# Elective Payment of Applicable Credits; Elective Payment of Advanced Manufacturing Investment Credit; Final Rules; Election To Exclude Certain Unincorporated Organizations Owned by Applicable Entities From Application of the Rules on Partners and Partnerships; Proposed Rule > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-04604 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** March 11, 2024 - **Citation:** 89 FR 17546 ## Text DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 301 [TD 9988] RIN 1545-BQ63 Elective Payment of Applicable Credits; Elective Payment of Advanced Manufacturing Investment Credit; Final Rules; Election To Exclude Certain Unincorporated Organizations Owned by Applicable Entities From Application of the Rules on Partners and Partnerships; Proposed Rule AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. SUMMARY: This document contains final regulations concerning the election under the Inflation Reduction Act of 2022 to treat the amount of certain tax credits as a payment of Federal income tax. The regulations describe rules for the elective payment of these credit amounts in a taxable year, including definitions and special rules applicable to partnerships and S corporations and regarding repayment of excessive payments. In addition, the regulations describe rules related to a required IRS pre-filing registration process. These regulations affect tax-exempt organizations, State and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, rural electric cooperatives, and, in the case of three of these credits, certain taxpayers eligible to elect the elective payment of credit amounts in a taxable year. DATES: Effective date: These regulations are effective May 10, 2024. Applicability date: For dates of applicability, see §§ 1.6417-1(q), 1.6417-2(f), 1.6417-3(f), 1.6417-4(f), 1.6417-5(d), 1.6417-6(e), 301.6241-1(b)(1), and 301.6241-7(k)(3). FOR FURTHER INFORMATION CONTACT: Concerning these final regulations, Jeremy Milton at (202) 317-5665 and James Holmes at (202) 317-5114 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains final regulations that amend the Income Tax Regulations (26 CFR part 1) and the Procedure and Administration Regulations (26 CFR part 301) to implement the statutory provisions of section 6417 of the Internal Revenue Code (Code), as enacted by section 13801(a) of Public Law 117-169, 136 Stat. 1818, 2003 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA). I. Overview of Section 6417 An applicable entity that meets all the requirements of section 6417 is permitted to make an election under section 6417 with respect to any applicable credit determined with respect to the applicable entity for the taxable year (elective payment election). If an applicable entity makes an elective payment election, the applicable entity is treated as making a payment against Federal income taxes imposed by subtitle A of the Code (subtitle A) for the taxable year with respect to which such credit was determined that is equal to the amount of such credit (elective payment amount). An election under section 6417 must be made at such time and in such manner as provided by the Secretary of the Treasury or her delegate (Secretary). Section 6417(b) defines the term “applicable credit” to mean each of the following 12 credits: (1) So much of the credit for alternative fuel vehicle refueling property allowed under section 30C of the Code that, pursuant to section 30C(d)(1), is treated as a credit listed in section 38(b) of the Code (section 30C credit); (2) So much of the renewable electricity production credit determined under section 45(a) of the Code as is attributable to qualified facilities that are originally placed in service after December 31, 2022 (section 45 credit); (3) So much of the credit for carbon oxide sequestration determined under section 45Q(a) of the Code as is attributable to carbon capture equipment that is originally placed in service after December 31, 2022 (section 45Q credit); (4) The zero-emission nuclear power production credit determined under section 45U(a) of the Code (section 45U credit); (5) So much of the credit for production of clean hydrogen determined under section 45V(a) of the Code as is attributable to qualified clean hydrogen production facilities that are originally placed in service after December 31, 2012 (section 45V credit); (6) In the case of a “tax-exempt entity” described in section 168(h)(2)(A)(i), (ii), or (iv) of the Code, the credit for qualified commercial vehicles determined under section 45W of the Code by reason of section 45W(d)(3) 1 (section 45W credit); 1 The reference was intended to be to section 45W(d)(2). See General Explanation of Tax Legislation Enacted in the 117th Congress, JCS-1-23 (December 21, 2023) at 282. Thus, the final regulations refer to section 45W(d)(2). (7) The credit for advanced manufacturing production under section 45X(a) of