065 and by the instructions relating thereto, only the name or
other identification and the address of the organization together with
information on the return, or in the statement attached to the return,
showing the names, addresses, and identification numbers of all the
members of the organization; a statement that the organization
qualifies under Sec. 1.761-2(a)(1) and either Sec. 1.761-2(a)(2) or
(3); a statement that all of the members of the organization elect that
it be excluded from all of subchapter K; and a statement indicating
where a copy of the agreement under which the organization operates is
available (or if the agreement is oral, from whom the provisions of the
agreement may be obtained). These requirements and associated forms are
already approved by OMB under 1545-0123 for business filers. These
final regulations are not changing or creating new collection
requirements not already approved by OMB.
The recordkeeping requirements mentioned in these final regulations
are considered general tax records under Sec. 1.6001-1(e). These
records are required for the IRS to validate that electing taxpayers
have consistently met the regulatory requirements outlined in Sec.
1.761-2. For PRA purposes, general tax records are already approved by
OMB under 1545-0123 for business
[[Page 91560]]
filers and 1545-0047 for tax-exempt organizations.
III. Regulatory Flexibility Act
The Secretary of the Treasury hereby certifies that the final
regulations will not have a significant economic impact on a
substantial number of small entities pursuant to the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
These final regulations would affect unincorporated organizations
that elect out of subchapter K in connection with an election under
section 6417, as well as the members of such organizations.
Data is not readily available about these organizations. Such
organizations could not have made an election out of subchapter K under
the preexisting regulations, so information about existing
organizations that have made section 761(a) elections is not
instructive.
Even if these final regulations affect a substantial number of
small entities, such impact will not be significant. The final
regulations do not make it more costly to make or maintain an election
under section 761(a).
These final regulations do not change the procedural requirements
under Sec. 1.761-2(b) for making an election under section 761(a).
Other than to conform to modern formatting conventions, the final
regulations would amend Sec. 1.761-2(b) only by adding a parenthetical
to clarify that in making a valid section 761 election, which requires
attaching certain statements to a Form 1065 as required in accordance
with the preexisting regulations, Sec. 1.761-2(a)(4) should be taken
into account, as applicable, with regard to the required statement that
the organization qualifies under Sec. 1.761-2(a)(1) and either Sec.
1.761-2(a)(2) or (3) ``(taking into account Sec. 1.761-2(a)(4), as
applicable)''. Otherwise, an unincorporated organization making an
election under these final regulations would not be required to submit
anything additional or different than required under the preexisting
version of Sec. 1.761-2(b).
These final regulations impose no new ongoing compliance costs.
Though any unincorporated organization that has made an election under
section 761(a) should ensure that it remains qualified under Sec.
1.761-2(a)(1) and either Sec. 1.761-2(a)(2) or (3) (taking into
account Sec. 1.761-2(a)(4), as applicable), the final regulations do
not add to this obligation. In fact, these final regulations could make
it simpler for certain unincorporated organizations to stay qualified,
given their joint operating agreements that satisfy the modified co-
ownership and severance requirements and multi-year contracts that
satisfy the modified joint marketing requirement.
For the reasons stated, a regulatory flexibility analysis under the
Regulatory Flexibility Act is not required.
Pursuant to section 7805(f), the notice of proposed rulemaking
preceding these regulations was submitted to the Chief Counsel for the
Office of Advocacy of the Small Business Administration for comment on
its impact on small business, and no comments were received.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandate Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). These final
regulations do not include any Federal mandate that may result in
expenditures by State, local, or Tribal governments or by the private
sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These final regulations do not have
federalism implications and do not impose substantial, direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
VI. Executive Order 13175: Consultation and Coordination With Indian
Tribal Governments
Executive Order 13175 (Consultation and Coordination With Indian
Tribal Governments) prohibits an agency from publishing any rule that
has Tribal implications if the rule either imposes substantial direct
compliance costs on Indian Tribal governments, and is not required by
statute, or preempts Tribal law, unless the agency meets the
consultation and funding requirements of section 5 of the Executive
order. These final rules do not have substantial direct effects on one
or more federally recognized Indian tribes and do not impose
substantial direct compliance costs on Indian Tribal governments within
the meaning of the Executive order.
