Bulletin No. 2020–30
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HIGHLIGHTS
OF THIS ISSUE
Bulletin No. 2020–30
July 20, 2020
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Notice 2020-53, page 151.
In response to the ongoing Coronavirus Disease 2019
(COVID–19) pandemic, this notice provides temporary relief
from certain requirements under § 42 of the Internal Revenue
Code (Code) for qualified low-income housing projects and
under §§ 142(d) and 147(d) of the Code for qualified residential rental projects.
REG-112339-19, page 155.
This document contains proposed regulations regarding the
credit for carbon oxide sequestration under section 45Q of
the Internal Revenue Code (Code). These proposed regulations will affect persons who physically or contractually ensure the capture and disposal of qualified carbon oxide, use
of qualified carbon oxide as a tertiary injectant in a qualified
enhanced oil or natural gas recovery project, or utilization
of qualified carbon oxide in a manner that qualifies for the
credit.
REG-117589-18, page 184.
These proposed regulations provide rules under section
1031 of the Internal Revenue Code relating to the non-recognition of gain or loss on exchanges of certain property for
other property of like kind. The proposed regulations amend
the existing regulations under section 1031 to add a defi-
Finding Lists begin on page ii.
nition of real property to reflect statutory changes limiting
section 1031 to exchanges of real property. The proposed
regulations also provide a rule addressing a taxpayer’s receipt of personal property that is incidental to real property
the taxpayer receives in the exchange.
REG-125716-18, page 197.
This document contains proposed regulations under section
1502 of the Internal Revenue Code (the Code). The proposed
regulations would update existing regulations under section
1.1502-21 to reflect statutory changes made to section 172
of the Code by the Tax Cuts and Jobs Act, P.L. 115-97 (Dec.
22, 2017) and the Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-36 (Mar. 27, 2020). The proposed regulations would affect taxpayers that file consolidated returns.
T.D. 9900, page 143.
Section 2303 of the “Coronavirus Aid, Relief, and Economic
Security Act,” Pub. L. No. 116-136, 134 Stat. 281 (March
27, 2020) (the “CARES Act”), amended the carryback provisions related to net operating losses. As a result of the
CARES Act amendments, which specifically extended the
carryback period for certain net operating losses, these
temporary regulations permit certain acquiring consolidated
groups to elect to waive all or a portion of the pre-acquisition
portion of the extended carryback period under section 172
for certain losses attributable to certain acquired members.
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Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
July 20, 2020
Bulletin No. 2020–30
Part I
26 CFR 1.1502-21T: Carryback of Consolidated Net
Operating Losses
T.D. 9900
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Carryback of Consolidated
Net Operating Losses
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations under section 1502
of the Internal Revenue Code (Code) that
affect corporations filing consolidated returns. These regulations permit consolidated groups that acquire new members
that were members of another consolidated group to elect in a year subsequent
to the year of acquisition to waive all or
part of the pre-acquisition portion of an
extended carryback period under section
172 of the Code for certain losses attributable to the acquired members where
there is a retroactive statutory extension of the NOL carryback period under
section 172. These regulations respond
to the enactment of section 2303 of the
CARES Act, which retroactively extends
the carryback period under section 172
for taxable years beginning after 2017
and before 2021.
DATES: Effective date: These temporary
regulations are effective on July 2, 2020.
Applicability date: For the date of applicability, see §1.1502-21T(h)(9).
FOR FURTHER INFORMATION CONTACT: Jonathan R. Neuville, at (202)
317-5363 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
The text of these temporary regulations
Bulletin No. 2020–30
also serves as the text of part of the proposed regulations set forth in the related
notice of proposed rulemaking on this
subject (REG-125716-18) in the Proposed
Rules section in this issue of the Federal
Register.
Background
This Treasury decision amends the
Income Tax Regulations (26 CFR part
1) under section 1502 of the Code. Section 1502 authorizes the Secretary of
the Treasury or his delegate (Secretary)
to prescribe regulations for an affiliated
group of corporations that join in filing
(or that are required to join in filing) a
consolidated return (consolidated group)
to reflect clearly the Federal income tax
liability of the consolidated group and
to prevent avoidance of such tax liability. See §1.1502-1(h) (defining the term
“consolidated group”). For purposes of
carrying out those objectives, section
1502 also permits the Secretary to prescribe rules that may be different from
the provisions of chapter 1 of the Code
that would apply if the corporations
composing the consolidated group filed
separate returns. Terms used in the consolidated return regulations generally are
defined in §1.1502-1.
The Department of the Treasury (Treasury Department) and the IRS are issuing
these temporary regulations to provide
guidance to consolidated groups regarding the application of the net operating
loss (NOL) carryback rules under section
172(b) of the Code, as amended by (i)
section 2303(b) of the Coronavirus Aid,
Relief, and Economic Security Act, Public
Law 116-136, 134 Stat. 281 (March 27,
2020) (CARES Act), and (ii) any future
statutory amendments to section 172. Specifically, if there is a retroactive statutory
extension of the NOL carryback period
under section 172, these temporary regulations permit consolidated groups that
acquired new members that were members of another consolidated group prior
to the statutory change to elect to waive,
in a taxable year subsequent to the taxable year of the acquisition, all or part of
the pre-acquisition portion of an extended carryback period (as defined in part I
143
of the Explanation of Provisions) under
section 172 for consolidated net operating losses (CNOLs) attributable to the acquired members.
I. NOL Carrybacks and Carryovers under
Section 172
For purposes of section 172, an NOL
equals the excess of a taxpayer’s deductions allowed by chapter 1 of the Code
over the taxpayer’s gross income, computed with the modifications specified
in section 172(d). Section 172(c). For a
taxable year beginning before January 1,
2021, section 172(a)(1) allows as a deduction an amount equal to the aggregate
of the NOL carryovers and carrybacks
to such year. As amended by section
2303(b)(2) of the CARES Act, section
172(b)(1)(A)(i) of the Code provides that
an NOL for any taxable year must be an
NOL carryback to the extent provided
in section 172(b)(1)(B), 172(b)(1)(C)(i),
and 172(b)(1)(D).
A. Tax Cuts and Jobs Act amendments to
section 172
Prior to enactment of the CARES Act,
section 172 was most recently amended
by Public Law 115-97, 131 Stat. 2054
(December 22, 2017), commonly referred
to as the Tax Cuts and Jobs Act (TCJA).
In relevant part, section 13302(b) of the
TCJA amended section 172(b) to generally prohibit the carryback of NOLs
arising in taxable years beginning after
December 31, 2017 (post-2017 NOLs).
The TCJA also provided limited exceptions to the general carryback prohibition
by amending sections 172(b)(1)(B) and
172(b)(1)(C)(i) to provide that farming
losses (within the meaning of section
172(b)(1)(B)(ii)) and losses incurred
by insurance companies (as defined in
section 816(a) of the Code) other than
life insurance companies (nonlife insurance companies), respectively, must be
carried back to each of the two taxable
years preceding the taxable year of the
loss. Therefore, prior to enactment of the
CARES Act, taxpayers generally could
not carry back post-2017 NOLs to prior
taxable years.
July 20, 2020
B. CARES Act amendments to section
172
Section 2303(b) of the CARES Act
added section 172(b)(1)(D) to the Code.
This provision contains an additional exception to the general prohibition of NOL
carrybacks. Specifically, section 172(b)
(1)(D) provides that an NOL arising in a
taxable year beginning after December
31, 2017, and before January 1, 2021,
must be carried back to each of the five
taxable years preceding the taxable year
in which that NOL arises (five-year carryback period). Section 172(b)(2) requires
taxpayers to carry the entire amount of
such NOL back to the earliest taxable year
of that five-year carryback period. Section
172(b)(2) also provides that the portion of
the NOL that must be carried to each successive taxable year in the five-year carryback period equals the amount, if any,
that was not used in the preceding taxable
years to which the NOL was carried.
Section 172(b)(1)(D)(i)(II), as added
by section 2303(b)(1) of the CARES Act,
further provides that the exceptions to the
prohibition of NOL carrybacks regarding
farming losses and nonlife insurance companies do not apply to NOLs that are subject to the five-year carryback period. See
sections 172(b)(1)(B)(i) (regarding farming losses) and 172(b)(1)(C)(i) (regarding
nonlife insurance companies). Therefore,
farming losses and losses incurred by
nonlife insurance companies arising in a
taxable year beginning after December 31,
2017, and before January 1, 2021, are carried back five years instead of two years.
Section 172(b)(1)(D)(i)(II).
C. Election to waive carryback under
section 172(b)(3)
Section 172(b)(3) permits a taxpayer
entitled to a carryback period under section 172(b)(1) to make, with respect to an
NOL for any taxable year, an irrevocable
election to relinquish the carryback period. A taxpayer generally must make this
election (i) in such manner as may be prescribed by the Secretary, and (ii) by the
due date (including extensions of time) for
filing the taxpayer’s return for the taxable
year of the NOL for which the election is
to be in effect. However, solely with regard to NOLs arising in a taxable year be-
July 20, 2020
ginning in 2018 or 2019, section 172(b)(1)
(D)(v)(II), as added by section 2303(b)(1)
of the CARES Act, provides a special rule
that requires elections to waive the carryback period for such NOLs under section
172(b)(3) to be made no later than the due
date (including extensions of time) for filing the taxpayer’s Federal income tax return for the first taxable year ending after
March 27, 2020. See also Rev. Proc. 202024, 2020-18 I.R.B. 750, §§4.01(1), 4.03
(providing procedures regarding the time
and manner of filing elections for consolidated groups to waive the carryback under section 172(b)(3) for NOLs arising in
taxable years beginning in 2018 or 2019).
II. Consolidated Return Regulations
Section 1.1502-21(a) defines the consolidated net operating loss (that is, a
CNOL) deduction for any consolidated
return year as “the aggregate of the net
operating loss carryovers and carrybacks
to the year,” which consist of (i) CNOLs
of the consolidated group, and (ii) any
NOLs of the group’s members arising in
separate return years. A “CNOL” is, for a
consolidated return year, the excess of a
consolidated group’s deductions over the
group’s gross income, as determined under §1.1502-11(a) (without regard to any
CNOL deduction). See §1.1502-21(e).
A. General rules regarding NOL
carryovers and carrybacks
The NOL carryovers and carrybacks to
a taxable year are determined under the
principles of section 172 and §1.150221. Section 1.1502-21(b)(1). Thus, losses
permitted to be absorbed in a consolidated return year generally are absorbed in
the order of the taxable years in which
they arose, and losses carried from taxable years ending on the same date, and
which are available to offset consolidated
taxable income for the year, generally are
absorbed on a pro rata basis. Id. If any
percentage of the CNOL that is attributable to a member (determined pursuant to
§1.1502-21(b)(2)(iv)(B)) may be carried
to a separate return year of the member,
the amount of the CNOL that is attributable to the member is apportioned to the
member and carried to the separate return
year. Section 1.1502-21(b)(2)(i). If carried
144
back to a separate return year, the apportioned loss may not be carried back to an
equivalent, or earlier, consolidated return
year of the group. Id.
B. General waiver election to relinquish
entire carryback
Section 1.1502-21(b)(3)(i) permits a
consolidated group to make an irrevocable
election under section 172(b)(3) to relinquish the entire carryback period with respect to a CNOL for any consolidated return year (general waiver election). When
making this general waiver election for a
consolidated return year, a consolidated
group cannot make this election separately
for a particular member (whether or not it
remains a member). Section 1.1502-21(b)
(3)(i). Rather, the consolidated return regulations provide only a narrowly scoped
“split-waiver election” (as described in
detail in part II.C of this Background)
that a consolidated group can make solely with respect to one or more members
that previously were members of another
group. Id. A general waiver election must
be made in a separate statement filed with
the group’s Federal income tax return for
the consolidated return year in which the
NOL arises. Id.
C. Special election for acquisitions of
members that were members of another
consolidated group
A consolidated group (acquiring group)
that acquires a new member (acquired
member) that was a member of another
consolidated group (former group) may
make an irrevocable election to relinquish,
with respect to all CNOLs of the acquiring
group that are attributable to the acquired
member, the portion of the carryback period for which the acquired member was
a member of a former group (split-waiver
election). See §1.1502-21(b)(3)(ii)(B). If
an acquiring group makes a split-waiver
election for a consolidated return year, the
portion of the acquiring group’s CNOL
attributable to the acquired member for
which the election is made will not be
carried back to a former group. Id. Unlike
a general waiver election, a split-waiver
election is not a yearly election, but rather applies to all CNOLs attributable to an
acquired member that otherwise would be
Bulletin No. 2020–30
carried back to a taxable year of a former
group under section 172. Id.
Eligibility for a split-waiver election
is subject to certain conditions and procedures. Importantly, a split-waiver election must be made in a separate statement
filed with the acquiring group’s original
Federal income tax return for the year the
corporation became a member. Id. In other words, if a split-waiver election is not
made with this particular Federal income
tax return, the election cannot later be
made by amending this return in a subsequent consolidated return year or by
attaching the above-described statement
to a Federal income tax return for a later consolidated return year. If any other
corporation joining the acquiring group
was affiliated with the acquired member
immediately before the acquired member joined the acquiring group, that other
corporation also must be included in the
split-waiver election. Id.
Explanation of Provisions
I. In General
On prior occasions, enacted legislation
has amended section 172 to extend the
carryback period for NOLs. See Worker,
Homeownership, and Business Assistance
Act of 2009, Public Law 111-92, 123 Stat.
2984 (November 6, 2009); Job Creation
and Worker Assistance Act of 2002, Public Law 107-147, 116 Stat. 21 (March 9,
2002). Most recently, section 2303(b) of
the CARES Act added section 172(b)(1)
(D) to the Code. As described in part I of
the Background, section 172(b)(1)(D) requires (in the absence of a waiver under
section 172(b)(3)) a five-year carryback
period for an NOL that arises in a taxable
year beginning after December 31, 2017,
and before January 1, 2021.
Such statutory changes to NOL carryback periods uniquely impact consolidated groups that acquire one or more corporations prior to the statutory extension of
the carryback period. During the past two
decades, the Treasury Department and the
IRS have provided consolidated groups
with certain additional elections for waiving carrybacks of losses into other, former
groups. See 75 FR 35643 (June 23, 2010)
(2010 split-waiver regulations); 67 FR
38000 (May 31, 2002) (2002 split-waiver
Bulletin No. 2020–30
regulations). These additional elections,
while responsive to particular statutory amendments, have reflected common
policy objectives of providing affected
groups with the ability to waive all or a
portion of the statutorily extended NOL
carryback period.
The Treasury Department and the IRS
have determined that it is appropriate
to provide similar rules with regard to
amendments to the NOL carryback rules
under section 2303(b) of the CARES Act,
as well as any similar statutory changes
in the future. (For purposes of these regulations, the amended NOL carryback
rules implemented by the CARES Act in
particular or by future legislation more
generally are referred to as the “amended carryback rules.”) Therefore, these
temporary regulations provide principle-based rules applicable to CNOLs
arising in taxable years to which amended carryback rules become applicable
after the acquisition of a member. Under
these rules, which are consistent with the
2002 and 2010 split-waiver regulations
(although these rules are not limited to
a one-time statutory change of the NOL
carryback rules), acquiring groups would
possess the opportunity to waive, on a
taxable-year-by-taxable-year basis, all
or a portion of the carryback period with
regard to CNOLs attributable to acquired
members for pre-acquisition years during
which the acquired members were members of a former group.
Therefore, these temporary regulations
provide two additional types of split-waiver elections for consolidated groups that
(i) include one or more acquired members,
and (ii) have CNOLs that, under amended
carryback rules, become eligible to be carried back for a greater number of years than
under statutory law in effect at the time of
the acquisition (default carryback period).
See the discussion in parts II through IV
of this Explanation of Provisions. A default carryback period may consist of zero
years in the case of a complete prohibition
on carrybacks. The additional years added
under amended carryback rules constitute
the “extended carryback period.” The two
additional types of split-waiver elections
set forth in these temporary regulations
provide relief, and are subject to conditions and procedures, consistent with the
applicable split-waiver elections set forth
145
in the 2002 and 2010 split-waiver regulations.
II. Amended Statute Split-Waiver Election
These temporary regulations permit
an acquiring group to make a special
split-waiver election with regard to a
CNOL for a consolidated return year in
which an acquired member was included in the acquiring group and to which
amended carryback rules apply (amended statute split-waiver election). Through
this election, an acquiring group can
relinquish that part of the extended carryback period during which an acquired
member was a member of a former group
(for the portion of a CNOL attributable to
the acquired member), notwithstanding
that the group did not file a split-waiver election for the year in which the acquired member became a member of the
acquiring group (as required by §1.150221(b)(3)(ii)(B)). Accordingly, an amended statute split-waiver election applies
only to the portion of a CNOL that is attributable to an acquired member for the
portion of the carryback period (including the default carryback period and the
extended carryback period) during which
the acquired member was a member of a
former group.