the Code (section 45X credit); (8) The clean electricity production credit determined under section 45Y(a) of the Code (section 45Y credit); (9) The clean fuel production credit determined under section 45Z(a) of the Code (section 45Z credit); (10) The energy credit determined under section 48 of the Code (section 48 credit); (11) The qualifying advanced energy project credit determined under section 48C of the Code (section 48C credit); and (12) The clean electricity investment credit determined under section 48E of the Code (section 48E credit). As described in part II of this Background, section 6417(d) defines an “applicable entity” and provides generally applicable rules for making elective payment elections. Section 6417(e) through (h) provide special rules applicable under section 6417 that are described in part II of this Background. As described in parts III and IV of this Background, section 6417(c), (d)(1)(B) through (D), and (d)(3) also contain special rules allowing a taxpayer, including for this purpose a partnership or S corporation, that is not an applicable entity (electing taxpayer) to elect to be treated as an applicable entity for the limited purpose of making an elective payment election under section 6417, but only with respect to section 45Q credits, section 45V credits, and section 45X credits. Part V of this Background describes Notice 2022-50, 2022-43 I.R.B. 325, which, in part, requested feedback from the public on potential issues with respect to the elective payment election provisions under section 6417. Part VI of this Background describes proposed regulations (REG-101607-23) and temporary regulations (TD 9975) issued under section 6417. II. Applicable Entities and General Elective Payment Election Rules Section 6417(d)(1)(A) defines the term “applicable entity” to mean: (1) Any organization exempt from tax imposed by subtitle A; (2) Any State or political subdivision thereof; (3) The Tennessee Valley Authority; (4) An Indian tribal government (as defined in section 30D(g)(9) of the Code); (5) Any Alaska Native Corporation (as defined in section 3 of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(m)); or (6) Any corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas. Section 6417(d)(2) provides that, in the case of any applicable entity that makes the election described in section 6417(a), any applicable credit amount is determined (1) without regard to section 50(b)(3) and (4)(A)(i) of the Code (that is, restrictions on property used by tax-exempt organizations and governmental units), and (2) by treating any property with respect to which such credit is determined as used in a trade or business of the applicable entity. Section 6417(d)(3)(A)(i) provides rules regarding the due date for making any elective payment election. In the case of any government (such as a State, the District of Columbia, an Indian tribal government, any U.S. territory) or any political subdivision, agency or instrumentality of the foregoing described in section 6417(d)(1) and for which no return is required under section 6011 or 6033(a) of the Code, any election under section 6417(a) cannot be made later than the date as is determined appropriate by the Secretary. In any other case, any election under section 6417(a) cannot be made later than the due date (including extensions of time) for the tax return for the taxable year for which the election is made, but in no event earlier than 180 days after the date of the enactment of section 6417 (that is, in no event earlier than 180 days after August 16, 2022, which is February 13, 2023). Section 6417(d)(3)(A)(ii) provides that any election under section 6417(a), once made, is irrevocable, and applies (except as otherwise provided in section 6417(d)(3)) with respect to any credit for the taxable year for which the election is made. Section 6417(d)(3)(B) provides that, in the case of section 45 credits, any election under section 6417(a): (1) applies separately with respect to each qualified facility; (2) must be made for the taxable year in which such qualified facility is originally placed in service; and (3) applies to such taxable year and to any subsequent taxable year that is within the 10-year credit period described in section 45(a)(2)(A)(ii) with respect to such qualified facility. Section 6417(d)(3)(C) provides that, in the case of section 45Q credits, any election under section 6417(a): (1) applies separately with respect to the carbon capture equipment originally placed in service by the applicable entity during a taxable year; and (2) applies to such taxable year and to any subsequent taxable year that is within the 12-year credit period described in section 45Q(a)(3)(A) or (4)(A) with respect to such equipment. Section 6417(d)(3)(C)(i)(II)(aa), (d)(3)(C)(ii), and (d)(3)(C)(iii) provides special rules for a taxpayer making the election to be treated as an applicable entity for