Nevertheless, on April 5, 2024, the Treasury Department and the IRS
held a consultation with Tribal leaders requesting assistance in
addressing questions related to the section 761(a) proposed rules
published on March 11, 2024, which informed the development of these
final regulations.
VII. Executive Order 14112: Reforming Federal Funding and Support for
Tribal Nations To Better Embrace Our Trust Responsibilities and Promote
the Next Era of Tribal Self-Determination
Executive Order 14112 (Reforming Federal Funding and Support for
Tribal Nations to Better Embrace Our Trust Responsibilities and Promote
the Next Era of Tribal Self-Determination) reaffirms the executive
branch's support for Tribal self-determination as the most effective
policy for the economic growth of Tribal Nations and the economic well-
being of Tribal citizens. Executive Order 14112 requires agency heads
to take certain actions, consistent with applicable law and to the
extent practicable, to increase access to ``Federal funding and support
programs for Tribal Nations''; provide Tribal Nations with the
flexibility to improve economic growth and address the specific needs
of their communities; and reduce administrative burdens. Section 2(b)
of the Executive order defines ``Federal funding and support programs
for Tribal Nations'' as including ``funding, programs, technical
assistance, loans, grants, or other financial support or direct
services that the Federal Government provides to Tribal Nations or
Indians because of their status as Indians.'' As section 1 of the
Executive order explains, ``As we continue to support Tribal Nations,
we must respect their sovereignty by better ensuring that they are able
to make their own decisions about where and how to meet the needs of
their communities. No less than for any other sovereign, Tribal self-
governance is about the fundamental right of a people to determine
their own destiny and to prosper and flourish on their own terms.''
These commitments build on a recognition of principles of sovereignty,
sovereign immunity, and self-governance that have been repeatedly
reaffirmed by the Supreme Court. See, e.g., Three Affiliated Tribes of
the Fort Berthold Reservation v. Wold Engineering, P.C., et al., 476
U.S. 877, 890-91 (1986); Oklahoma Tax Comm'n v. Citizen Band Potawatomi
Indian Tribe of Oklahoma, 498 U.S. 505, 510 (1991). The Treasury Tribal
Advisory Committee has advised that Tribes
[[Page 91561]]
consider ``financial support'' in Executive Order 14112 to include tax
matters that range from tax credits to Federal tax rules that regulate
Tribal revenue.
Consistent with Executive Order 14112, the Treasury Department and
the IRS recognize the importance of protecting and supporting Tribal
sovereignty and self-determination. These final regulations would
further Tribal self-determination and self-governance and reduce
administrative burdens by providing Tribes the ability to directly make
section 6417 elections for applicable credit property held through
applicable unincorporated organizations provided all applicable
statutory and regulatory requirements are satisfied.
VIII. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs has designated this
rule as a ``major rule,'' as defined by 5 U.S.C. 804(2).
Statement of Availability of IRS Documents
IRS notices and other guidance cited in this preamble are published
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website
at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal author of these final regulations is Cameron
Williamson. However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, the Treasury Department and the IRS amend 26 CFR part
1 as follows:
PART 1--INCOME TAXES
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Paragraph 1. The authority citation for part 1 is amended by revising
the entry for Sec. 1.761-2 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.761-2 also issued under 26 U.S.C. 446(b), 761(a),
6031(a), 6417(d), and 6417(h).
* * * * *
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Par. 2. Section 1.761-2 is amended by:
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a. Revising and republishing paragraphs (a)(1), (a)(2)(i), and
(a)(3)(i);
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b. Adding paragraphs (a)(4) and (5);
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c. Revising and republishing paragraphs (b)(1) and (2), (b)(3)(i), (c),
and (e); and
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d. Adding paragraph (f).
The revisions and additions read as follows:
Sec. 1.761-2 Exclusion of certain unincorporated organizations from
the application of all or part of subchapter K of chapter 1 of the
Internal Revenue Code.