An acquiring group makes an amended statute split-waiver election on a
year-by-year basis, consistent with the
2002 and 2010 split-waiver regulations.
Consequently, an acquiring group may
make this election for the portion of a
CNOL attributable to an acquired member that arises in any particular taxable
year to which an amended carryback rule
applies (amended carryback CNOL), regardless of whether the acquiring group
makes such an election for CNOLs arising in other consolidated return years.
However, also consistent with the 2002
and 2010 split-waiver regulations, an
acquiring group can make an amended
statute split-waiver election with respect
to an amended carryback CNOL only if
any carryback to a taxable year included
in the extended carryback period is not
claimed on a return or other filing by a
former group that is filed on or before the
date this election is filed by the acquiring
group. Also consistent with the 2002 and
2010 split-waiver regulations, an acquir-
July 20, 2020
ing group can make an amended statute
split-waiver election with respect to an
acquired member only if the acquiring
group did not file (i) a valid split-waiver election with respect to that acquired
member on or before the effective date of
the relevant amended carryback rules, or
(ii) a general waiver election with respect
to a CNOL of the acquiring group from
which the amended carryback CNOL is
attributed to the acquired member.
The amended statute split-waiver election generally must be made by attaching
a statement to the acquiring group’s timely filed tax return (including extensions)
with regard to the consolidated return
year during which the amended carryback
CNOL was incurred. In certain circumstances, the statement may be attached to
an amended return, but that return must be
filed no later than 150 days after the effective date of the relevant amended carryback rules. These regulations also include
rules specific to the amendments to section 172 made by section 2303(b) of the
CARES Act, which provide an additional option under which the statement may
be attached to an amended return filed
no later than November 30, 2020 (a date
that is 150 days after the date of filing of
these temporary regulations). These filing
requirements incorporate the principles
of the filing requirements set forth in the
2002 and 2010 split-waiver regulations,
which were tailored to specific enacted
legislation.
III. Extended Split-Waiver Election
To provide acquiring groups with additional flexibility for making split-waiver elections, these temporary regulations
provide a second, alternative split-waiver election (extended split-waiver election) that applies solely to the extended
carryback period (that is, the additional
carryback years provided under amended carryback rules). Through an extended split-waiver election, an acquiring
group can ensure that amended carryback
CNOLs are carried back to taxable years
of former groups only to the extent those
losses would have been carried back under prior law (that is, the default carryback
period). In other words, this election affects only the extended carryback period
for an acquired member’s attributed loss.
July 20, 2020
The extended split-waiver election
and the amended statute split-waiver
election are subject to the same conditions and procedures, and provide the
same relief, except that the extended
split-waiver election waives only the extended carryback period. Therefore, any
CNOL carryback to default carryback
years would be unaffected by an extended split-waiver election. For example, if
the default carryback period were two
years and a change in law extended the
carryback period to five years, an acquiring group could make an extended
split-waiver election to waive the carryback to a former group of only the three
additional carryback years with respect
to the amended carryback CNOL. Accordingly, the extended split-waiver election is available if losses attributable to
the acquired member have been carried
back solely to taxable years of a former
group in the default carryback period, but
not in the extended carryback period.
IV. Applicability Date
These temporary regulations apply
to any CNOLs arising in a taxable year
ending after July 2, 2020. However, consistent with the applicability date for the
amendments to section 172(b) pursuant to
section 2303(b) of the CARES Act, and
pursuant to section 7805(b)(2), taxpayers
may apply these temporary regulations to
any CNOLs arising in a taxable year beginning after December 31, 2017. The applicability of these temporary regulations
will expire on June 30, 2023.
V. Good Cause
The Treasury Department and the IRS
are issuing these temporary regulations
without prior notice and the opportunity
for public comment pursuant to section
553(b)(B) of the Administrative Procedure Act (APA), which provides that advance notice and the opportunity for public comment are not required with respect
to a rulemaking when an agency “for good
cause finds (and incorporates the finding
and a brief statement of reasons therefor
in the rules issued) that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.” Under the “public interest” prong
146
of 5 U.S.C. 553(b)(B), the good cause
exception appropriately applies where
notice and comment would harm, defeat,
or frustrate the public interest, rather than
serving it.
These temporary regulations, which
solely provide certain acquiring groups
with elective relief, are necessary to permit certain acquiring groups to elect to
waive all or a portion of the carryback
period for certain losses attributable to acquired members for pre-acquisition years
during which the acquired members were
members of a former group. The amended
carryback rules enacted by section 2303(b)
of the CARES Act apply for NOLs arising
in a taxable year beginning after December 31, 2017, and before January 1, 2021.
Consequently, good cause arises from the
fact that these temporary regulations will
affect taxable years of certain acquiring
groups for which tax returns already are
due or may become due during a period
of comment and delayed effectiveness.
Deferring the effectiveness of the temporary regulations until after such a period
could prevent taxpayers from immediately electing to obtain the intended benefits
of section 2303(b) of the CARES Act and
increase taxpayer compliance costs and
uncertainty because of delay of the time
before which relevant acquiring groups
could make the elections permitted by the
regulations with certainty.
Special Analyses
I. Regulatory Planning and Review
Executive Orders 13771, 13563, and
12866 direct agencies to assess costs and
benefits of available regulatory alternatives and, if regulation is necessary, to
select regulatory approaches that maximize net benefits (including potential
economic, environmental, public health
and safety effects, distributive impacts,
and equity). Executive Order 13563 emphasizes the importance of quantifying
both costs and benefits, reducing costs,
harmonizing rules, and promoting flexibility.
These regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum
of Agreement (April 11, 2018) between
the Treasury Department and the Office
Bulletin No. 2020–30
of Management and Budget regarding review of tax regulations.
II. Paperwork Reduction Act
The collections of information in these
temporary regulations are in §1.150221T(b)(3)(ii)(C)(5)(i) and §1.1502-21T(b)
(3)(ii)(C)(5)(ii). The information is required to inform the IRS on whether, and
to what extent, an acquiring group makes
either of the elections described in these
temporary regulations.
The collection of information provided
by these temporary regulations has been
approved by the Office of Management
and Budget (OMB) under control number
1545-0123. For purposes of the Paperwork Reduction Act, 44 U.S.C. 3501 et
seq. (PRA), the reporting burden associated with the collection of information
in Form 1120 (U.S. Corporation Income
Tax Return) will be reflected in the PRA
Submission associated with OMB control
number 1545-0123.
In general, if the acquiring group
makes an election under §1.1502-21T(b)
(3)(ii)(C), the acquiring group is required
to attach a separate statement to its Form
1120 as provided in §1.1502-21T(b)(3)(ii)
(C)(5)(i) and §1.1502-21T(b)(3)(ii)(C)(5)
(ii), respectively. This statement must be
filed as provided in §1.1502-21T(b)(3)(ii)
(C)(6).
The following table displays the number of respondents estimated to be required to report on Form 1120 with respect to the collections of information
required by these temporary regulations.
Due to the absence of historical tax data,
direct estimates of the number of respondents required to attach a statement to other types of tax returns, as applicable, are
not available.
Number of Respondents (Estimated)
Amended Statute Split-Waiver Election & Extended Split-Waiver Election
Form 1120
17,500
Source: RAAS:CDW
The numbers of respondents in the table
were estimated by the Research, Applied
Analytics and Statistics Division (RAAS)
of the IRS from the Compliance Data
Warehouse (CDW). Data for Form 1120
represents estimates of the total number of
taxpayers that may attach an election statement to their Form 1120 to make the elections in §1.1502-21T(b)(3)(ii)(C)(5)(i) and
§1.1502-21T(b)(3)(ii)(C)(5)(ii).
It is estimated that 17,500 consolidated entities will be required to attach a
statement under these temporary regulations. The burden associated with the information collections in these temporary
regulations are included in aggregated
burden estimates for the OMB control
number 1545-0123. The burden estimates provided in the OMB control numbers in the following table are aggregate
amounts that relate to the entire package of forms associated with the OMB
control number, and will in the future
include, but not isolate, the estimated
Form
Type of Filer
Form 1120
Published in the Federal Register on 9/30/19. Public comment period
closed on 11/29/19. Approved by OIRA through 1/31/2021.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-requestfor-forms-1065-1065-b-1066-1120-1120-1120-f-1120-h-1120-nd
Corporation
OMB Number(s)
burden of those information collections
associated with these temporary regulations. To guard against over-counting
the burden that consolidated tax provisions imposed prior to §1.1502-21T, the
Treasury Department and the IRS urge
readers to recognize that these burden
estimates have also been cited by regulations that rely on the applicable OMB
control numbers in order to collect information from the applicable types of
filers.
Status
1545-0123
Source: RAAS:CDW
III. Regulatory Flexibility Act
These temporary regulations do not impose a collection of information on small
entities. Further, pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is
hereby certified that these temporary regulations would not have a significant economic impact on a substantial number of
small entities. This certification is based
on the fact that these temporary regula-
Bulletin No. 2020–30
tions apply only to corporations that file
consolidated Federal income tax returns,
and that such corporations tend to be larger businesses. Therefore, these temporary
regulations would not create additional
obligations for, or impose an economic
impact on, small entities.
Pursuant to section 7805(f) of the Internal Revenue Code, these temporary
regulations have been submitted to the
Chief Counsel for Advocacy of the Small
147
Business Administration for comment on
its impact on small business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
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
July 20, 2020
one year by a state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars,
updated annually for inflation. In 2020,
that threshold is approximately $156 million. This rule does 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.
26 CFR Part 602
V. Executive Order 13132: Federalism
PART 1—INCOME TAX
Executive Order 13132 (entitled
“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 temporary
regulations do not have federalism implications, do not impose substantial direct compliance costs on state and local
governments, and do not preempt state
law within the meaning of the Executive
Order.
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1502-21T is revised to
read as follows:
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, and Notices 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 http://www.irs.gov.
Drafting Information
The principal author of these regulations is Jonathan R. Neuville of the Office
of Associate Chief Counsel (Corporate).
However, other personnel from the Treasury Department and the IRS participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
July 20, 2020
Reporting and recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
§1.1502-21T Net operating losses
(temporary).
(a) For further guidance, see §1.150221(a).
(b) For further guidance, see §1.150221(b) introductory text through (b)(2).
(1) and (2) [Reserved]
(3) For further guidance, see §1.150221(b)(3) introductory text through (b)(3)
(ii)(B).
(i) [Reserved]
(ii)(A) [Reserved]
(B) [Reserved]
(C) Waiver of carryback period for
losses in taxable years to which statutorily amended carryback rules apply—
(1) In general. An acquiring group may
make either (but not both) an amended
statute split-waiver election or an extended split-waiver election with respect to a
particular amended carryback CNOL.
(See paragraph (b)(3)(ii)(C)(2) of this
section for definitions of terms used in
this paragraph (b)(3)(ii)(C) and paragraph (b)(3)(ii)(D) of this section.) These
elections are available only if the statutory amendment to the carryback period referred to in paragraph (b)(3)(ii)(C)(2)(iv)
of this section occurs after the date of acquisition of an acquired member. A separate election is available for each taxable
year to which amended carryback rules
apply. An acquiring group may make an
amended statute split-waiver election or
an extended split-waiver election only if
the acquiring group, with regard to that
election—
148
(i) Satisfies the requirements in paragraph (b)(3)(ii)(C)(3) of this section; and
(ii) Follows the procedures in paragraphs (b)(3)(ii)(C)(5) and (6) of this section, as relevant to that election.
(2) Definitions. The definitions provided in this paragraph (b)(3)(ii)(C)(2) apply for purposes of this paragraph (b)(3)
(ii)(C) and paragraph (b)(3)(ii)(D) of this
section.
(i) Acquired member. The term acquired member means a member of a consolidated group that joins another consolidated group.
(ii) Acquiring group. The term acquiring group means a consolidated group that
has acquired a former member of another
consolidated group (that is, an acquired
member).
(iii) Amended carryback CNOL. The
term amended carryback CNOL means
the portion of a CNOL attributable to an
acquired member (determined pursuant
to §1.1502-21(b)(2)(iv)(B)) arising in a
taxable year to which amended carryback
rules apply.
(iv) Amended carryback rules. The
term amended carryback rules means
the rules of section 172 of the Code after
amendment by statute to extend the carryback period for NOLs attributable to an
acquired member (determined pursuant to
§1.1502-21(b)(2)(iv)(B)).
(v) Amended statute split-waiver election. The term amended statute
split-waiver election means, with respect
to any amended carryback CNOL, an
irrevocable election made by an acquiring group to relinquish the portion of the
carryback period (including the default
carryback period and the extended carryback period) for that loss during which an
acquired member was a member of any
former group.
(vi) Amended statute split-waiver election statement. The term amended statute
split-waiver election statement has the
meaning provided in paragraph (b)(3)(ii)
(C)(5)(i) of this section.
(vii) Default carryback period. The
term default carryback period means the
NOL carryback period existing at the
time the acquiring group acquired the acquired member, before the applicability of
amended carryback rules.
(viii) Extended carryback period. The
term extended carryback period means
Bulletin No. 2020–30
the additional taxable years added to a
default carryback period by any amended
carryback rules.
(ix) Extended split-waiver election.
The term extended split-waiver election
means, with respect to any amended carryback CNOL, an irrevocable election
made by an acquiring group to relinquish
solely the portion of the extended carryback period (and no part of the default carryback period) for that loss during which
an acquired member was a member of any
former group.
(x) Extended split-waiver election
statement. The term extended split-waiver
election statement has the meaning provided in paragraph (b)(3)(ii)(C)(5)(ii) of
this section.
(xi) Former group. The term former
group means a consolidated group of
which an acquired member previously
was a member.
(3) Conditions for making an amended statute split-waiver election or an extended split-waiver election. An acquiring group may make an amended statute
split-waiver election or an extended
split-waiver election (but not both) with
respect to an amended carryback CNOL
only if—
(i) The acquiring group has not filed a
valid election described in §1.1502-21(b)
(3)(ii)(B) with respect to the acquired
member on or before the effective date of
amended carryback rules;
(ii) The acquiring group has not filed a
valid election described in section 172(b)
(3) and §1.1502-21(b)(3)(i) with respect
to a CNOL of the acquiring group from
which the amended carryback CNOL is
attributed to the acquired member;
(iii) Any other corporation joining the
acquiring group that was affiliated with
the acquired member immediately before
the acquired member joined the acquiring
group is included in the waiver; and
(iv) A former group does not claim any
carryback (as provided in paragraph (b)
(3)(ii)(C)(4) of this section) to any taxable
year in the carryback period (in the case of
an amended statute split-waiver election)
or in the extended carryback period (in the
case of an extended split-waiver election)
with respect to the amended carryback
CNOL on a return or other filing filed on
or before the date the acquiring group files
the election.
Bulletin No. 2020–30
(4) Claim for a carryback. For purposes of paragraph (b)(3)(ii)(C)(3)(iv) of
this section, a carryback is claimed with
respect to an amended carryback CNOL
if there is a claim for refund, an amended
return, an application for a tentative carryback adjustment, or any other filing that
claims the benefit of the NOL in a taxable
year prior to the taxable year of the loss,
whether or not subsequently revoked in
favor of a claim based on the period provided for in the amended carryback rules.
(5) Procedures for making an amended
statute split-waiver election or an extended split-waiver election—(i) Amended
statute split-waiver election. An amended statute split-waiver election must be
made in a separate statement entitled
“THIS IS AN ELECTION UNDER SECTION 1.1502-21T (b)(3)(ii)(C)(1 ) TO
WAIVE THE PRE-[insert first day of the
first taxable year for which the acquired
member was a member of the acquiring
group] CARRYBACK PERIOD FOR
THE CNOLS ATTRIBUTABLE TO THE
[insert taxable year of losses] TAXABLE
YEAR(S) OF [insert names and employer identification numbers of members]”
(amended statute split-waiver election
statement). This statement must be filed as
provided in paragraph (b)(3)(ii)(C)(6) of
this section.
(ii) Extended split-waiver election.