purposes of section 6417 with respect to a section 45Q credit ( see part III of this Background). Section 6417(d)(3)(D) provides that, in the case of section 45V credits, any election under section 6417(a): (1) applies separately with respect to each qualified clean hydrogen production facility; (2) must be made for the taxable year in which such facility is placed in service (or within the 1-year period subsequent to the date of enactment of section 6417 in the case of facilities placed in service before December 31, 2022); and (3) applies to the taxable year and all subsequent taxable years with respect to such facility. Section 6417(d)(3)(D)(i)(III)(aa), (ii), and (iii) provide special rules for a taxpayer making the election to be treated as an applicable entity for purposes of section 6417 with respect to the 45V credit ( see part III of this Background). Section 6417(d)(3)(E) provides that, in the case of section 45Y credits, any election under section 6417(a): (1) applies separately with respect to each qualified facility; (2) must be made for the taxable year in which such facility is placed in service; and (3) applies to such taxable year and to any subsequent taxable year that is within the 10-year credit period described in section 45Y(b)(1)(B) with respect to such facility. Section 6417(d)(4) provides rules regarding when the elective payment is treated as made. Section 6417(d)(4)(A) provides that, in the case of any government or political subdivision described in section 6417(d)(1), and for which no return is required under section 6011 or 6033(a), the payment described in section 6417(a) is treated as made on the later of the date that a return would be due under section 6033(a) if such government or subdivision were described in section 6033 or the date on which such government or subdivision submits a claim for credit or refund (at such time and in such manner as the Secretary provides). Section 6417(d)(4)(B) provides that, in any other case, the payment described in section 6417(a) is treated as made on the later of the due date (determined without regard to extensions) of the return of tax for the taxable year or the date on which such return is filed with the IRS. Section 6417(d)(5) provides that, as a condition of, and prior to, any amount being treated as a payment that is made by an applicable entity under section 6417(a), the Secretary may require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments under section 6417. Section 6417(d)(6) provides rules relating to excessive payments. In the case of any amount treated as a payment that is made by the applicable entity under section 6417(a), or the amount of the payment made pursuant to section 6417(c), that is determined to constitute an excessive payment, the tax imposed on such entity by chapter 1 of the Code (chapter 1), regardless of whether such entity would otherwise be subject to chapter 1 tax, for the taxable year in which such determination is made is increased by an amount equal to the sum of (1) the amount of such excessive payment, plus (2) an amount equal to 20 percent of such excessive payment. The increase equal to 20 percent of the excessive payment does not apply if the applicable entity can demonstrate that the excessive payment resulted from reasonable cause. An excessive payment is defined as, with respect to a facility or property for which an election is made under section 6417 for any taxable year, an amount equal to the excess of (1) the amount treated as a payment that is made by the applicable entity under section 6417(a), or the amount of the payment made pursuant to section 6417(c), with respect to such facility or property for such taxable year, over (2) the amount of the credit that, without application of section 6417, would be otherwise allowable (as determined pursuant to section 6417(d)(2) and without regard to section 38(c)) with respect to such facility or property for such taxable year. Section 6417(e) provides a denial of double benefit rule providing that, in the case of an applicable entity making an election under section 6417 with respect to an applicable credit, such credit is reduced to zero and, for any other purpose under the Code, is deemed to have been allowed to such entity for such taxable year. Section 6417(f) provides a special rule relating to any territory 2 of the United States with a mirror code tax system (as defined in section 24(k) of the Code). Under this rule, section 6417 will not be treated as part of the income tax laws of the United States for purposes of determining the income tax law of any such U.S. territory unless such U.S. territory elects to have section 6417 be so treated. Currently, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands have mirror code tax systems. 