(a) * * *
(1) In general. Under the conditions set forth in this section, an
unincorporated organization described in paragraph (a)(2) or (3) of
this section (taking into account paragraph (a)(4) of this section, as
applicable) may be excluded from the application of all or a part of
the provisions of subchapter K of chapter 1 of the Internal Revenue
Code (subchapter K). Such organization must be availed of for
investment purposes only and not for the active conduct of a business,
or for the joint production, extraction, or use of property, but not
for the purpose of selling services or property produced or extracted.
The members of such organization must be able to compute their income
without the necessity of computing partnership taxable income. Any
syndicate, group, pool, or joint venture which is treated as a
corporation for Federal tax purposes does not fall within the
provisions in this paragraph (a)(1).
(2) * * *
(i) Own the property as co-owners;
* * * * *
(3) * * *
(i) Own the property as co-owners, either in fee or under lease or
other form of contract granting exclusive operating rights; and
* * * * *
(4) Modifications for certain joint ownership arrangements of
applicable credit property--(i) Scope. Paragraph (a)(4)(iii) of this
section provides certain modifications to specified rules in paragraph
(a)(3) of this section in the case of an applicable unincorporated
organization meeting the requirements of paragraph (a)(4)(ii) of this
section.
(ii) Applicable unincorporated organization. For purposes of this
section, an applicable unincorporated organization is an unincorporated
organization:
(A) That is owned, in whole or in part, by one or more applicable
entities, as defined in section 6417(d)(1)(A) and Sec. 1.6417-1(c);
(B) The members of which enter into a joint operating agreement in
which the members reserve the right separately to take in kind or
dispose of their pro rata shares of any property produced, extracted,
or used, and any associated renewable energy credits or similar
credits;
(C) That, pursuant to the joint operating agreement, is organized
exclusively to own and operate applicable credit property (as defined
in Sec. 1.6417-1(e));
(D) For which one or more of the applicable entities will make an
elective payment election under section 6417(a) for the applicable
credits determined with respect to its share of the applicable credit
property;
(E) The members of which are able to compute their income without
the necessity of computing partnership taxable income; and
(F) Which is not a syndicate, group, pool, or joint venture which
is classifiable as an association, or any group operating under an
agreement which creates an organization classifiable as an association.
(iii) Specified modifications for applicable unincorporated
organizations. Solely for purposes of an election under section 761(a)
by an applicable unincorporated organization that meets the
requirements of paragraphs (b) and (e) of this section:
(A) The requirement in paragraph (a)(3)(i) of this section is
modified such that the participants are permitted to own the applicable
credit property through an unincorporated organization that is an
entity, other than one that is treated as a corporation for Federal tax
purposes; and
(B) The requirement in paragraph (a)(3)(iii) of this section is
modified such that the delegation of authority to sell the
participant's share of the property produced or used may allow the
delegee to enter into contracts the duration of which exceeds the
minimum needs of the industry and may be for more than one year,
provided that the delegation of authority to act on behalf of the
participant may not be for a period of time that exceeds the minimum
needs of the industry, and in no event for more than one year.
(5) Examples. The following examples are intended to illustrate the
principles of this section.
(i) Example 1--(A) Facts. G and H enter into a joint operating
agreement to own and operate a facility that will produce solar energy.
G, an applicable entity, is entitled under the joint operating
agreement to take in kind or dispose of 40% of the energy produced by
the unincorporated organization and H, which is not an applicable
entity, is entitled to the remaining 60%. G and H
[[Page 91562]]
form LLC, a limited liability company, to hold the solar energy
property that G and H intend to operate pursuant to the joint operating
agreement. In accordance with the joint operating agreement, G owns a
40% ownership interest in LLC and H owns the remaining 60% ownership
interest. G will sell its share of energy produced by the facility in a
manner designed to generate applicable credits under section 45(a) and
will make an election under section 6417(a) with respect thereto. LLC
makes a valid election under section 761(a) to be excluded from
subchapter K.
(B) Analysis. G will be entitled to any credits under section 45(a)
generated by its sale of energy produced by LLC that G has the right to
take in kind or dispose of (which, under the joint operating agreement,
is 40% of the energy produced by LLC). Assuming all other requirements
are met, G will be able to make an elective payment election under
section 6417 for the applicable credits determined with respect to its
ownership share of the solar energy property.