An extended split-waiver election must
be made in a separate statement entitled
“THIS IS AN ELECTION UNDER SECTION 1.1502-21T (b)(3)(ii)(C)(1 ) TO
WAIVE THE PRE-[insert first day of the
first taxable year for which the acquired
member was a member of the acquiring
group] EXTENDED CARRYBACK PERIOD FOR THE CNOLS ATTRIBUTABLE TO THE [insert taxable year of
losses] TAXABLE YEAR(S) OF [insert
names and employer identification numbers of members]” (extended split-waiver
election statement). This statement must
be filed as provided in paragraph (b)(3)(ii)
(C)(6) of this section.
(6) Time and manner for filing statement—(i) In general. Except as otherwise provided in paragraph (b)(3)(ii)(C)
(6)(ii) or (iii) of this section, an amended
statute split-waiver election statement or
extended split-waiver election statement
must be filed with the acquiring group’s
timely filed consolidated return (including
149
extensions) for the year during which the
amended carryback CNOL is incurred.
(ii) Amended returns. This paragraph
(b)(3)(ii)(C)(6)(ii) applies if the date of the
filing required under paragraph (b)(3)(ii)
(C)(6)(i) of this section is not at least 150
days after the date of the statutory amendment to the carryback period referred to
in paragraph (b)(3)(ii)(C)(2)(iv) of this
section. Under this paragraph (b)(3)(ii)
(C)(6)(ii), an amended statute split-waiver
election statement or extended split-waiver election statement may be attached to
an amended return filed by the date that
is 150 days after the date of the statutory
amendment referred to in paragraph (b)(3)
(ii)(C)(2)(iv) of this section.
(iii) Certain taxable years beginning
before January 1, 2021. This paragraph
(b)(3)(ii)(C)(6)(iii) applies to taxable
years beginning before January 1, 2021,
for which the date of the filing required
under paragraph (b)(3)(ii)(C)(6)(i) of this
section precedes July 3, 2023. Under this
paragraph (b)(3)(ii)(C)(6)(iii), an amended statute split-waiver election statement
or extended split-waiver election statement may be attached to an amended return filed by July 3, 2023.
(D) Examples. The following examples illustrate the rules of paragraph (b)
(3)(ii)(C) of this section. For purposes of
these examples: all affiliated groups file
consolidated returns; all corporations are
includible corporations that have calendar taxable years; each of P, X, and T is a
corporation having one class of stock outstanding; each of P and X is the common
parent of a consolidated group (P Group
and X Group, respectively); neither the P
Group nor the X Group includes an insolvent financial institution or an insurance
company; no NOL is a farming loss; there
are no other relevant NOL carrybacks to
the X Group’s consolidated taxable years;
except as otherwise stated, the X Group
has sufficient consolidated taxable income
determined under §1.1502-11 (CTI) to
absorb the stated NOL carryback by T; T
has sufficient SRLY register income within the X Group to absorb the stated NOL
carryback by T; all transactions occur between unrelated parties; and the facts set
forth the only relevant transactions.
(1) Example 1: Computation and absorption of
amended carrybacks—(i) Facts. In Year 1, T became
a member of the X Group. On the last day of Year
5, P acquired all the stock of T from X. At the time
July 20, 2020
of P’s acquisition of T stock, the default carryback
period was zero taxable years. The P Group did not
make an irrevocable split-waiver election under
§1.1502-21(b)(3)(ii)(B) to relinquish, with respect to
all CNOLs attributable to T while a member of the P
Group, the portion of the carryback period for which
T was a member of the X Group (that is, a former
group). In Year 7, the P Group sustained a $1,000
CNOL, $600 of which was attributable to T pursuant
to §1.1502-21(b)(2)(iv)(B). In that year, P did not
make an irrevocable general waiver election under
section 172(b)(3) and §1.1502-21(b)(3)(i) with respect to the $1,000 CNOL when the P Group filed its
consolidated return for Year 7. In Year 8, legislation
was enacted that amended section 172 to require a
carryback period of five years for NOLs arising in a
taxable year beginning after Year 5 and before Year
9.
(ii) Analysis. As a result of the amended carryback
rules enacted in Year 8, the P Group’s $1,000 CNOL
in Year 7 must be carried back to Year 2. Therefore,
T’s $600 attributed portion of the P Group’s Year 7
CNOL (that is, T’s amended carryback CNOL) must
be carried back to taxable years of the X Group. See
§§1.1502-21(b)(1) and 1.1502-21(b)(2)(i). To the extent T’s amended carryback CNOL is not absorbed
in the X Group’s Year 2 taxable year, the remaining
portion must be carried to the X Group’s Year 3, Year
4, and Year 5 taxable years, as appropriate. See id.
Any remaining portion of T’s amended carryback
CNOL is carried to consolidated return years of the P
Group. See §1.1502-21(b)(1).
(2) Example 2: Amended statute split-waiver
election—(i) Facts. The facts are the same as in
paragraph (b)(3)(ii)(D)(1)(i) of this section (Example 1), except that, following the change in statutory
carryback period in Year 8, the P Group made a valid
amended statute split-waiver election under paragraph (b)(3)(ii)(C) of this section to relinquish solely
the carryback of T’s amended carryback CNOL.
(ii) Analysis. Because the P Group made a valid
amended statute split-waiver election, T’s amended
carryback CNOL is not eligible to be carried back to
any taxable years of the X Group (that is, a former
group). However, the amended statute split-waiver
election does not prevent T’s Year 7 amended carryback CNOL from being carried back to years of the
P group (that is, the acquiring group) during which
T was a member. See paragraph (b)(3)(ii)(C)(2)(v)
of this section. As a result, the entire amount of T’s
amended carryback CNOL is eligible to be carried
back to taxable Year 6 of the P Group. Any remaining
CNOL may then be carried over within the P Group.
See §1.1502-21(b)(1).
(3) Example 3: Computation and absorption of
extended carrybacks—(i) Facts. The facts are the
same as in paragraph (b)(3)(ii)(D)(1)(i) of this section (Example 1), except that the X Group had $300
of CTI in Year 4 and $200 of CTI in Year 5 and, at
the time of the P Group’s acquisition of T, the default
carryback period was two years. Therefore, T’s $600
attributed portion of the P Group’s Year 7 CNOL was
required to be carried back to the X Group’s Year
5 taxable year, and the X Group was able to offset
$200 of CTI in Year 5.
(ii) Analysis. As a result of the amended carryback rules, the X Group must offset its $300 of CTI
in Year 4 against T’s amended carryback CNOL.
See §§1.1502-21(b)(1) and (b)(2)(i). The remaining
$100 ($600 - $300 - $200) of T’s amended carryback
CNOL is carried to taxable years of the P Group. See
§1.1502-21(b)(1).
(4) Example 4: Extended split-waiver election—
(i) Facts. The facts are the same as in paragraph (b)
(3)(ii)(D)(3)(i) of this section (Example 3), except
that, following the change in law in Year 8, the P
Group made a valid extended split-waiver election
under paragraph (b)(3)(ii)(C) of this section to relinquish the extended carryback period for T’s amended
carryback CNOL for years in which T was a member
of the X Group.
(ii) Analysis. As a result of the P Group’s extended split-waiver election, T’s amended carryback
CNOL is not eligible to be carried back to any portion of the extended carryback period (that is, any
taxable year prior to Year 5). See paragraph (b)(3)
(ii)(C)(2)(ix) of this section. As a result, the X Group
absorbs $200 of T’s $600 loss in Year 5, and the
CFR part or section where identified and
described
remaining $400 ($600 - $200) is carried to taxable
years of the P Group. See §1.1502-21(b)(1).
(iii) For further guidance, see §1.150221(b)(3)(iii).
(iv) and (v) [Reserved]
(c) For further guidance, see §1.150221(c) through (h)(8).
(d) through (j) [Reserved]
(h)(1) through (8) [Reserved]
(9) Amended carryback rules—(i)
Applicability date. Paragraphs (b)(3)(ii)
(C) and (D) of this section apply to any
CNOLs arising in a taxable year ending
after July 2, 2020. However, taxpayers
may apply paragraphs (b)(3)(ii)(C) and
(D) of this section to any CNOLs arising
in a taxable year beginning after December 31, 2017.
(ii) Expiration date. The applicability
of paragraphs (b)(3)(ii)(C) and (D) of this
section will expire on June 30, 2023.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In §602.101, paragraph (b), the
entry for §1.1502-21T is revised to read
as follows:
§602.101 OMB Control Numbers.
*****
(b) * * *
Current OMB control No.
*******
1.1502.21T . . . . . . . . . . . . . . . . . . . . . . . .
1545-0123
*******
Douglas W. O’Donnell
Acting Deputy Commissioner for
Services and Enforcement.
July 20, 2020
Approved: June 23, 2020
David J. Kautter
Assistant Secretary of the Treasury
(Tax Policy).
150
(Filed by the Office of the Federal Register on July
2, 2020, 4:15 p.m., and published in the issue of the
Federal Register for July 8, 2020, 85 F.R. 40892)
Bulletin No. 2020–30
Part III
Notice 2020-53
I. PURPOSE
In response to the ongoing Coronavirus Disease 2019 (COVID–19) pandemic,
this notice provides temporary relief from
certain requirements under § 42 of the Internal Revenue Code (Code) for qualified
low-income housing projects and under
§§ 142(d) and 147(d) of the Code for qualified residential rental projects. Section
IV of this notice describes the Agencies,
Issuers, Operators, and Owners eligible
for the relief granted in section V of this
notice, which provides relief pursuant to
§ 7508A(a) of the Code, and section VI of
this notice, which provides relief pursuant
to § 1.42–13(a) of the Income Tax Regulations. In this notice, the terms “Agency,”
“Issuer,” “Operator,” and “Owner” have
the same meanings as described in section
5 of Rev. Proc. 2014-49, 2014-37 I.R.B.
535, or section 4 of Rev. Proc. 2014-50,
2014-37 I.R.B. 540.
II. BACKGROUND
A. Qualified low-income housing projects
Section 42(a) provides that the amount
of the low-income housing credit for any
taxable year in the credit period is an
amount equal to the applicable percentage of the qualified basis of each qualified
low-income building.
Section 42(c)(1)(A) provides that the
qualified basis of any qualified low-income building for any taxable year is an
amount equal to (i) the applicable fraction
(determined as of the close of the taxable year) of (ii) the eligible basis of the
building (determined under § 42(d)(4)).
Sections 42(c) and 42(d) define applicable
fraction and eligible basis. Section 42(d)
(1) and (2) define the eligible basis of a
new building and an existing building, respectively.
Section 42(c)(2) defines a qualified
low-income building as any building
which is part of a qualified low-income
housing project at all times during the
“compliance period” (that is, the period of
15 taxable years beginning with the first
Bulletin No. 2020–30
taxable year of the credit period) and to
which the amendments made by section
201(a) of the Tax Reform Act of 1986
(Pub. L. No. 99–514) apply. To qualify as
a low-income housing project, one of the
§ 42(g) minimum set-aside tests, as elected by the taxpayer, must be satisfied.
Under § 42(d)(4)(A) and (B), the eligible basis for a qualified low-income building includes the adjusted basis of the property (of a character subject to the allowance
of depreciation) used in common areas or
provided as comparable amenities to all
residential rental units in the building.
Section 42(e) provides general rules
under which rehabilitation expenditures
incurred by taxpayers related to a low-income building may be treated as a separate
new building. Under § 42(e)(3)(A)(ii), to
qualify as a separate new building, the rehabilitation expenditures with respect to a
low-income building during a 24-month
period (§ 42(e) 24-month minimum rehabilitation expenditure period) must be at
least the greater of two statutory criteria.
Section 42(g) sets forth three alternative minimum set-aside tests for low-income housing projects. The Owner of
a project must elect one and satisfy that
chosen test each taxable year. Once a taxpayer elects to use a particular set-aside
test, the election is irrevocable.
Section 42(h)(1)(E) provides general rules for carryover allocations of the
low-income housing credit. A carryover
allocation is defined in § 1.42-6(a)(1) of
the Income Tax Regulations as an allocation that meets the requirements of § 42(h)
(1)(E) (relating to carryover allocations
for single buildings) or § 42(h)(1)(F) (relating to carryover allocations for multiple
building projects).
Under § 42(h)(1)(E)(i), if a qualified
building is placed in service not later than
a statutorily specified date, the building is
relieved of a requirement concerning the
timing of the allocation. Section 42(h)(1)
(E)(ii) provides in part, for purposes of
§ 42(h)(1)(E)(i), that the term “qualified
building” means any building which is
part of a project if the taxpayer’s basis in
the project (as of the date that is 1 year after the date that the allocation was made)
is more than 10 percent of the taxpayer’s
151
reasonably expected basis in the project
(as of the close of the second calendar
year following the calendar year in which
an allocation is made) (10-percent test).
In general, under § 42(j)(1), if (1) a
building is beyond the first year of the
credit period, and (2) at the end of the
taxable year, the building’s qualified basis with respect to the taxpayer is less than
the qualified basis with respect to the taxpayer at the end of the preceding taxable
year, then the credits, if any, for the year
of the reduction are determined using the
reduced qualified basis, and the taxpayer’s
Federal income tax liability for the year
of the reduction is increased by the credit
recapture amount prescribed in § 42(j)(2).
Section 42(j)(4)(E) provides generally
that a building is not subject to recapture
by reason of a casualty loss to the extent
the loss is restored by reconstruction or replacement within a reasonable period established by the Secretary of the Treasury
or his delegate (Secretary).
Section 42(m)(1) requires an Agency
to allocate housing credit dollar amounts
among candidate proposed housing projects. The allocation must be pursuant to a
qualified allocation plan (QAP) that has
been approved by the governmental unit
of which the Agency is a part. A QAP not
only sets forth selection criteria by which
an Agency makes these allocations but
also provides a procedure that the Agency
must follow in monitoring for noncompliance with the provisions of § 42, including monitoring for noncompliance with
habitability standards through regular site
visits.
Section 1.42-5 provides the general requirements of Agencies’ compliance-monitoring responsibilities under their monitoring procedures that must be part of any
QAPs. Among the requirements, an Agency must perform physical inspections and
low-income certification review.
Section 1.42-5(c)(1)(iii) requires, generally, that the Owner of a low-income
housing project certify at least annually to the Agency that, for the preceding
12-month period, the Owner has received
an annual income certification from each
low-income tenant, and the documentation to support that certification.
July 20, 2020
Under § 1.42-13(a), the Secretary may
provide guidance to carry out the purposes
of § 42 through various publications in the
Internal Revenue Bulletin.
B. Qualified residential rental projects
financed by bonds
Generally, under § 103 of the Code,
private activity bonds that are not qualified bonds within the meaning of § 141
of the Code are not tax-exempt. Section
141(e) provides in part that the term
“qualified bond” means any private activity bond if such bond is an exempt
facility bond, and § 142(a) provides in
part that the term “exempt facility bond”
means any bond issued as part of an issue
95 percent or more of the net proceeds of
which are to be used to provide qualified
residential rental projects. To be a qualified residential rental project, a residential
rental housing project must meet the requirements in § 142(d).
Section 142(d)(1) provides that the term
“qualified residential rental project” means
any project for residential rental property
if, at all times during the qualified project
period, such project meets the requirements
under § 142(d)(1)(A) or (B) (§ 142(d) setaside requirements), whichever is elected
by the Issuer at the time of the issuance of
the issue with respect to such project.
Section 142(d)(2)(A) provides that the
term “qualified project period” means the
period beginning on the first day on which
10 percent of the residential units in the
project are occupied and ending on the
latest of (i) the date that is 15 years after
the date on which 50 percent of the residential units in the project are occupied,
(ii) the first day on which no tax-exempt
private activity bond issued with respect
to the project is outstanding, or (iii) the
date on which any assistance provided
with respect to the project under section 8
of the United States Housing Act of 1937
terminates.
Rev. Proc. 2004-39, 2004-2 C.B. 49,
sets forth procedures for determining
whether a residential rental project complies with the applicable § 142(d) setaside requirements during the qualified
project period. Under section 5.02 of
Rev. Proc. 2004-39, for a period of up to
1
2
12 months beginning on the issue date of
bonds issued to acquire an existing residential rental project (12-month transition
period), a failure to satisfy the § 142(d)
set-aside requirements will not cause the
acquired project to fail to be a qualified
residential rental project.
Section 147(d)(1) provides, with certain exceptions, that a private activity
bond shall not be a qualified bond if issued as part of an issue and any portion
of the net proceeds of such issue is to be
used for the acquisition of any property
(or an interest therein) unless the first use
of such property is pursuant to such acquisition. The private activity bonds to which
§ 147(d) applies include bonds to finance
qualified residential rental projects.