2 Section 6417(f) uses the term “possession,” but the proposed regulations and these final regulations use the alternative term “territory.” Section 6417(g) provides basis reduction and recapture rules. It states that, except as otherwise provided in section 6417(c)(2)(A), 3 rules similar to the rules of section 50 apply for purposes of section 6417. 3 There is no section 6417(c)(2)(A) and the Treasury Department and the IRS believe Congress intended to refer instead to section 6417(d)(2)(A). See General Explanation of Tax Legislation Enacted in the 117th Congress, JCS-1-23 (December 21, 2023) at 284. Thus, the proposed and final regulations refer to section 6417(d)(2)(A). Section 6417(h) authorizes the Secretary to issue regulations or other guidance as may be necessary to carry out the purposes of section 6417, including guidance to ensure that the amount of the payment or deemed payment made under section 6417 is commensurate with the amount of the credit that would be otherwise allowable (determined without regard to section 38(c)). III. Special Rules Relating to Electing Taxpayers Making an Election Under Section 6417(d)(1)(B), (C), or (D) A taxpayer other than an applicable entity under section 6417(d)(1)(A) (electing taxpayer) may make an election to be treated as an applicable entity for the limited purpose of making an elective payment election with respect to a section 45V credit, a section 45Q credit, or a section 45X credit under section 6417(d)(1)(B), (C), or (D), respectively. An electing taxpayer may make an elective payment election under section 6417(d)(1)(B), (C), or (D) at such time and in such manner as the Secretary provides (but no election may be made with respect to any taxable year beginning after December 31, 2032). The special rules for such an election are described in parts III.A, III.B, and III.C of this Background. A. Electing Taxpayers Making an Election With Respect to Section 45V Credits Section 6417(d)(1)(B) allows an electing taxpayer to make an elective payment election for any taxable year in which such taxpayer has placed in service a qualified clean hydrogen production facility (as defined in section 45V(c)(3)), but only with respect to a section 45V credit determined in such year with respect to the electing taxpayer. Pursuant to section 6417(d)(3)(D)(i)(III), such electing taxpayer is treated as having made such election for the taxable year with respect to which the election is made and each of the four subsequent taxable years ending before January 1, 2033. Under section 6417(d)(3)(D)(iii), an electing taxpayer may elect to revoke the application of such election, but any such election to revoke, if made, applies to the applicable year specified in such election (but not any prior taxable year) and each subsequent taxable year within the 5-year period and cannot be revoked. Section 6417(d)(3)(D)(ii) prohibits an electing taxpayer from making a transfer election under section 6418(a) of the Code with respect to a section 45V credit for any year for which the electing taxpayer's election under section 6417(d)(1)(B) is in effect. B. Electing Taxpayers Making an Election With Respect to Section 45Q Credits Section 6417(d)(1)(C) allows an electing taxpayer to make an elective payment election for any taxable year in which the electing taxpayer has, after December 31, 2022, placed in service carbon capture equipment at a qualified facility (as defined in section 45Q(d)), but only with respect to a section 45Q credit determined in such year with respect to such taxpayer. Pursuant to section 6417(d)(3)(C)(i)(II)(aa), such electing taxpayer is treated as having made such election for the taxable year with respect to which the election is made and each of the four subsequent taxable years ending before January 1, 2033. Under section 6417(d)(3)(C)(iii), an electing taxpayer may elect to revoke the application of such election, but any such election to revoke, if made, applies to the applicable year specified in such election (but not any prior taxable year) and each subsequent taxable year within the 5-year period and cannot be revoked. Section 6417(d)(3)(C)(ii) prohibits an electing taxpayer from making a transfer election under section 6418(a) with respect to a section 45Q credit for any year for which the electing taxpayer's election under section 6417(d)(1)(C) is in effect. C. Electing Taxpayers Making an Election With Respect to Section 45X Credits Section 6417(d)(1)(D) allows an electing taxpayer to make an elective payment election for any taxable year in which the electing taxpayer has, after December 31, 2022, produced eligible components (as defined in section 45X(c)(1)), but only with respect to a section 45X credit determined in such year with respect to such taxpayer. Pursuant to section 6417(d)(1)(D)(ii)(I), such electing taxpayer is treated as having made such election for the taxable year with respect to which the election is made and each of the four subsequent taxable years ending before January 1, 2033. Under section 