(ii) Example 2--(A) Facts. T is an Indian Tribal government as
defined in Sec. 1.6417-1(c) and an applicable entity. Through a
limited liability company organized under T's Tribal law (TLLC), T and
Y own and operate applicable credit property that will generate
electricity the sale of which will generate applicable credits under
section 45(a). TLLC is not treated as an association taxable as a
corporation for Federal tax purposes and no election under Sec.
301.7701-3 of this chapter has been made to treat TLLC as such. T and Y
enter into a joint operating agreement with respect to the ownership
and operation of the applicable credit property in which each of T and
Y reserve the right separately to take in kind or dispose of their pro
rata shares of property produced, extracted, or used and any associated
renewable energy credits or similar credits. TLLC is formed exclusively
to own and operate an applicable credit property with respect to which
section 45(a) credits will be determined. On January 1st of year 1, T
and Y enter into delegation agreements with Q that delegate T's and Y's
authority to Q to sell the electricity generated by T's and Y's shares
of the applicable credit property. The term of the delegation
agreements is one year, which does not exceed the minimum needs of the
industry. On June 1st of year 1, Q enters into a power purchase
agreement with Utility on T's and Y's behalf that commits T and Y to
sell the electricity produced from their shares of the applicable
credit property to Utility for a term of 15 years. At the end of the
day on December 31st of year 1, the delegation agreements terminate.
(B) Analysis. Because T and Y did not delegate authority for a
period of more than one year to sell the output from their shares of
the applicable credit property, the requirements of paragraph
(a)(3)(iii) of this section (as modified by paragraph (a)(4)(iii)(B) of
this section) are met. Assuming that TLLC otherwise qualifies as an
applicable unincorporated organization, TLLC is an organization
described in paragraph (a)(4)(iii)(A) of this section and can make an
election under paragraphs (b) and (e) of this section to be excluded
from the application of all of subchapter K under section 761(a). As
such, T can make an elective payment election for the applicable
credits determined with respect to its share of the applicable credit
property held by TLLC, assuming the requirements of section 6417 are
otherwise met. The analysis in this example would be the same whether Y
is also an Indian Tribal government, another applicable entity, or some
other person.
(iii) Example 3--(A) Facts. The facts are the same as in paragraph
(a)(5)(ii)(A) of this section (Example 2), except that at the end of
the day on December 31, T and Y each agree, in writing, to a new agent
delegation agreement with Q with substantively identical terms as the
agent delegation agreement in effect during year 1.
(B) Analysis. Because each of T and Y have agreed, in writing, to
engage Q in an agency relationship lasting no longer than one year, the
results are the same as in paragraph (a)(5)(ii)(B) of this section
(Example 2). In contrast, if the agent delegation agreement renewed
automatically, T and Y have effectively entered into an agent
delegation agreement lasting longer than one year and have violated the
requirements of paragraph (a)(4)(iii)(B) of this section. In that case,
TLLC would not be eligible to make or maintain an election under
section 761(a). As such, T could not make an elective payment election
for the applicable credits determined with respect to its share of the
applicable credit property held through TLLC.
(b) * * *
(1) Time for making election for exclusion. Any unincorporated
organization described in paragraph (a)(1) of this section and either
paragraph (a)(2) or (3) of this section (taking into account paragraph
(a)(4) of this section, as applicable) that wishes to be excluded from
all of subchapter K must make the election provided in section 761(a)
not later than the time prescribed by Sec. 1.6031(a)-1(e) (including
extensions thereof) for filing the partnership return for the first
taxable year for which exclusion from subchapter K is desired.
Notwithstanding the prior sentence, such organization may be deemed to
have made the election in the manner prescribed in paragraph (b)(2)(ii)
of this section.