Section 147(d)(2) provides that
§ 147(d)(1) shall not apply with respect to
any building (and the equipment therefor)
if the rehabilitation expenditures with respect to such building, equal or exceed 15
percent of the portion of the cost of acquiring such building (and equipment) financed with the net proceeds of the issue.
Section 147(d)(3)(C) provides that the
term “rehabilitation expenditures” shall
not include any amount which is incurred
after the date 2 years after the later of (i)
the date on which the building was acquired, or (ii) the date on which the bond
was issued (§ 147(d) 2-year rehabilitation
expenditure period).
C. Postponement of certain deadlines by
reason of Presidentially declared disasters
Section 7508A provides the Secretary
with authority to postpone the time for
performing certain acts under the internal
revenue laws for a taxpayer determined by
the Secretary to be affected by a Federally declared disaster as defined in § 165(i)
(5)(A). Pursuant to § 7508A(a), a period
of up to one year may be disregarded in
determining whether the performance of
certain acts is timely under the internal
revenue laws.
On March 13, 2020, the President of
the United States issued an emergency
declaration under the Robert T. Stafford
Disaster Relief and Emergency Assistance
Act (Stafford Act), 42 U.S.C. 5121 et seq.,
in response to the ongoing COVID-19
pandemic (Emergency Declaration). 1
The Emergency Declaration instructed
the Secretary of the Treasury “to provide
relief from tax deadlines to Americans
who have been adversely affected by the
COVID-19 emergency, as appropriate,
pursuant to 26 U.S.C. 7508A(a).” Subsequent to the Emergency Declaration, the
President issued major disaster declarations under the authority of the Stafford
Act with respect to all 50 States, the District of Columbia, and 5 territories (Major
Disaster Declarations).2
In the context of a Presidentially-declared Major Disaster, Rev. Proc. 2014-49
provides temporary relief from certain requirements of § 42 for Agencies and Owners of low-income housing projects. Under
section 8 of Rev. Proc. 2014-49, in the case
of a casualty loss suffered due to a Major
Disaster that has reduced a low-income
building’s qualified basis, the Agency that
has jurisdiction over the building must determine what constitutes a reasonable restoration period. The reasonable restoration
period established by the Agency must not
extend beyond the end of the 25th month
following the close of the month of the Major Disaster declaration (25-month reasonable restoration period).
Rev. Proc. 2014-49 also provides emergency housing relief for individuals who
are displaced by a Major Disaster from
their principal residences in certain Major
Disaster Areas. See Rev. Proc. 2014-49,
sections 12–14.
In the context of a Presidentially-declared Major Disaster, Rev. Proc. 201450 provides temporary relief from certain
requirements under § 142(d) for qualified
residential rental projects financed with
exempt facility bonds issued by State and
local governments under § 142. Rev. Proc.
2014-50 also provides emergency housing
relief for individuals who are displaced by
a Major Disaster from their principal residences in certain Major Disaster Areas.
See Rev. Proc. 2014-50, sections 5–7.
III. NOTICE 2020-23 AND RELIEF
UNDER SECTION 42
On April 9, 2020, the Department of the
Treasury and the Internal Revenue Service
issued Notice 2020-23, 2020-18 I.R.B.
See https://www.whitehouse.gov/wp-content/uploads/2020/03/LetterFromThePresident.pdf.
See https://www.fema.gov/coronavirus/disaster-declarations.
July 20, 2020
152
Bulletin No. 2020–30
742, which provided certain relief to affected taxpayers and postponed due dates until
July 15, 2020, with respect to certain tax
filings and payments, certain time-sensitive
government actions, and all time-sensitive
actions listed in Rev. Proc. 2018-58, 2018Statute or Regulation
§ 42(h)(1)(E) and (F)
§ 42(e)(3)(A)(ii)
§ 1.42-5(c)
July 15, 2020, the time to perform certain
time-sensitive actions for purposes of § 42
that are due to be performed on or after
April 1, 2020, and before July 15, 2020.
These time-sensitive actions listed in Rev.
Proc. 2018-58 include, among others:
Act Postponed
The taxpayer’s basis in the building project, as of the date which is one year after the date that the
allocation was made, must be more than 10 percent of the taxpayer’s reasonably expected basis in
the project.
The taxpayer has a 24-month measuring period in which the requisite amount of rehabilitation
expenditures has to be incurred in order to qualify for treatment as a separate new building.
The taxpayer must make certain certifications at least annually to the Agency.
Rev. Proc. 2018-58, section 15, 2018–50
IRB at 1015.
Thus, in addition to other postponements (including other postponements
for purposes of § 42 listed in Rev. Proc.
2018-58), Notice 2020-23 postponed until
July 15, 2020, the time to perform the following time-sensitive actions for purposes
of § 42 that are due to be performed on
or after April 1, 2020, and before July 15,
2020:
• The 10-percent test under § 42(h)(1)
(E)(ii);
• The 24-month minimum rehabilitation expenditure period under § 42(e);
and
• The income recertification requirement under § 1.42-5(c)(1)(iii).
IV. SCOPE OF THE RELIEF
GRANTED IN THIS NOTICE
Sections V.A though E and VI.A
through D of this notice apply to low-income housing projects under § 42, to
qualified residential rental projects under
§ 142(d), and to Agencies, Issuers, Owners, and Operators that have responsibilities with respect to those projects. Section
V.F of this notice applies to bonds for
qualified residential rental projects that
would be qualified bonds (as defined in
§ 141(e)) if the requirements of § 147(d)
(2) were satisfied. The persons described
in this section IV have been determined
by the Secretary to be persons affected
by the COVID-19 emergency for the purposes of the relief described in section V
of this notice. In addition, the recipients
of relief described in section VI of this
Bulletin No. 2020–30
50 I.R.B. 990 (Dec. 10, 2018), that were
due to be performed on or after April 1,
2020, and before July 15, 2020. See Notice
2020-23 and Rev. Proc. 2018-58. Among
the relief granted, Notice 2020-23 (referencing Rev. Proc. 2018-58) postponed until
notice have been determined by the Secretary to be sufficiently affected by the
COVID–19 pandemic to merit the relief
that is provided here under the authority
of § 1.42–13(a).
V. GRANT OF RELIEF PURSUANT TO
SECTION 7508A
A. THE 10-PERCENT TEST FOR
CARRYOVER ALLOCATIONS
For purposes of § 42(h)(1)(E)(ii), if the
last day for an Owner of a building with
a carryover allocation to meet the 10-percent test is on or after April 1, 2020, and
before December 31, 2020, the last day for
the Owner to meet the 10-percent test is
postponed to December 31, 2020.
B. THE § 42(e) 24-MONTH MINIMUM
REHABILITATION EXPENDITURE
PERIOD
For purposes of § 42(e)(3)(A)(ii), if
the 24-month minimum rehabilitation
expenditure period for a building originally ends on or after April 1, 2020, and
before December 31, 2020, the last day
for the Owner to incur the minimum rehabilitation expenditures with respect to
the building is postponed to December
31, 2020.
C. REASONABLE PERIOD FOR
RESTORATION OR REPLACEMENT
IN THE EVENT OF CASUALTY LOSS
sualty loss and the reasonable period
to restore by reconstruction or replacement ends on or after April 1, 2020,
and before December 31, 2020, the
last day for the Owner of the building
to restore the loss by reconstruction or
replacement is postponed to December
31, 2020.
D. REASONABLE RESTORATION
PERIOD IN THE EVENT OF PRIOR
MAJOR DISASTER
For purposes of section 8.02 of Rev.
Proc. 2014-49, if a low-income building, due to a prior Major Disaster, has
suffered a casualty loss that would have
reduced its qualified basis and if the reasonable restoration period determined by
the Agency for the building ends on or
after April 1, 2020, and before December
31, 2020, the last day for the Owner of
the building to complete the repair and
restoration is postponed to December 31,
2020.
E. THE 12-MONTH TRANSITION
PERIOD TO MEET SET-ASIDES FOR
QUALIFIED RESIDENTIAL RENTAL
PROJECTS
For purposes of section 5.02 of Rev.
Proc. 2004-39, the last day of a 12-month
transition period for a qualified residential
rental project that ends on or after April 1,
2020, and before December 31, 2020, is
postponed to December 31, 2020.
For purposes of § 42(j)(4)(E), if a
low-income building has suffered a ca-
153
July 20, 2020
F. THE § 147(d) 2-YEAR
REHABILITATION EXPENDITURE
PERIOD FOR BONDS USED TO
PROVIDE QUALIFIED RESIDENTIAL
RENTAL PROJECTS
If a bond is used to provide a qualified residential rental project and if the
§ 147(d) 2-year rehabilitation expenditure period for the bond ends on or after
April 1, 2020, and before December 31,
2020, the last day of that period is postponed to December 31, 2020.
VI. GRANT OF RELIEF PURSUANT
TO § 1.42-13(a)
A. INCOME RECERTIFICATIONS
An Owner of a low-income building
is not required to perform income recertifications under § 1.42-5(c)(1)(iii) in the
period beginning on April 1, 2020, and
ending on December 31, 2020. The Owner must resume the income recertifications
as due under § 1.42-5(c)(1)(iii) after December 31, 2020.
B. COMPLIANCE-MONITORING
For purposes of § 1.42-5, an Agency is
not required to conduct compliance-monitoring inspections or reviews in the period
beginning on April 1, 2020, and ending on
December 31, 2020. The Agency must re-
July 20, 2020
sume compliance-monitoring inspections
or reviews as due under § 1.42-5 after December 31, 2020.
C. COMMON AREAS AND
AMENITIES
If an amenity or common area in a
low-income building or project is temporarily unavailable or closed during some
or all of the period from April 1, 2020 to
December 31, 2020, in response to the
COVID-19 pandemic, and not because
of other noncompliance for § 42 purposes, this temporary closure does not result
in a reduction of the eligible basis of the
building.
D. EMERGENCY HOUSING FOR
MEDICAL PERSONNEL AND OTHER
ESSENTIAL WORKERS
If individuals who are medical personnel or other essential workers (as defined
by State or local governments) provide
services during the COVID-19 pandemic,
then, for purposes of providing emergency
housing from April 1, 2020, to December
31, 2020, under Rev. Proc. 2014-49 or under Rev. Proc. 2014-50, Agencies, Issuers,
Owners, and Operators of low-income
housing projects may treat these individuals as if they were Displaced Individuals
(defined under section 5.02 of Rev. Proc.
2014-49 or Section 4.04 of Rev. Proc.
154
2014-50, as applicable). That is, Agencies, Issuers, Owners, and Operators may
provide emergency housing for these individuals pursuant to the provisions of the
applicable revenue procedure. See sections
12, 13, and 14 of Rev. Proc. 2014-49 and
sections 5, 6, and 7 of Rev. Proc. 2014-50.
VII. EFFECTIVE DATE
This notice is effective as of July 1,
2020.
VIII. EFFECT ON OTHER
DOCUMENTS
Notice 2020-23, Rev. Proc. 2004-39,
Rev. Proc. 2014-49, and Rev. Proc. 201450 are amplified.
IX. DRAFTING INFORMATION
The principal authors of this notice are
Dillon Taylor and Michael J. Torruella
Costa, Office of the Associate Chief Counsel (Passthroughs and Special Industries),
and Timothy L. Jones and David White,
Office of the Associate Chief Counsel
(Financial Institutions and Products). For
further information regarding this notice,
contact Dillon Taylor or Michael J. Torruella Costa at (202) 317-4137 (not a tollfree number); contact Timothy L. Jones
or David White at (202) 317-6980 (not a
toll-free number).
Bulletin No. 2020–30
Part IV
Notice of Proposed
Rulemaking
Credit for Carbon Oxide
Sequestration
REG-112339-19
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations regarding the credit
for carbon oxide sequestration under section 45Q of the Internal Revenue Code
(Code). These proposed regulations will
affect persons who physically or contractually ensure the capture and disposal of
qualified carbon oxide, use of qualified
carbon oxide as a tertiary injectant in a
qualified enhanced oil or natural gas recovery project, or utilization of qualified
carbon oxide in a manner that qualifies for
the credit.
DATES: Written or electronic comments
and requests for a public hearing must be
received by August 3, 2020. Requests for
a public hearing must be submitted as prescribed in the “Comments and Requests
for a Public Hearing” section.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic submissions via the Federal eRulemaking Portal
at www.regulations.gov (indicate IRS and
REG-112339-19) by following the online
instructions for submitting comments.
Once submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have
limited personnel available to process
public comments that are submitted on
paper through mail. Until further notice,
any comments submitted on paper will be
considered to the extent practicable. The
Department of the Treasury (Treasury
Department) and the IRS will publish for
public availability any comment submit-
Bulletin No. 2020–30
ted electronically, and to the extent practicable on paper, to its public docket.
Send paper submissions to: CC:PA:LPD:PR (REG-112339-19), room 5203, Internal Revenue Service, PO Box 7604,
Ben Franklin Station, Washington, DC
20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Maggie Stehn of the Office
of Associate Chief Counsel (Passthroughs
& Special Industries) at (202) 317-6853;
concerning submissions of comments and/
or requests for a public hearing, Regina L.
Johnson at (202) 317-5177 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regulations (26 CFR part 1) under section 45Q
of the Code (proposed regulations).
Section 45Q was enacted on October 3,
2008, by section 115 of Division B of the
Energy Improvement and Extension Act
of 2008, Public Law 110-343, 122 Stat.
3765, 3829, to provide a credit for the sequestration of carbon oxide. On February
17, 2009, section 45Q was amended by
section 1131 of Division B of the American Recovery and Reinvestment Tax Act
of 2009, Public Law 111-5, 123 Stat 115,
325. Section 45Q was further amended
on December 19, 2014, by section 209(j)
(1) of Division A of the Tax Increase Prevention Act of 2014, Public Law 113-295,
128 Stat. 4010, 4030, and most recently
on February 9, 2018, by section 41119 of
Division D of the Bipartisan Budget Act
of 2018 (BBA), Public Law 115-123, 132
Stat. 64, 162, to encourage the construction and use of carbon capture and sequestration projects.
On May 20, 2019, the IRS published
Notice 2019-32, 2019-21 I.R.B. 1187.
The notice requested general comments
on issues arising under section 45Q, as
well as specific comments concerning secure geological storage, the measurement
of qualified carbon oxide, the recapture
155
of the benefit of the credit for carbon oxide sequestration, the types of utilization
that qualify for the credit, the beginning
of construction, partnership arrangements,
definitions of terms, and other issues related to the credit. The IRS received 116
comments from industry participants, environmental groups, and other stakeholders.
In response to comments submitted
pursuant to Notice 2019-32, on March 9,
2020, the Treasury Department and the
IRS published Revenue Procedure 202012, 2020-11 I.R.B. 511, and Notice 202012, 2020-11 I.R.B. 495. Revenue Procedure 2020-12 provides a safe harbor under
which the IRS will treat partnerships as
properly allocating the section 45Q credit
in accordance with section 704(b). Notice
2020-12 provides guidance on the determination of when construction has begun
on a qualified facility or on carbon capture
equipment that may be eligible for the section 45Q credit.
As requested by commenters, the safe
harbor in Revenue Procedure 2020-12 and
the rules in Notice 2020-12 are similar to
those provided in prior guidance.
Pursuant to section 45Q(h), the Secretary of the Treasury or his delegate (Secretary) may prescribe such regulations
and other guidance as may be necessary
or appropriate to carry out section 45Q,
including regulations or other guidance
to (i) ensure proper allocation under section 45Q(a) for qualified carbon oxide
captured by a taxpayer during the taxable
year ending after the date of the enactment
of the BBA, and (ii) determine whether a
facility satisfies the requirements under
section 45Q(d)(1).
Summary of Comments and
Explanation of Provisions
1. General Credit Provisions
a. Credit Amount in General
Section 45Q(a)(1) allows a credit of
$20 per metric ton of qualified carbon oxide (i) captured by the taxpayer using carbon capture equipment which is originally
placed in service at a qualified facility before the date of the enactment of the BBA
July 20, 2020
(February 9, 2018); (ii) disposed of by the
taxpayer in secure geological storage; and
(iii) neither used by the taxpayer as a tertiary injectant in a qualified enhanced oil
or natural gas recovery project nor utilized
in a manner described in section 45Q(f)
(5).
Section 45Q(a)(2) allows a credit of
$10 per metric ton of qualified carbon oxide (i) captured by the taxpayer using carbon capture equipment which is originally
placed in service at a qualified facility before February 9, 2018; and (ii) either (A)
used by the taxpayer as a tertiary injectant
in a qualified enhanced oil or natural gas
recovery project and disposed of by the
taxpayer in secure geological storage; or
(B) utilized by the taxpayer in a manner
described in section 45Q(f)(5).