6417(d)(1)(D)(ii)(II), an electing taxpayer may elect to revoke the application of such election, but any such election to revoke, if made, applies to the applicable year specified in such election (but not any prior taxable year) and each subsequent taxable year remaining within the 5-year period and cannot be revoked. Section 6417(d)(1)(D)(iii) prohibits an electing taxpayer from making a transfer election under section 6418(a) with respect to a section 45X credit for any year for which the electing taxpayer's election under section 6417(d)(1)(D) is in effect. IV. Section 6417 Rules for Partnerships and S Corporations Section 6417(c) provides special rules for partnerships and S corporations that hold directly (as determined for Federal tax purposes) a facility or property for which an applicable credit is determined. Section 6417(c)(1) provides that, in the case of any applicable credit determined with respect to any facility or property held directly by a partnership or S corporation, any elective payment election must be made by such partnership or S corporation in the manner provided by the Secretary. If a partnership or S corporation makes an elective payment election with respect to any applicable credit, (1) a payment is made to such partnership or S corporation equal to the applicable credit amount; (2) section 6417(e) is applied with respect to the applicable credit before determining any partner's distributive share, or S corporation shareholder's pro rata share, of such applicable credit; (3) any applicable credit amount with respect to which the election in section 6417(a) is made is treated as tax exempt income for purposes of sections 705 and 1366 of the Code; and (4) a partner's distributive share of such tax exempt income is based on such partner's distributive share of the otherwise applicable credit for each taxable year (an S corporation shareholder's share of tax exempt income is based on the shareholder's pro rata share). Section 6417(c)(2) provides that, in the case of any facility or property held directly by a partnership or S corporation, no election by any partner or shareholder is allowed under section 6417(a) with respect to any applicable credit determined with respect to such facility or property. V. Notice 2022-50 On October 24, 2022, the Department of the Treasury (Treasury Department) and the IRS published Notice 2022-50, 2022-43 I.R.B. 325, to, among other things, request feedback from the public on potential issues with respect to the elective payment election provisions under section 6417 that may require guidance. Stakeholders submitted more than 200 comments in response to Notice 2022-50. Feedback in those comments informed the development of the proposed regulations and is described in the preamble to the proposed regulations as appropriate. VI. Proposed and Temporary Regulations On June 21, 2023, the Treasury Department and the IRS published proposed regulations under section 6417 (REG-101607-23) in the Federal Register (88 FR 40528) to provide guidance on elective payment elections (proposed regulations). Those proposed regulations included proposed § 1.6417-5, which contained proposed rules identical to the temporary regulations at § 1.6417-5T. Those temporary regulations also were published on June 21, 2023, in the Federal Register (88 FR 40093) to provide guidance on the mandatory information and registration requirements for elective payment elections. The provisions of the proposed regulations are explained in greater detail in the preamble to the proposed regulations. Summary of Comments and Explanation of Revisions This Summary of Comments and Explanation of Revisions summarizes the proposed regulations and all the substantive comments submitted in response to the proposed regulations. The Treasury Department and the IRS received 151 written comments in response to the proposed regulations. The comments are available for public inspection at www.regulations.gov or upon request. A hearing was conducted in person and telephonically on August 21, 2023, during which 10 presenters provided comments. After full consideration of the comments received, these final regulations adopt the proposed regulations with modifications in response to the comments described in this Summary of Comments and Explanation of Revisions. Comments merely summarizing the proposed regulations, recommending statutory revisions to section 6417 or other statutes, or addressing issues that are outside the scope of this rulemaking, such as the calculation of applicable credits (including any bonus credit amounts) or recommended changes to IRS forms, are beyond the scope of these regulations and are not adopted. I. General Rules and Definitions A. Applicable Entities Section 6417(d)(1) defines applicable entity. Proposed § 1.6417-1(c) clarified the statutory definition of applicable entity pursuant to the Secretary's authority under section 6417(h) to issue regulations necessary to carry out the purposes of section 6417. Commenters addressed several aspects of the proposed definitions, as described in this Part I.A of the Summary of Comments and Explanation of Revisions. 