(2) Method of making election--(i) In general. Except as provided
in paragraph (b)(2)(ii) of this section, any unincorporated
organization described in paragraph (a)(1) of this section and either
paragraph (a)(2) or (3) of this section (taking into account paragraph
(a)(4) of this section, as applicable) which wishes to be excluded from
all of subchapter K must make the election provided in section 761(a)
in a statement attached to, or incorporated in, a properly executed
partnership return, Form 1065, U.S. Return of Partnership Income, which
must contain the information required in this paragraph (b)(2)(i). Such
return must be filed with the Internal Revenue Service Center where the
partnership return, Form 1065, would be required to be filed if no
election were made. To determine the appropriate Internal Revenue
Service Center, the principal office or place of business of the person
filing the return will be considered the principal office or place of
business of the organization. The partnership return must be filed not
later than the time prescribed Sec. 1.6031(a)-1(e) (including
extensions thereof) for filing the partnership return with respect to
the first taxable year for which exclusion from subchapter K is
desired. Such partnership return must contain, in lieu of the
information required by Form 1065 and by the instructions relating
thereto, only the name or other identification and the address of the
organization together with information on the return, or in the
statement attached to the return, showing the names, addresses, and
taxpayer identification numbers of all the members of the organization;
a statement that the organization qualifies under paragraph (a)(1) of
this section and either paragraph (a)(2) or (3) of this section (taking
into account paragraph (a)(4) of this section, as applicable); a
statement that all of the members of the organization elect that it be
excluded from all of subchapter K; and a statement indicating where a
copy of the agreement under which the organization operates is
available (or if the agreement is oral, from whom the provisions of the
agreement may be obtained).
(ii) Deemed election rule. If an unincorporated organization
described in paragraph (a)(1) of this section and either paragraph
(a)(2) or (3) of this
[[Page 91563]]
section (taking into account paragraph (a)(4) of this section, as
applicable) does not make the election provided in section 761(a) in
the manner prescribed by paragraph (b)(2)(i) of this section, it will
nevertheless be deemed to have made the election if it can be shown
from all the surrounding facts and circumstances that it was the
intention of the members of such organization at the time of its
formation to secure exclusion from all of subchapter K beginning with
the first taxable year of the organization. Although the following
facts are not exclusive, either one of such facts may indicate the
requisite intent:
(A) At the time of the formation of the organization there is an
agreement among the members that the organization be excluded from
subchapter K beginning with the first taxable year of the organization;
or
(B) The members of the organization owning substantially all of the
capital interests report their respective shares of the items of
income, deductions, and credits of the organization on their respective
returns (making such elections as to individual items as may be
appropriate) in a manner consistent with the exclusion of the
organization from subchapter K beginning with the first taxable year of
the organization.
(3) * * *
(i) In general. An election under this section to be excluded will
be effective unless within 90 days after the formation of the
organization any member of the organization notifies the Commissioner
that the member desires subchapter K to apply to such organization, and
also advises the Commissioner that the member has so notified all other
members of the organization by registered or certified mail. Such
election is irrevocable as long as the organization remains qualified
under paragraph (a)(1) of this section and either paragraph (a)(2) or
(3) of this section (taking into account paragraph (a)(4) of this
section, as applicable), or unless approval of revocation of the
election is secured from the Commissioner.
* * * * *
(c) Partial exclusion from subchapter K. An unincorporated
organization which wishes to be excluded from only certain sections of
subchapter K must submit to the Commissioner, no later than 90 days
after the beginning of the first taxable year for which partial
exclusion is desired, a request for permission to be excluded from
certain provisions of subchapter K. The request must set forth the
sections of subchapter K from which exclusion is sought and must state
that such organization qualifies under paragraph (a)(1) of this section
and either paragraph (a)(2) or (3) of this section (taking into account
paragraph (a)(4) of this section, as applicable), and that the members
of the organization elect to be excluded to the extent indicated. Such
exclusion will be effective only upon approval of the election by the
Commissioner and subject to the conditions the Commissioner may impose.
* * * * *
(e) Cross reference. For requirements with respect to the filing of
a return on Form 1065 by a partnership, see Sec. 1.6031(a)-1.
(f) Applicability date. Except as provided in paragraph (d) of this
section, this section applies to taxable years ending on or after March
11, 2024.
Heather C. Maloy,
Acting Deputy Commissioner.
Approved: November 6, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-26944 Filed 11-19-24; 8:45 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on November 20, 2024.
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