Section 45Q(a)(3) allows a credit of the
applicable dollar amount (as determined
under section 45Q(b)(1)) per metric ton of
qualified carbon oxide (i) captured by the
taxpayer using carbon capture equipment
which is originally placed in service at a
qualified facility on or after February 9,
2018, during the 12-year period beginning
on the date the equipment was originally
placed in service; (ii) disposed of by the
taxpayer in secure geological storage; and
(iii) neither used by the taxpayer as a tertiary injectant in a qualified enhanced oil
or natural gas recovery project nor utilized
in a manner described in section 45Q(f)
(5).
Section 45Q(a)(4) allows a credit of the
applicable dollar amount (as determined
under section 45Q(b)(1)) per metric ton of
qualified carbon oxide (i) captured by the
taxpayer using carbon capture equipment
which is originally placed in service at a
qualified facility on or after February 9,
2018, during the 12-year period beginning
on the date the equipment was originally
placed in service; and (ii) either (A) used
by the taxpayer as a tertiary injectant in
a qualified enhanced oil or natural gas
recovery project and disposed of by the
taxpayer in secure geological storage, or
(B) utilized by the taxpayer in a manner
described in section 45Q(f)(5).
Section 45Q(b)(1)(A)(i)(I) and (ii)(I)
provides that the applicable dollar amount
for activities under section 45Q(a)(3) for
any taxable year beginning in a calendar
year (1) after 2016 and before 2027 is an
amount equal to the dollar amount es-
July 20, 2020
tablished by linear interpolation between
$22.66 and $50 for each calendar year
during such period, and (2) after 2026 is
an amount equal to the product of $50 and
the inflation adjustment factor for such
calendar year determined under section
43(b)(3)(B) for such calendar year, determined by substituting “2025” for “1990.”
Section 45Q(b)(1)(A)(i)(II) and (ii)(II)
provides that the applicable dollar amount
for activities under section 45Q(d)(4) for
any taxable year beginning in a calendar
year (1) after 2016 and before 2027 is an
amount equal to the dollar amount established by linear interpolation between
$12.83 and $35 for each calendar year
during such period, and (2) after 2026 is
an amount equal to the product of $35 and
the inflation adjustment factor for such
calendar year determined under section
43(b)(3)(B) for such calendar year, determined by substituting “2025” for “1990.”
Section 45Q(b)(1)(B) provides that the
applicable dollar amount determined under section 45Q(b)(1)(A) is rounded to the
nearest cent.
Section 45Q(b)(2) provides a method
to compute the amount of qualified carbon oxide captured at a qualified facility
that was placed in service before February
9, 2018, and for which additional carbon
capture equipment is placed in service on
or after February 9, 2018. For purposes
of section 45Q(a)(1)(A) and (2)(A), the
amount of qualified carbon oxide that is
captured by the taxpayer is equal to the
lesser of (i) the total amount of qualified
carbon oxide captured at such facility for
the taxable year, or (ii) the total amount
of the carbon dioxide capture capacity of
the carbon capture equipment in service at
such facility on February 8, 2018 (the day
before the date of enactment of the BBA).
For purposes of section 45Q(a)(3)(A) and
(4)(A), the amount of qualified carbon oxide captured by the taxpayer is an amount
(not less than zero) equal to the excess of
(i) the total amount of qualified carbon oxide captured at such facility for the taxable
year, over (ii) the total amount of the carbon dioxide capture capacity of the carbon
capture equipment in service at such facility on February 8, 2018. These proposed
regulations explain the difference between
a physical modification or equipment addition that results in an increase in the carbon dioxide capture capacity of existing
156
carbon capture equipment, which will be
treated as newly placed in service, and a
mere increase in the amount of carbon dioxide captured by existing carbon capture
equipment, which will not be treated as
newly placed in service.
Pursuant to section 45Q(b)(3), a taxpayer may elect to have the dollar amounts
applicable under section 45Q(a)(1) or (2)
apply in lieu of the dollar amounts applicable under section 45Q(a)(3) or (4) for
each metric ton of qualified carbon oxide
which is captured by the taxpayer using
carbon capture equipment which is originally placed in service at a qualified facility on or after February 9, 2018. These proposed regulations provide that the election
will apply to all metric tons of qualified
carbon oxide captured by the taxpayer at
the qualified facility for the full 12-year
credit period.
Section 45Q(f)(6)(A) provides that for
any taxable year in which an applicable facility captures not less than 500,000 metric
tons of qualified carbon oxide, the person
described in section 45Q(f)(3)(A)(ii) may
elect to have such applicable facility, and
any carbon capture equipment placed in
service at such applicable facility, deemed
as having been placed in service on February 9, 2018. The term “applicable facility”
means a qualified facility (i) which was
placed in service before February 9, 2018,
and (ii) for which no taxpayer claimed a
section 45Q credit for any taxable year
ending before February 9, 2018.
Section 45Q(f)(7) provides that in the
case of any taxable year beginning in a
calendar year after 2009, there is substituted for each dollar amount contained in
section 45Q(a)(1) and (2) an amount equal
to the product of (i) such dollar amount,
multiplied by (ii) the inflation adjustment
factor for such calendar year determined
under section 43(b)(3)(B) for such calendar year, determined by substituting
“2008” for “1990.”
Section 45Q(g) provides that in the
case of any carbon capture equipment
placed in service before February 9, 2018,
the section 45Q credit applies with respect
to qualified carbon oxide captured using
such equipment before the end of the
calendar year in which the Secretary, in
consultation with the Administrator of the
Environmental Protection Agency (EPA),
certifies that a total of 75,000,000 metric
Bulletin No. 2020–30
tons of qualified carbon oxide have been
taken into account in accordance with
former section 45Q(a) (as in effect before
February 9, 2018) and sections 45Q(a)(1)
and (2).
These proposed regulations reflect
the statutory provisions relating to credit
amounts.
b. Contractually Ensuring Capture and
Disposal, Injection, or Utilization of
Qualified Carbon Oxide
Section 45Q(f)(3)(A)(i) provides that
in the case of qualified carbon oxide captured using carbon capture equipment
which is originally placed in service at a
qualified facility before February 9, 2018,
the section 45Q credit is attributable to
the person that captures and physically or
contractually ensures the disposal through
secure geological storage (referred to as
disposal), use for tertiary injection and
disposal through secure geological storage
(referred to as injection) or utilization in a
manner consistent with section 45Q(f)(5)
(referred to as utilization).
Section 45Q(f)(3)(A)(ii) provides that
in the case of qualified carbon oxide captured using carbon capture equipment
which is originally placed in service at a
qualified facility on or after February 9,
2018, the section 45Q credit is attributable
to the person that owns the carbon capture
equipment and physically or contractually
ensures the capture and disposal, injection, or utilization of such qualified carbon oxide.
Commenters requested that the Treasury Department and the IRS clarify
which contract provisions are necessary
to contractually ensure the capture and
disposal, injection, or utilization of qualified carbon oxide. Several commenters
requested broad guidance on commercially reasonable terms rather than specifying
exact language. One commenter requested
guidance regarding the assurance of capture, remedies, guarantees, and the prevention of leakage.
In response, the proposed regulations
provide a framework for the types of
contracts, terms, and reporting requirements that will demonstrate the contractual assurance of the capture and disposal, injection, or utilization of qualified
carbon oxide. The proposed regulations
Bulletin No. 2020–30
provide that a taxpayer may enter into
multiple contracts with multiple parties
for the disposal, injection, or utilization
of qualified carbon oxide. For example,
a taxpayer that captures qualified carbon
oxide may contract with one party to dispose of a portion of its captured qualified
carbon oxide in a deep saline formation,
with another party to use another portion
of its captured qualified carbon oxide as a
tertiary injectant in multiple enhanced oil
recovery (EOR) sites, and with several
parties to utilize the remaining portion of
its captured qualified carbon oxide. The
existence of each contract and the parties
involved must be reported to the IRS on
an annual basis on Form 8933, Carbon
Oxide Sequestration Credit (or successor forms, or pursuant to instructions and
other guidance). For contracts for the disposal of carbon oxide or use as a tertiary
injectant in enhanced oil or natural gas
recovery, the following information must
be included: identifying information
(name of operator, field, unit and reservoir), the location (county and state) and
the identification number assigned to the
facility by the EPA’s electronic Greenhouse Gas Reporting Tool (e-GGRT ID
number). The e-GGRT ID number will
allow the IRS to reconcile information
with data reported to the EPA’s Greenhouse Gas Reporting Program (GHGRP)
and otherwise receive technical assistance from the EPA.
The proposed regulations require taxpayers to contractually ensure the disposal, injection, or utilization of qualified
carbon oxide in a binding written contract
that includes commercially reasonable
terms that provides for enforcement. The
proposed regulations provide that taxpayers may include information regarding
how much carbon oxide the parties agree
to dispose of, inject, or utilize in their contracts. Contracts may also include various
other specific provisions relating to enforcement, such as long-term liability provisions, indemnity provisions, or penalties
for breach of contract or liquidated damages. While the proposed regulations require
that the contract include a mechanism for
enforcement, no specific enforcement-related provision, or other particular kind of
enforcement provision, are mandated by
these proposed regulations. This is consistent with allowing contracting parties to
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tailor their agreements to a wide variety of
business needs and circumstances.
Under the proposed regulations, a
taxpayer does not elect to allow all or
a portion of the section 45Q credit to
any of the contracting parties merely by
contracting with that party to ensure the
disposal, injection, or utilization of qualified carbon oxide. Any election to allow
all or a portion of the credit to another
taxpayer must be made separately in the
manner provided in these proposed regulations.
c. Election to Allow the Credit to Another
Taxpayer
Section 45Q(f)(3)(B) provides that a
person that is entitled to claim the credit
under section 45Q(f)(3)(A)(i) or section
45Q(f)(3)(A)(ii) may elect to allow the
person that disposes of the qualified carbon oxide, utilizes the qualified carbon
oxide, or uses the qualified carbon oxide
as a tertiary injectant to claim the credit
(section 45Q(f)(3)(B) election).
Commenters requested guidance regarding the section 45Q(f)(3)(B) election. Commenters generally sought to
maximize the ability of the taxpayer to
whom the section 45Q credit is attributable (electing taxpayer) to make the section 45Q credit allowable to one or more
other taxpayers (credit claimants) pursuant to the section 45Q(f)(3)(B) election.
Commenters also generally requested that
guidance provide that section 45Q(f)(3)
(B) elections may be made on an annual basis. One commenter requested that
guidance provide for a broader range of
permissible credit claimants, including an
owner, operator, service company, supplier, partner, or tax equity or other project
finance participant.
One commenter suggested that the section 45Q(f)(3)(B) election should be made
in the taxable year that the qualified carbon
oxide is disposed of, utilized, or used as a
tertiary injectant. The commenter recommended that the election procedures follow the procedures for making a section
338(h)(10) election. Further, commenters
suggested that Forms 8933 should be filed
by all parties to the section 45Q(f)(3)(B)
election with their respective tax returns
for the taxable year in which the qualifying activity is completed.
July 20, 2020
Other commenters suggested that a
taxpayer should make a section 45Q(f)(3)
(B) election for a taxable year by attaching
a statement to a timely filed income tax return (including extensions) for the taxable
year. Further, commenters suggested that
a taxpayer should be permitted to make
a section 45Q(f)(3)(B) election for a portion of the section 45Q credit. The portion
allowed to a credit claimant would be
specified in the electing taxpayer’s annual
election as a percentage of the total credit
claimed.
One commenter noted that when a taxpayer makes a section 45Q(f)(3)(B) election, the electing taxpayer should no longer claim the section 45Q credit subject to
the election. To ensure compliance with
this rule, the commenter suggested that
the guidance and the relevant tax forms
(i.e., Form 8933) require coordination between the electing taxpayer and the credit
claimant. For example, the credit claimant
could be required to include a copy of the
electing taxpayer’s section 45Q(f)(3)(B)
election to allow the credit.
In response to these comments, the
proposed regulations provide guidance regarding who may make a section 45Q(f)
(3)(B) election and the time and manner
for making a section 45Q(f)(3)(B) election. The proposed regulations also provide that section 45Q(f)(3)(B) elections
must be made on an annual basis no later
than the time prescribed by law (including
extensions) for filing the Federal income
tax return or Form 1065 and may not be
made on an amended Federal income tax
return. However, a section 45Q(f)(3)(B)
election may be made on an amended Federal income tax return, an amended Form
1065 or an administrative adjustment
request under section 6227 of the Code
(AAR), for any taxable year ending after
February 9, 2018, but not for taxable years
beginning after June 2, 2020.
The proposed regulations also set forth
information to be provided as part of a section 45Q(f)(3)(B) election, requiring both
an electing taxpayer and a credit claimant to include a Form 8933 (or successor
forms, or pursuant to instructions and other guidance) with its timely filed Federal income tax return or Form 1065, U.S.
Return of Partnership Income (including
extensions) as applicable. An electing
taxpayer must provide each credit claim-
July 20, 2020
ant with a copy of the electing taxpayer’s
Form 8933, and each credit claimant must
attach that copy of the electing taxpayer’s
Form 8933 to its own Form 8933.
The proposed regulations further provide that section 45Q(f)(3)(B) elections
may be made for all or a portion of the
available section 45Q credit and may be
made for a single or multiple credit claimants. If an electing taxpayer elects to allow
multiple credit claimants to claim section
45Q credits, the proposed regulations provide that the maximum amount of section 45Q credits allowable to each credit
claimant is proportional to the amount of
qualified carbon oxide disposed of, utilized, or used as a tertiary injectant by the
credit claimant. In addition, as provided
in Revenue Procedure 2020-23, 202018 I.R.B.1 (April 27, 2020), the exception applies regarding the time to file an
amended return by a partnership subject
to the centralized partnership audit regime
enacted as part of the BBA (BBA partnership) for the 2018 and 2019 taxable years.
The amended Federal income tax return or
the amended Form 1065 must be filed, in
no event, later than the applicable period
of limitations on assessment for the taxable year for which the amended Federal
income tax return or Form 1065 is being
filed. In the case of a BBA partnership
that chooses not to file an amended Form
1065 as permitted under Revenue Procedure 2020-23, the BBA partnership may
make a late election by filing an AAR
on or before October 15, 2021, but in no
event, later than the applicable period of
limitations on making adjustments under
section 6235 for the reviewed year, as defined in §301.6241-1(a)(8) of the Procedure and Administration Regulations (26
CFR Part 301).
d. Amended Returns
Taxpayers may claim section 45Q
credits on an amended Federal income
tax return, an amended Form 1065, or
an AAR, as applicable, for taxable years
beginning on or after February 9, 2018,
provided that the requirements described
in the proposed regulations are satisfied.
In addition, as provided in Revenue Procedure 2020-23, the exception applies
regarding the time to file an amended return by a BBA partnership for the 2018
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and 2019 taxable years. The amended
Federal income tax return or the amended Form 1065 must be filed, in no event,
later than the applicable period of limitations on assessment for the taxable
year for which the amended Federal income tax return or Form 1065 is being
filed. In the case of a BBA partnership
that chooses not to file an amended Form
1065 as permitted under Revenue Procedure 2020-23, the BBA partnership may
make a late election by filing an AAR
on or before October 15, 2021, but in no
event, later than the applicable period of
limitations on making adjustments under
section 6235 for the reviewed year, as
defined in §301.6241-1(a)(8) of the Procedure and Administration Regulations
(26 CFR Part 301). However, section
45Q(f)(3)(B) elections may not be made
on amended returns for taxable years beginning after the date of issuance of these
proposed regulations.
2. Definitions
a. Qualified Carbon Oxide
Section 45Q(c) provides that “qualified carbon oxide” means (A) any carbon
dioxide which (i) is captured from an industrial source by carbon capture equipment which is originally placed in service
before February 9, 2018; (ii) would otherwise be released into the atmosphere as
industrial emission of greenhouse gas or
lead to such release; and (iii) is measured
at the source of capture and verified at the
point of disposal, injection, or utilization;
(B) any carbon dioxide or other carbon
oxide which (i) is captured from an industrial source by carbon capture equipment
which is originally placed in service on or
after February 9, 2018; (ii) would otherwise be released into the atmosphere as
industrial emission of greenhouse gas or
lead to such release; and (iii) is measured
at the source of capture and verified at the
point of disposal, injection, or utilization;
or (C) in the case of a direct air capture facility, any carbon dioxide which (i) is captured directly from ambient air; and (ii)
is measured at the source of capture and
verified at the point of disposal, injection,
or utilization.
While “qualified carbon oxide” includes the initial deposit of captured
Bulletin No. 2020–30
carbon oxide used as a tertiary injectant,
section 45Q(c)(2) provides that the term
does not include carbon oxide that is recaptured, recycled, and re-injected as part
of the qualified enhanced oil or natural gas
recovery process. Additionally, section
45Q(f)(1) provides that the section 45Q
credit apples only with respect to qualified
carbon oxide the capture and disposal,
injection, or utilization of which is within the United States (within the meaning
of section 638(1)), or a possession of the
United States (within the meaning of section 638(2)).
Commenters suggested generally that
the statutory definition of qualified carbon oxide is sufficient, and did not seek
additional clarification. The Treasury Department and the IRS agree that the statutory definition of qualified carbon oxide
is clear due to the broad acceptance and
use of the term by industry participants,
environmental groups, and stakeholders.
Therefore, the proposed regulations generally conform to the statutory definition
of qualified carbon oxide, including the
provision that only qualified carbon oxide
captured and disposed of, injected, or utilized within the United States or a possession of the United States is taken into account. Therefore, the proposed regulations
generally conform to the statutory definition of qualified carbon oxide, including
the provision that only qualified carbon
oxide captured and disposed of, injected,
or utilized within the United States or a
possession of the United States is taken
into account.
b. Carbon Capture Equipment
Section 45Q does not define carbon
capture equipment. One commenter suggested that carbon capture equipment be
broadly defined as, “any system that but
for its presence and application, the carbon oxides captured at a qualifying industrial facility and on which a section 45Q
credit is earned would have been vented
into the atmosphere.” Another commenter suggested that the definition allow
for maximum flexibility to encompass a
complete configuration of equipment including separate units, processing units,
processing plants, pipe, buildings, pumps,
compressors, meters, facilities, motors,
fixtures, materials, and machinery, and all
Bulletin No. 2020–30
other improvements used for the purpose
of: (1) separating and/or capturing carbon
dioxide that would otherwise be released
into the atmosphere from a qualifying
facility; (2) compressing or otherwise increasing the pressure of carbon dioxide; or
(3) transporting, disposing, injecting, and/
or utilizing qualified carbon oxide.
Finally, some commenters suggested
that the definition of carbon capture equipment should be limited to the equipment
that functions to capture the carbon oxides
from any industrial source. The commenters explained that once the carbon oxides
are captured, equipment having a separate
function such as compression, liquefaction, transportation, or pumping, should
not be included in the definition of carbon
capture equipment.
The Treasury Department and the IRS
agree that carbon capture equipment generally should be defined in terms of its
functionality. The proposed regulations
provide that in general, carbon capture
equipment includes all components of
property that are used to capture or process carbon oxide until the carbon oxide
is transported for disposal, injection, or
utilization. Further, the proposed regulations list specific items that are included
in, or excluded from the definition of carbon capture equipment. Components of
property related to the function of capturing carbon oxides, such as components
of property necessary to compress, treat,
process, liquefy, or pump carbon oxides,
are included within the definition of carbon capture equipment. Components of
property related to transporting carbon
oxides for disposal, injection, or utilization are not included in the general definition.
c. Qualified Facility
Section 45Q(d) provides that “qualified
facility” means any industrial facility or
direct air capture facility, the construction
of which begins before January 1, 2024,
and (i) the construction of carbon capture
equipment begins before such date; or (ii)
the original planning and design for such
facility includes installation of carbon
capture equipment. In addition, a qualified facility must capture: (i) in the case
of a facility which emits not more than
500,000 metric tons of carbon oxide into
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the atmosphere during the taxable year,
not less than 25,000 metric tons of qualified carbon oxide during the taxable year
which is utilized in a manner described in
section 45Q(f)(5) (Section 45Q(d)(2)(A)
Facility); (ii) in the case of an electricity
generating facility which is not a Section
45Q(d)(2)(A) Facility (Section 45Q(d)(2)
(B) Facility), not less than 500,000 metric
tons of qualified carbon oxide during the
taxable year; or (iii) in the case of a direct
air capture facility or any facility which
is not a Section 45Q(d)(2)(A) Facility or
a Section 45Q(d)(2)(B) Facility, not less
than 100,000 metric tons of qualified carbon oxide during the taxable year.
Some commenters requested that the
proposed regulations incorporate the
“80/20 Rule” set forth in Rev. Rul. 94-31,
1994-1 C.B. 16, which held that for section 45 purposes a facility that contains
some used property would still qualify as
originally placed in service, provided the
fair market value of the used property is
not more than 20 percent of the facility’s
total value. Commenters requested the
inclusion of this rule because the section
45Q credit amounts depend on whether carbon capture equipment is placed in
service before February 9, 2018, or on or
after that date.
The proposed regulations adopt the
80/20 Rule and provide that a qualified
facility or carbon capture equipment may
qualify as originally placed in service even
though it contains some used components
of property, provided the fair market value
of the used components of property is not
more than 20 percent of the qualified facility or carbon capture equipment’s total
value (the cost of the new components of
property plus the value of the used components of property). For purposes of
the 80/20 Rule, the cost of a new qualified facility or carbon capture equipment
includes all properly capitalized costs of
the new qualified facility or carbon capture equipment. Solely for purposes of the
80/20 Rule, properly capitalized costs of
a new qualified facility or carbon capture
equipment may, at the option of the taxpayer, include the cost of new equipment
for a pipeline owned and used exclusively
by that taxpayer to transport carbon oxides
captured from that taxpayer’s qualified facility that would otherwise be emitted into
the atmosphere.
July 20, 2020
d. Industrial Facility
Section 45Q does not define the term
“industrial facility.” Commenters suggested that an “industrial facility” should be
defined as a facility that produces a carbon oxide stream from a fuel combustion
source, a manufacturing process, or a fugitive carbon oxide-emission source that,
absent capture and disposal, injection, or
utilization, would otherwise be released
into the atmosphere. They also recommended that the term not include a facility that produces carbon dioxide through
carbon dioxide production wells at natural
carbon dioxide-bearing formations. This
definition is consistent with the definition
of industrial facility provided in section
3.03 of Notice 2020-12. The proposed
regulations adopt this definition.
e. Direct Air Capture Facility
Section 45Q(e)(1) provides that the
term “direct air capture facility” means
any facility which uses carbon capture
equipment to capture carbon dioxide directly from the ambient air, except the
term does not include any facility which
captures carbon dioxide that is deliberately released from naturally occurring
subsurface springs or using natural photosynthesis.
Generally, commenters did not request
that the definition of “direct air capture
facility” be clarified. One commenter
suggested that “direct air capture facility”
include certain algae. Although section
45Q(f)(5)(A)(i) provides that photosynthesis or chemosynthesis is a permitted
type of utilization of qualified carbon oxide, the statutory definition of a “direct
air capture facility” excludes any facility
that captures carbon dioxide using natural
photosynthesis. Therefore, the proposed
regulations do not adopt the commenter’s
suggestion.
3. Secure Geological Storage
Section 45Q(f)(2) provides that the
Secretary, in consultation with the Administrator of the EPA, the Secretary of
Energy, and the Secretary of the Interior,
must establish regulations for determining
adequate security measures for the geological storage of qualified carbon oxide
July 20, 2020
under section 45Q(a) such that the qualified carbon oxide does not escape into the
atmosphere. Such term includes storage
at deep saline formations, oil and gas reservoirs, and unminable coal seams under
such conditions as the Secretary may determine under such regulations.
Injection of carbon oxide into any underground reservoir, onshore or offshore
under submerged lands within the territorial jurisdiction of States, requires the
operator to comply with Underground Injection Control (UIC) program regulations
and to obtain the appropriate UIC well
permits. Under 40 CFR §146.5 (Classification of injection wells) Class II may be
an appropriate UIC well permit for wells
which inject fluids (including carbon dioxide) brought to the surface in connection with conventional oil or natural gas
production and may be commingled with
waste waters from gas plants that are an
integral part of production operations, unless those fluids are classified as a hazardous waste at the time of injection, and for
wells which inject fluids (including carbon oxides) for enhanced recovery of oil
or natural gas. Class VI is an appropriate
UIC well permit for wells that are not experimental in nature that are used for geologic sequestration of carbon dioxide beneath the lowermost formation containing
an underground source of drinking water;
or, for wells used for geologic sequestration of carbon dioxide that have been
granted a waiver of the injection depth requirements pursuant to requirements at 40
CFR §146.95; or, for wells used for geologic sequestration of carbon dioxide that
have received an expansion to the areal
extent of an existing Class II enhanced oil
recovery or enhanced gas recovery aquifer exemption pursuant to §§146.4 and
144.7(d) of 40 CFR.
Operators that inject carbon dioxide
underground are also subject to the EPA’s
GHGRP requirements set forth at 40 CFR
Part 98. Under 40 CFR Part 98 subpart RR
(Geologic Sequestration of Carbon Dioxide source category, referred to as subpart RR), certain facilities, including UIC
Class VI wells, are required to report basic
information on carbon dioxide received
for injection, develop and implement an
EPA-approved site-specific Monitoring,
Reporting, and Verification Plan (MRV
Plan), and report the amount of carbon
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dioxide geologically sequestered using a
mass balance approach and annual monitoring activities. Under 40 CFR Part 98
subpart UU (Injection of Carbon Dioxide
source category, referred to as subpart
UU), all other facilities that inject carbon
dioxide underground such as for EOR or
any other purpose, are required to report
basic information on carbon dioxide received for injection. Facilities that conduct EOR are not required by 40 CFR Part
98 to report under subpart RR unless (1)
the owner or operator chooses to opt into
subpart RR or, (2) the facility holds a UIC
Class VI permit for the well or group of
wells used for EOR. Annual reports that
are submitted under 40 CFR Part 98 to the
EPA’s GHGRP undergo verification by
the EPA, and non-confidential data from
these reports are published on the EPA’s
website.
Commenters noted that Form 8933
defines “secure geological storage” for
purposes of section 45Q as requiring approval by the EPA of an MRV Plan. Thus,
meeting the Form 8933 conditions would
be achieved currently by receiving either
(i) a UIC Class VI permit plus an EPA-approved MRV Plan, which UIC Class VI
permit holders are already required to
have because they are subject to subpart
RR; or (ii) a UIC Class II permit plus an
EPA-approved MRV Plan. The Form 8933
requirement that UIC Class II permit holders receive an approved MRV Plan for purposes of the section 45Q credit creates an
additional burden on such holders. Some
commenters expressed concern that being
required to opt into subpart RR may create
a misalignment with state mineral property and natural resource conservation laws,
as well as accepted industry practices and
commercial arrangements. Therefore, the
commenters generally requested that the
Treasury Department and the IRS provide
alternatives to opting into subpart RR for
demonstrating secure geological storage
for EOR projects.
Many commenters suggested that a
standard adopted by the International
Organization for Standardization (ISO)
and endorsed by the American National
Standards Institute (ANSI), CSA/ANSI
ISO 27916:19, “Carbon Dioxide Capture,
Transportation and Geological Storage –
Carbon Dioxide Storage Using Enhanced
Oil Recovery (CO2-EOR),” is a viable
Bulletin No. 2020–30
alternative to subpart RR for establishing
secure geological storage for the use of
qualified carbon oxide for EOR.
The CSA/ANSI ISO 27916:19 standard
was developed for the purpose of quantifying and documenting the total carbon
dioxide that is stored in association with
EOR. In general, reporting under CSA/
ANSI ISO 27916:19 uses mass balance
accounting, has established reporting and
documentation requirements, and includes
requirements for documenting a monitoring program and a containment assurance
plan.
Some of the commenters advocating
for the application of the CSA/ANSI ISO
27916:19 standard emphasized the importance and need for public acceptance
and input, transparent public filings, credible third-party audits and certifications,
and government oversight and enforcement. For example, some commenters
suggested that the proposed regulations
require that all relevant documentation
of the amount of qualified carbon oxide
stored for purposes of the section 45Q
credit be retained and made available
for public review and the total quantity
of qualified carbon oxide stored for longterm containment be reported annually.
The Treasury Department and the IRS
appreciate the importance of shared and
open information in this context and encourage transparency. However, there is
no statutory requirement in section 45Q
for taxpayers, Federal agencies, or industry groups to pubicly display this information or otherwise make it available. In
addition, the IRS is itself limited in what
it can disclose because of the rules prohibiting the public disclosure of taxpayer
information under section 6103.
Some commenters also requested that
the Treasury Department and the IRS recognize the standards for secure geological
storage required by government entities
with regulatory primacy, and also recommended that states be allowed to certify
the secure geological storage of qualified
carbon oxide. The commenters noted that
the EPA has approved primary enforcement authority (primacy) for UIC Class
II wells for more than half the states. Primacy permits a state, tribe, or territory to
implement and oversee its own EPA approved program. One commenter requested that the IRS clarify that a valid UIC
Bulletin No. 2020–30
Class VI permit issued under the authority
of the EPA includes permits issued by a
state that has received final approval from
the EPA of its primacy application under
section 1422 of the Safe Water Drinking
Act to implement a Class VI UIC Program. The commenter also suggested that
use of an accounting methodology consistent with the mass balance equation under
subpart RR be adequate to establish secure geological storage.
The Treasury Department and the IRS,
in consultation with the EPA, DOE, and
the Department of Interior (Interior Department), agree that providing CSA/
ANSI ISO 27916:19 as an alternative
for UIC Class II wells is a viable quantification methodology that is appropriate for these purposes. Both subpart RR
and CSA/ANSI ISO 27916:19 require an
assessment and monitoring of potential
leakage pathways; quantification of inputs, losses and storage through a mass
balance approach; and documentation of
steps and approaches. Operators of UIC
Class II wells that follow the CSA/ANSI
ISO 27916:19 standard could elect to report to the EPA’s GHGRP under subpart
RR but would not be required to do so.
Rather, they could continue to report to
the EPA under subpart UU.
The Treasury Department and the IRS,
in consultation with the EPA, DOE, and
the Interior Department, disagree with
suggestions to allow the reporting rules
promulgated by states as an alternative to
subpart RR or CSA/ANSI ISO 27916:19.
Reporting rules among states are not uniform and states may have different reporting requirements and different governing
bodies to whom carbon dioxide injection
projects are required to report. Adopting
such rules would not promote uniformity, and would increase the administrative
burden on the IRS significantly.
Consequently, the proposed regulations
allow the CSA/ANSI ISO 27916:19 standard as an alternative to subpart RR for
UIC Class II wells using qualified carbon
oxide for EOR, but do not allow standards
set by states as an alternative to subpart
RR. In addition, the proposed regulations
do not provide for an alternative to subpart
RR reporting for UIC Class VI wells because all UIC Class VI wells are already
subject to subpart RR reporting requirements. A taxpayer that reported volumes
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of carbon oxide to the EPA pursuant to
subpart RR may self-certify the volume of
carbon oxide claimed for purposes of section 45Q. Alternatively, if a taxpayer determined volumes pursuant to CSA/ANSI
ISO 27916:19, the taxpayer may prepare
documentation as outlined in CSA/ANSI
27916:2019 internally, but such documentation must be provided to a qualified
independent engineer or geologist, who
then must certify that the documentation
provided, including the mass balance calculations as well as information regarding
monitoring and containment assurance, is
accurate and complete.
4. Utilization of Qualified Carbon Oxide
Section 45Q(f)(5)(A) provides that
“utilization of qualified carbon oxide”
means (i) the fixation of such qualified carbon oxide through photosynthesis or chemosynthesis, such as through the growing
of algae or bacteria; (ii) the chemical conversion of such qualified carbon oxide to a
material or chemical compound in which
such qualified carbon oxide is securely
stored; or (iii) the use of such qualified
carbon oxide for any other purpose for
which a commercial market exists (with
the exception of use as a tertiary injectant
in a qualified enhanced oil or natural gas
recovery project), as determined by the
Secretary.
Section 45Q(f)(5)(B) provides a methodology to determine the amount of qualified carbon oxide utilized by the taxpayer.
Such amount is equal to the metric tons of
qualified carbon oxide which the taxpayer
demonstrates, based upon an analysis of
lifecycle greenhouse gas emissions and
subject to such requirements as the Secretary, in consultation with the Secretary of
Energy and the Administrator of the EPA,
determines appropriate, were (i) captured
and permanently isolated from the atmosphere, or (ii) displaced from being emitted into the atmosphere, through use of a
process described in section 45Q(f)(5)(A).
The term “lifecycle greenhouse gas emissions” has the same meaning given such
term under subparagraph (H) of section
211(o)(1) of the Clean Air Act (42 U.S.C.
7545(o)(1)(H)), as in effect on February 9,
2018, except that “product” is substituted
for “fuel” each place it appears in such
subparagraph.
July 20, 2020
Commenters generally sought guidance about the methodologies required to
prepare an acceptable life cycle analysis
(LCA) that demonstrates the amount of
qualified carbon oxide utilized, as well as
the boundaries required for the LCA.
One commenter requested that guidance establish clear guidelines for the
preparation of an LCA by applicants to
demonstrate the net reduction or avoidance of carbon dioxide achieved through
its utilization by the taxpayer. Because
LCA requires selection of comparative
data, the commenter recommended that
the LCA undergo a review by a third party,
determined by the IRS, to assess the reasonableness of the assumptions, factors
and calculations used by the applicant.
Other commenters suggested using
the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation
(GREET) model, or an adaptation of it
adopted by the California Air Resources
Board, to perform LCA of transportation
fuels, and further suggested using both a
basic method and a safe harbor method.
The GREET model is a tool that examines
the life-cycle impacts of vehicle technologies, fuels, products, and energy systems.
It provides a transparent platform through
which energy and vehicle producers, researchers, and regulators can evaluate
energy and environmental effects of vehicle technologies and energy and product
systems. For any given energy and vehicle system, GREET can calculate total
energy consumption (non-renewable and
renewable), emissions of air pollutants,
emissions of greenhouse gases, and water
consumption.
One commenter suggested that the
LCA, as reviewed by the relevant governmental agency, should determine whether
any release of embodied qualified carbon
oxide is possible for a specific utilization project. If so, the commenter recommended that recapture be addressed in the
LCA. The commenter requested guidance
regarding the types of LCA models that
are appropriate, and recommended the
GREET model.
Another commenter suggested that the
IRS should not adopt a specific methodology or approach to calculating lifecycle emissions. Instead, the commenter
recommended that guidance make clear
that models that are acceptable to the EPA
July 20, 2020
will also be acceptable for purposes of
section 45Q. The commenter suggested
that the LCA model for section 45Q purposes should be one that is recognized by
the EPA based on its use in the Renewable Fuel Standard or other program administered by the EPA. The commenter
further recommended that if the capture
and utilization of carbon oxides also generates other greenhouse gas detriments,
such as an increase in emissions over the
base case, those greenhouse gases caused
by the utilization should be adjusted to
account for the relative global warming
potential. Similarly, if the capture and
utilization of carbon oxides reduce greenhouse gas emissions over the base case,
the commenter argued that those benefits
should also be credited.
One commenter sought guidance on
the boundaries for LCA to determine displacement of carbon dioxide and recommended that lifecycle emissions include
the entirety of the lifecycle.
Several commenters expressed the
view that an MRV Plan or any accredited LCA performed by a qualified firm as
determined by the IRS could be suitable
for establishing boundaries for lifecycle
emissions for qualified carbon oxide utilization. Further, commenters suggested
that there should be contractual proof to
track the supply chain and ensure that the
MRV Plan is followed according to the annual LCA.
Some commenters suggested that guidance require EOR operators to provide a
full lifecycle greenhouse gas emissions
analysis that, like the requirements for
utilization, includes all stages of product
and feedstock production and distribution,
from feedstock generation or extraction
through the distribution and delivery and
use of the finished product to the ultimate
consumer. The commenters requested that
the IRS make public all lifecycle emissions calculations.
One commenter made the following
suggestions. First, taxpayers should use
an independent consulting firm or other
similar independent entity to undertake
the LCA. Second, taxpayers should insure that an LCA model is realistic and
has been used widely by the LCA industry. Third, an LCA must be commercially available to anyone and must be able
to be examined in any audit by the IRS.
162
Fourth, taxpayers should use an LCA that
compares a base case of making the product produced by utilization without carbon
capture to the modeled utilization case using qualified carbon oxide to determine
what greenhouse gases were displaced
from being emitted into the atmosphere.
Finally, taxpayers must use an LCA which
models all “greenhouse gases” as defined
in the Clean Air Act in determining the net
impact of such greenhouse gases generated or reduced in utilization of qualified
carbon oxide.
One commenter suggested that the IRS
should provide a safe harbor for taxpayers
that retain a third-party firm to undertake
the LCA. However, the commenter stated
that while a safe harbor would be helpful,
third-party verification should not be mandatory, as many taxpayers may have sufficient engineering expertise in-house and
some smaller projects may not support the
extra cost of third-party verification.
In response to the commenters, the proposed regulations conform the definition
of utilization to the statutory definition.
The Treasury Department and the IRS, in
consultation with the EPA and the DOE,
concluded that the LCA must be in writing
and either performed or verified by a professionally-licensed third party that uses
generally-accepted standard practices of
quantifying the greenhouse gas emissions
of a product or process and comparing
that impact to a baseline. In particular, the
analysis must contain documentation consistent with the International Organization
for Standardization (ISO) 14044:2006,
“Environmental management — Life
cycle assessment — Requirements and
Guidelines,” as well as a statement documenting the qualifications of the third party. Although the section 45Q credit is only
available with respect to qualified carbon
oxides, all greenhouse gas emissions are
taken into account under this analysis. The
proposed regulations require a taxpayer to
submit an LCA report to the IRS and the
DOE. The LCA will be subject to a technical review by the DOE, and the IRS, in
consultation with the DOE and the EPA,
will determine whether to approve the
LCA. The Treasury Department and the
IRS request comments on how to achieve
consistency in boundaries and baselines
so that similarly situated taxpayers will
be treated consistently. The Treasury De-
Bulletin No. 2020–30
partment and the IRS are willing to consider issuing guidance on particular fact
patterns.
The proposed regulations do not define
commercial markets or provide for Standards of Lifecycle Analysis. The Treasury
Department and the IRS continue to study
these issues and request comments.
5. Credit Recapture
Section 45Q(f)(4) directs the Secretary
to provide regulations for recapturing the
benefit of any section 45Q credit allowable with respect to any qualified carbon
oxide which ceases to be captured, disposed of, or used as a tertiary injectant in
a manner consistent with the requirements
of section 45Q.
Commenters sought guidance about
the method for measuring the amount of
leaked qualified carbon oxide subject to
recapture (recapture amount), the method
for calculating recapture, and the open period during which a recapture event may
occur (recapture period).
All of these issues require a definition
of the recapture period. The proposed regulations provide that the recapture period
begins on the date of the first injection
of qualified carbon oxide for disposal in
secure geological storage or use as a tertiary injectant and ends the earlier of five
years after the last taxable year in which
the taxpayer claimed a section 45Q credit
or the date monitoring ends under subpart
RR requirements or the CSA/ANSI ISO
27916:19 standard.
For clarity we will describe two
sub-portions of the recapture period,
the “post-credit-claiming period” and
the “lookback period”. The “post-credit-claiming period” is the period after
the end of the twelve year credit period
during which a leak can result in recapture, whereas the “lookback period” is
the portion of the recapture period during
which the IRS can look back after a leakage event to recapture credits. Most commenters supported a lookback period of
three to five years.
Commenters generally suggested that
if a recapture event occurs with respect to
storage of qualified carbon oxide, then the
taxpayer must add the recapture amount to
the amount of tax due in the taxable year
in which the recapture event occurs, as
Bulletin No. 2020–30
opposed to attributing the leak to past tax
years and amending those returns.
Commenters also suggested that a recapture event should occur when qualified carbon oxide, for which a section
45Q credit has been allowed, ceases to be
stored in secure geological storage if the
amount of leakage of qualified carbon oxide in a taxable year exceeds the amount
of qualified carbon oxide stored in that
same taxable year. In other words, they
suggested that a leak would first offset the
immediate tax year’s claimed credits and
then be an addition to tax, as opposed to
auditing and amending past tax returns.
One commenter stated that the standard
for measuring recapture of the section
45Q credit should be the mass balance calculations that are used for determining the
amount of qualified carbon oxide stored in
secure geological storage. The commenter
noted that these mass balance calculations
effectively establish a last-in/first-out
(LIFO) accounting method that assumes
current year releases offset current year
injections for the qualified carbon oxide
that is in secure geological storage.
Several commenters requested a safe
harbor for recapture, providing that recapture will not apply so long as the injection
operator is operating in compliance with
any standards set by the Treasury Department and the IRS for secure geological storage of the qualified carbon oxide.
These commenters asserted that if the injection operator is in compliance with the
secure geological storage standards at the
time of a release, any release or leakage
of the qualified carbon oxide would be
offset by current year injections of qualified carbon oxide. If the injection operator is not operating in compliance with
the standards for secure geological storage
at the time of the release, the commenters
recommended that any recapture be calculated on a LIFO basis against previously
taken section 45Q credits when the injection operator was in compliance with the
secure geological storage standards.
The proposed regulations do not provide a recapture safe harbor, but do limit
the recapture period similar to the recapture provisions for investment credit property under section 50(a)(1). Specifically,
the proposed regulations provide that any
recapture amount will be accounted for
in the taxable year that it is identified and
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reported. If, during the recapture period,
a taxpayer, operator, or regulatory agency determines that qualified carbon oxide
has leaked to the atmosphere, the taxpayer
will have a recapture amount if the leaked
amount of qualified carbon oxide exceeds
the amount of qualified carbon dioxide
disposed of in secure geological storage
or used as a tertiary injectant in that taxable year. That excess amount of leaked
qualified carbon oxide will be recaptured
at a credit rate calculated on a LIFO basis
(that is, the excess leaked qualified carbon
oxide will be deemed attributable first to
the first preceding year, then to second
preceding year, and then up to the fifth
preceding year) to simplify the calculation
of the recapture amount.
The taxpayer must add the amount of
the recaptured section 45Q tax credit to
the amount of tax due in the taxable year
in which the recapture event occurs. Consistent with this five-year lookback period, the proposed regulations provide that
the post-credit-claiming period ends the
earlier of (i) five years after the last taxable year in which the taxpayer claimed
a section 45Q credit or (ii) the date monitoring ends under the requirements of the
subpart RR standard or the CSA/ANSI
ISO 27916:19 standard.
The proposed regulations also provide
that in the event of a recapture event with
respect to a secure geological storage location in which the stored qualified carbon
oxide had been captured from more than
one unit of carbon capture equipment that
was not under common ownership, the recapture amount must be allocated among
the taxpayers that own the multiple units
of carbon capture equipment pro rata on
the basis of the amount of qualified carbon
oxide captured from each of the multiple
units of carbon capture equipment.
Similarly, the proposed regulations
provide that in the event of a recapture
event where the leaked amount of qualified carbon oxide is deemed attributable
to qualified carbon oxide with respect to
which multiple taxpayers claimed section
45Q credit amounts, the recapture amount
is allocated on a pro rata basis among the
taxpayers that claimed the section 45Q
credits.
The proposed regulations provide a
limited exception to recapture in the event
of a leakage of qualified carbon oxide re-
July 20, 2020
sulting from actions not related to the selection, operation, or maintenance of the
storage facility, such as volcanic activity
or a terrorist attack. Finally, the proposed
regulations provide that if qualified carbon oxide is deliberately removed from
a secure storage site, a recapture event
occurs in the year in which the qualified
carbon oxide is removed from its original
storage.
As noted in section 4.08 of Revenue
Procedure 2020-12, a taxpayer may obtain
third-party recapture insurance to protect
against recapture.
The Treasury Department and the IRS
request comments on how to apply the recapture provisions to section 45Q credits
that are carried forward to future taxable
years due to insuffificent income tax liability in the current taxable year.
Effect on Other Documents
Sections 1 through 5 of Notice 200983, 2009-2 C.B. 588, as modified by Notice 2011-25, 2011-1 C.B. 604, are obsoleted. The remaining sections of Notice
2009-83 provide reporting and recordkeeping requirements associated with
the limitation on credits available under
former section 45Q(a) (as in effect before
February 9, 2018) and sections 45Q(a)(1)
and (2). After the end of the calendar year
in which the Secretary, in consultation
with the Administrator of the EPA, certifies that a total of 75,000,000 metric tons
of qualified carbon oxide have been taken
into account under former section 45Q(a)
(as in effect before February 9, 2018) and
sections 45Q(a)(1) and (2), the remaining
sections of Notice 2009-83 will be obsoleted.
Proposed Effective/Applicability Date
The regulations are proposed to apply
to taxable years beginning on or after the
date the Treasury decision adopting these
regulations as final regulations is published in the Federal Register. However,
taxpayers may choose to apply the final
regulations for taxable years beginning on
or after February 9, 2018, and before the
date the Treasury decision adopting these
regulations as final regulations is published in the Federal Register. See section 7805(b)(7). Alternatively, taxpayers
July 20, 2020
may rely on these proposed regulations
for taxable years beginning on or after
February 9, 2018, and before the date the
Treasury decision adopting these regulations as final regulations is published in
the Federal Register, provided the taxpayers follow the proposed regulations in
their entirety and in a consistent manner.
Statement of Availability for IRS
Documents
For copies of recently issued Revenue
Procedures, Revenue Rulings, Notices,
and other guidance published in the Internal Revenue Bulletin, please visit the IRS
website at http://www.irs.gov.
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 13563, 13771, and
12866 direct agencies to assess costs and
benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. The
preliminary E.O. 13771 designation is deregulatory.
These regulations have been designated by the Office of Management and
Budget’s Office of Information and Regulatory Affairs (OIRA) as economically
significant under Executive Order 12866
pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of
tax regulations.
A. Background and Overview
Section 45Q was enacted on October
3, 2008, by section 115 of Division B
of the Energy Improvement and Extension Act of 2008, Public Law 110-343,
122 Stat. 3765, 3829, to provide a credit
for the sequestration of carbon dioxide.
On February 17, 2009, section 45Q was
164
amended by section 1131 of Division B
of the American Recovery and Reinvestment Tax Act of 2009, Public Law 111-5,
123 Stat. 115, 325. Section 45Q was further amended on December 19, 2014, by
section 209(j)(1) of Division A of the Tax
Increase Prevention Act of 2014, Public
Law 113-295, 128 Stat. 4010, 4030, and
most recently on February 9, 2018, by section 41119 of Division D of the Bipartisan
Budget Act of 2018 (BBA), Public Law
115-123, 132 Stat. 64, 162.
On May 20, 2019, the IRS published
Notice 2019-32, 2019-21 I.R.B. 1187.
The notice requested general comments
on issues arising under section 45Q, as
well as specific comments concerning
the secure geological storage and measurement of qualified carbon oxide, and
the recapture of the benefit of the credit
for carbon oxide sequestration. The IRS
received 116 comments from industry
members, environmental groups, and
other stakeholders.
In addition, the Treasury Department
and the IRS published Revenue Procedure
2020-12, 2020-11 I.R.B. 511, and Notice
2020-12, 2020-11 I.R.B. 495. Revenue
Procedure 2020-12 provides a safe harbor under which the IRS will treat partnerships as properly allocating the section
45Q credit in accordance with section
704(b). Notice 2020-12 provides guidance
on the determination of when construction
has begun on a qualified facility or on carbon capture equipment that may be eligible for the section 45Q credit.
Section 45Q generally allows a credit of
an amount per metric ton of qualified carbon oxide captured by the taxpayer using
carbon capture equipment. This qualified
carbon oxide must be captured according
to the statute in one of three general manners. First, it may be disposed of in secure
geological storage. This would occur if it
were injected into a geologic formation,
such as a deep saline formation, an oil and
gas reservoir, or an unminable coal seam.
Second, the qualified carbon oxide may
be used as a tertiary injectant in a qualified enhanced oil or natural gas recovery
project and disposed of in secure geological storage. A “tertiary injectant” is qualified carbon oxide that is injected into and
stored in a qualified enhanced oil or natural gas recovery project and contributes to
the extraction of crude oil or natural gas.
Bulletin No. 2020–30
Third, the qualified carbon oxide may
be “utilized” by fixing it through photosynthesis or chemosynthesis, converting
it to a material or chemical compound in
which it is securely stored, or using it for
any other purpose for which a commercial market exists. “Utilization” generally
means the qualified carbon oxide was captured and permanently isolated from the
atmosphere, or displaced from being emitted into the atmosphere. Calculation of the
amount utilized is based on an analysis of
lifecycle greenhouse gas emissions.
The amount of the credit depends on
the date the carbon capture equipment is
placed in service and whether the qualified carbon oxide is disposed of in secure
storage, injected, or utilized. Different
rules and credit amounts apply to qualified carbon oxide capture projects placed
in service before and after the date of enactment of the BBA on February 9, 2018.
Based on annual reports filed with the IRS
as of May, 2019, the aggregate amount
of qualified carbon oxide taken into account for purposes of section 45Q was
62,740,171 metric tons. This is an increase
of 2,972,247 metric tons from the preceding year.1 According to data reported to
the EPA’s Greenhouse Gas Reporting Program (GHGRP), there were 65 enhanced
oil recovery (EOR) projects operating in
the U.S. in 2018. As of 2019, the National
Petroleum Council, an oil and natural gas
advisory committee to the Secretary of
Energy, reports that there were 10 carbon
capture, utilization, and storage projects
in the United States. DOE models project
that the section 45Q credit may result in
the sequestration of approximately 570
million metric tons of carbon oxides between 2018 and 2036.
B. Need for Regulation
The proposed regulations provide
guidance regarding the application of
section 45Q. Section 45Q requires regulations for determining adequate security
measures for the secure geological storage
of qualified carbon oxide such that it does
not escape into the atmosphere, standards
for recapture of section 45Q credits, and
standards for carbon oxide utilization.
1
C. Economic Analysis
1. Baseline
The Treasury Department and the IRS
have assessed the economic impacts of
the final regulations relative to a no-action
baseline reflecting anticipated Federal income tax-related behavior in the absence
of these regulations.
2. Economic Rationale for Issuing
Guidance for the 2018 BBA
The Treasury Department and the IRS
anticipate that the issuance of guidance
pertaining to section 45Q will provide
greater clarity in definitions than the alternative of having no further descriptions than the statute; more flexibility in
methods to establish qualifications for the
credit relative to prior guidance; and more
transparency regarding business arrangements related to the section 45Q credit relative to the baseline. These features may
lower compliance burden and increase
economic investment by lowering regulatory barriers to entry, compared to a baseline of having only the statue and not the
regulations.
3. Economic Analysis of Specific
Provisions
The final regulations embody certain
regulatory decisions that reflect necessary
regulatory discretion. These decisions
specify more fully how the section 45Q
credit is to be implemented.
i. Standard for Secure Geological Storage
a. Background
Section 45Q(f)(2) provides that the
Secretary, in consultation with the Administrator of the EPA, the Secretary of
Energy, and the Secretary of the Interior,
must establish regulations for determining adequate security measures for the
secure geological storage of qualified
carbon oxide under section 45Q such
that qualified carbon oxide does not escape into the atmosphere. Such term in-
cludes storage at deep saline formations,
oil and gas reservoirs, and unminable
coal seams under such conditions as the
Secretary may determine under such regulations.
Under existing law, injection of carbon
oxide into any underground reservoir requires the operator to comply with EPA’s
Underground Injection Control (UIC) program regulations and to obtain the appropriate UIC well permits. The UIC program
is designed to protect underground sources of drinking water from underground
injection. Operators that inject carbon dioxide underground are also subject to the
EPA’s GHGRP requirements set forth at
40 CFR Part 98.
Under 40 CFR Part 98, facilities that
inject carbon dioxide underground for
long-term containment of carbon dioxide in subsurface geologic formations are
specifically subject to 40 CFR Part 98
subpart RR (Geologic Sequestration of
Carbon Dioxide source category, referred
to as subpart RR). Facilities that are subject to subpart RR, including UIC Class
VI wells, are required to report basic
information on carbon dioxide received
for injection, develop and implement an
EPA-approved site-specific Monitoring,
Reporting, and Verification Plan (MRV
Plans); and report the amount of carbon
dioxide geologically sequestered using a
mass balance approach and annual monitoring activities.
Facilities that inject carbon dioxide underground for the purposes of enhanced
oil (EOR) and gas recovery or any other
purpose other than geologic sequestration
are required to report basic information
on carbon dioxide received for injection
under 40 CFR Part 98 subpart UU (Injection of Carbon Dioxide source category,
referred to as subpart UU). At present, the
EPA does not generally require facilities
that conduct EOR to report under subpart
RR. However, the owner or operator may
voluntarily choose to opt in to subpart RR.
For both subparts RR and UU, annual reports are submitted under 40 CFR Part 98
to the EPA’s GHGRP and undergo verification by the EPA. Non-confidential data
from these reports are published on the
EPA’s website.
These data are available in Notice 2018-40, 2018-20 I.R.B. 583, and Notice 2019-31, 2019-20 I.R.B. 1181.
Bulletin No. 2020–30
165
July 20, 2020
b. Comments Received
Commenters noted that in order to
qualify for section 45Q credits, IRS Form
8933 defines “secure geological storage”
as requiring approval by the EPA of an
MRV Plan under 40 CFR Part 98 subpart
RR. Thus, meeting the Form 8933 conditions would currently be achieved by receiving either (i) a UIC Class VI permit
plus an EPA-approved MRV Plan, which
UIC Class VI permit holders are already
required to have because they are subject
to subpart RR; or (ii) a UIC Class II permit
plus an EPA-approved MRV Plan, which
requires UIC Class II permit holders to opt
in to subpart RR. In this manner, the Form
8933 requirement that UIC Class II permit
holders receive an approved MRV Plan
creates an additional burden on such holders because– it requires them to opt in to
subpart RR to receive section 45Q credits.
In addition, some commenters expressed
concern that a requirement that they opt
in to subpart RR, in addition to being a
supplementary requirement, may create a
misalignment with state mineral property
and natural resource conservation laws.
Commenters supported the continued
use of subpart RR, but most commenters
sought an alternative method in addition
to subpart RR. Many of these commenters
considered the subpart RR requirements
burdensome, for the reasons noted immediately above.
Many commenters suggested that a
standard adopted by the International Organization for Standardization (ISO) and
endorsed by the American National Standards Institute (ANSI), CSA/ANSI ISO
27916:19 standard, “Carbon dioxide capture, transportation and geological storage
– Carbon dioxide storage using enhanced
oil recovery (CO2-EOR),” (CSA/ANSI
ISO 27916:19) is a viable alternative to
subpart RR for establishing secure geological storage for the use of qualified carbon oxide for EOR.
The CSA/ANSI ISO 27916:19 was
developed for the purpose of quantifying
and documenting the total carbon dioxide
that is stored in association with carbon
dioxide-EOR. In general, reporting under
CSA/ANSI ISO 27916:19 (i) uses mass
balance accounting, (ii) has established
reporting and documentation requirements, and (iii) includes requirements for
July 20, 2020
documenting a monitoring program and a
containment assurance plan. ANSI, a notfor-profit organization dedicated to supporting the U.S. voluntary standards and
conformity assessment system, adopted
the CSA/ANSI ISO 27916:19 standard in
2019.
c. Regulatory Alternatives and Analysis
The Treasury Department and the IRS
considered three options for defining standards for secure geological storage: (i) the
requirements set forth in 40 CFR Part 98
subpart RR; (ii) an election for the taxpayer to comply with either the subpart RR
standards or the requirements set forth in
CSA/ANSI ISO 27916:19 and (iii) other
alternatives to subpart RR, including allowing use of state programs.
In evaluating option (ii), the Treasury
Department and the IRS, in consultation
with the EPA, the DOE, and the Interior Department, agree with commenters
that CSA/ANSI ISO 27916:19 is a viable quantification methodology that is
adequate for the intent and purpose of
the statute. Both subpart RR and CSA/
ANSI ISO 27916:19 require an assessment and monitoring of potential leakage
pathways; quantification of inputs, losses
and storage through a mass balance approach; and documentation of steps and
approaches. Under option (ii), operators
of UIC Class II wells that follow the
CSA/ANSI ISO 27916:19 standard could
elect to report under subpart RR but
would not be required to do so. Rather,
they could continue to report to the EPA
under subpart UU.
The Treasury Department and the IRS,
in consultation with the EPA, the DOE,
and the Interior Department, disagree with
commenter suggestions to allow the reporting rules promulgated by states as an
alternative to subpart RR or CSA/ANSI
ISO 27916:19. Reporting rules among
states are not uniform and states may have
different reporting requirements and different governing bodies to whom carbon
dioxide injection projects are required to
report. The adoption of such rules by the
Treasury Department and the IRS would
substantially increase the administrative
burden on the IRS. The Treasury Department and the IRS did not attempt to determine to what extent particular states’ stan-
166
dards would fulfill the intent and purpose
of the statute.
The ability for taxpayers to elect to use
the CSA/ANSI ISO 27916:19 standard instead of subpart RR could yield economic differences in three ways. First, if the
two standards are different in their costs
of compliance, then allowing a choice
allows EOR project operators to choose
the less costly standard. This would reduce costs of compliance and regulatory
burden. Second, to the extent that the difference in compliance costs between the
two standards is high and that difference
is a significant portion of start-up costs,
then allowing a less expensive standard
might lead to more investment and more
new projects. Third, operators can use the
option that best aligns with their project
goals and timeframes. The Treasury Department and the IRS project that compliance costs for some taxpayers may be
lower under the CSA/ANSI ISO 27916:19
standard than under subpart RR. Some
commenters stated that subpart RR may
create a misalignment for UIC Class II
wells with both state mineral property and
natural resource conservation laws; and
that such potential misalignment would be
costly to taxpayers. This stated misalignment would not be implicated with the use
of the ISO standards.
The Treasury Department and the IRS
recognize that the two standards differ
in terms of who would be responsible
for reviewing and approving a sequestration plan and for identifying leakage
once a project is in place. In addition,
the standards differ because unless otherwise required by law, the CSA/ANSI
ISO 27916:19 standard does not require
public reports of the amount of qualified
carbon oxide sequestered, whereas the
subpart RR standard does entail the public provision of such data. The Treasury
Department and the IRS did not attempt
to analyze the economic consequences of
these differences.
The Treasury Department and the
IRS did not attempt to provide quantitative estimates of the difference in compliance costs between the CSA/ANSI
ISO 27916:19 standard and a regulatory alternative of requiring only subpart
RR because suitable data are not readily
available at this level of detail. Further,
the Treasury Department and IRS did not
Bulletin No. 2020–30
attempt to estimate the effects of compliance cost differences on investment or sequestration.
The Treasury Department and the IRS
solicit comments on these findings and
particularly solicit data, models, or other
evidence that could enhance the rigor with
which the final regulations are developed.
ii. Credit Recapture
Section 45Q(f)(4) requires the Treasury
Department and the IRS to promulgate
regulations to provide for the recapture of
section 45Q credits in the event of leakage. “Recapture” refers to the repayment
of the tax credits claimed, and not to the
capturing of CO2 that may have leaked
from the project after being injected.
In response to Notice 2019-32, 2019-21
I.R.B. 1187, several commenters requested clarification regarding credit recapture,
including (i) when the tax would be due in
relation to the year of a recapture event,
(ii) how long the IRS can “look back” to
recapture credits in the event of leakage
(lookback period), and (iii) the length of
time after ceasing to claim credits during
which a leakage event would lead to recapture of credits.
All of these issues require a definition
of the recapture period. The proposed regulations provide that the recapture period
begins on the date of the first injection
of qualified carbon oxide for disposal in
secure geological storage or use as a tertiary injectant and ends the earlier of five
years after the last taxable year in which
the taxpayer claimed a section 45Q credit
or the date monitoring ends under subpart
RR requirements or the CSA/ANSI ISO
27916:19 standard.
For clarity we will describe two
sub-portions of the recapture period,
the “post-credit-claiming period” and
the “lookback period”. The “post-credit-claiming period” is the lesser of 5 years
after the last taxable year in which the
taxpayer claimed a section 45Q credit
or the date monitoring ends under subpart RR requirements or the CSA/ANSI
ISO 27916:19 standard. Depending on
the project’s individual requirements, the
post-credit-claiming period is therefore
between zero and five years. Whereas the
“lookback period” is the portion of the recapture period during which the IRS can
Bulletin No. 2020–30
look back after a leakage event to recapture credits. Most commenters supported
a lookback period of three to five years.
A leakage event that leads to recapture
of credits can occur any time during the
recapture period. A leakage event that occurs after the recapture period would not
lead to recapture of credits.
The proposed regulations provide that
any recapture amount will be accounted
for in the taxable year that it is identified
and reported. The amount of credits that
can be recaptured in the event of leakage
depends on the length of the lookback period and the amount of the leakage.
If, during the recapture period, it is determined that qualified carbon oxide has
leaked to the atmosphere, the taxpayer
will have a recapture amount if the leaked
amount of qualified carbon oxide exceeds
the amount of qualified carbon dioxide
disposed of in secure geological storage
or used as a tertiary injectant in that taxable year. That excess amount of leaked
qualified carbon oxide will be recaptured
at a credit rate calculated on a LIFO basis (that is, such excess leaked qualified
carbon oxide will be deemed attributable
first to the first preceding year, then to second preceding year, and so forth up to five
years) for ease of administration. The taxpayer must add the amount of the recaptured section 45Q tax credit to the amount
of tax due in the taxable year in which the
recapture event occurs. This rule applies
regardless of whether the project injected
qualified carbon oxide in the taxable year.
In response to Notice 2019-32, commenters expressed concerns with how
long the length of a lookback period after
the project operator stops claiming section
45Q credits (for example, if the project is
finished or the period for claiming credits ends) that a leakage event can lead to
recapture. Commenters were concerned
that investors would deem the risk too
high to invest if the end of the recapture
period extended too long after the final
year of claiming section 45Q credits. To
address this concern the proposed regulations provide that the recapture period begins on the date of first injection
of qualified carbon oxide for disposal in
secure geological storage or use as a tertiary injectant and ends the earlier of five
years after the last taxable year in which
the taxpayer claimed a section 45Q credit
167
or the date monitoring ends under subpart
RR requirements or the CSA/ANSI ISO
27916:19 standard.
The Treasury Department and the IRS
considered alternative specifications for
the lookback period other than five years.
Open-ended or undefined lookback periods would increase the financial risk associated with the project and dissuade investors, particularly for projects for which
the section 45Q credit would constitute a
sizeable share of revenue. The proposed
regulations, by allowing for a specific
and finite lookback period, will encourage more investment in projects relative
to an unspecified or infinite period. The
Treasury Department and the IRS, in consultation with the EPA, the DOE, and the
Interior Department, have determined that
for the period after the lookback period,
existing environmental regulations and
standards will ensure integrity consistent
with the intent and purpose of the statute.
In examining possible lookback periods, the Treasury Department and the IRS
have not developed a quantitative model
to incorporate the costs of monitoring and
the probability of leakage along with the
tax administration burden involved in the
lookback period.
The Treasury Department and the IRS
welcome comments on the length of the
lookback period and particularly solicit
data, models, or other evidence that could
enhance the rigor with which the final regulations are developed.
iii. Utilization of Qualified Carbon Oxide
Section 45Q(f)(5)(A) provides that
“utilization of qualified carbon oxide”
means (i) the fixation of such qualified carbon oxide through photosynthesis or chemosynthesis, such as through the growing
of algae or bacteria; (ii) the chemical conversion of such qualified carbon oxide to a
material or chemical compound in which
such qualified carbon oxide is securely
stored; or (iii) the use of such qualified
carbon oxide for any other purpose for
which a commercial market exists (with
the exception of use as a tertiary injectant
in a qualified enhanced oil or natural gas
recovery project), as determined by the
Secretary.
Section 45Q(f)(5)(B) provides a
methodology to determine the amount
July 20, 2020
of qualified carbon oxide utilized by the
taxpayer. Such amount is equal to the
metric tons of qualified carbon oxide
which the taxpayer demonstrates, based
upon an analysis of lifecycle greenhouse
gas emissions and subject to such requirements as the Secretary, in consultation with the Secretary of Energy and
the Administrator of the EPA, determines
appropriate, were (i) captured and permanently isolated from the atmosphere, or
(ii) displaced from being emitted into the
atmosphere, through use of a process described in section 45Q(f)(5)(A). The term
“lifecycle greenhouse gas emissions” has
the same meaning given such term under
subparagraph (H) of section 211(o)(1) of
the Clean Air Act (42 U.S.C. 7545(o)(1)
(H)), as in effect on the date of enactment
of the BBA on February 9, 2018, except
that “product” is substituted for “fuel”
each place it appears in such subparagraph.
The term “lifecycle greenhouse gas
emissions” means the aggregate quantity
of greenhouse gas emissions (including
direct emissions and significant indirect
emissions such as significant emissions
from land use changes), related to the full
product lifecycle, including all stages of
product and feedstock production and distribution, from feedstock generation or extraction through the distribution and delivery and use of the finished product to the
ultimate consumer, where the mass values
for all greenhouse gases are adjusted to
account for their relative global warming
potential.
Commenters proposed multiple methods for the Treasury Department and the
IRS to allow for calculating “utilization”
of qualified carbon oxide. The proposed
regul
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