1. Any Organization Exempt From the Tax Imposed by Subtitle A Section 6417(d)(1)(A)(i) defines “applicable entity” as including any organization exempt from the tax imposed by subtitle A. The proposed regulations would have clarified that “any organization exempt from the tax imposed by subtitle A” meant (1) any organization exempt from the tax imposed by subtitle A by reason of section 501(a) of the Code and (2) any organization exempt from the tax imposed by subtitle A because it is the government of any U.S. territory or a political subdivision thereof. A few commenters asked that Puerto Rico-registered nonprofits (those with Puerto Rico 1101.01 nonprofit status) be allowed to file for elective payment of renewable energy tax credits without having to acquire section 501(c)(3) status. As the preamble to the proposed regulations noted, stakeholders had previously responded to Notice 2022-50 by asking whether an entity classified as a nonprofit under State law but that does not have Federal tax-exempt status would be described in section 6417(d)(1)(A). The preamble to the proposed regulations stated that such an entity would not be described in section 6417(d)(1)(A) because it is not exempt from the tax imposed by subtitle A (but that some of these entities might meet the requirements of another type of applicable entity, such as a State instrumentality, and might be an applicable entity on those grounds). This same answer applies to a Puerto Rico-registered nonprofit that does not have section 501(c)(3) status. Multiple commenters urged that homeowners' associations described in section 528 of the Code be considered applicable entities under section 6417(d)(1)(A) because they are “exempt from the tax imposed by subtitle A” by their statutory language. Two of these commenters noted that other sections within subchapter F of chapter 1 have similar statutory language, and one of these commenters thus requested that the final regulations be modified to include all organizations considered exempt from income taxes pursuant to subchapter F of chapter 1. In response, these final regulations adopt this comment and define “any organization exempt from the tax imposed by subtitle A” to include organizations exempt from the tax imposed by subtitle A by reason of subchapter F of chapter 1. Thus, under these final regulations, any organization described in sections 501 through 530 of the Code that meets the requirements to be recognized as exempt from tax under those sections is an applicable entity eligible to make an elective payment election. No commenters opposed the inclusion of the government of any U.S. territory or a political subdivision thereof in this definition; thus, these final regulations adopt this definition as proposed. However, several commenters recommended that the final regulations provide an exception to the general rule in section 50(b)(1) for territorial applicable entities making elections under section 6417 for investment tax credits, advocating that such a rule would provide better parity with domestic applicable entities making such elections and would advance the IRA's purpose by improving access to clean energy investment tax credits in U.S. territories. Since before the IRA, investment tax credits, vehicle-related credits, and energy efficiency incentives have included restrictions with respect to property located or used in U.S. territories by reference to section 50(b)(1). Section 50(b)(1) provides that “no [investment tax] credit shall be determined . . . with respect to any property which is used predominantly outside the United States” 4 unless section 168(g)(4) applies (which provides an exception for any property that is owned by a domestic corporation or by a United States citizen other than a citizen entitled to the benefits of section 931 or 933 of the Code, and that is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States). The IRA did not amend these provisions; instead, the IRA specifically referenced 50(b)(1) in section 30C, incorporated section 50(b)(1) into section 45W, and did not exclude section 48, 48C, or 48E from the application of section 50(b)(1). Furthermore, section 6417(d)(2) provides special rules that enable tax-exempt and government entities to benefit from section 30C, 45W, 48, 48C, and 48E because it provides that applicable credits are determined without regard to sections 50(b)(3) and (4)(A)(i). However, there is no provision lifting the territory-related restrictions of section 50(b)(1). Without specific language in section 6417 or in the underlying applicable credits addressing section 50(b)(1), or other compelling evidence of congressional intent, a special rule turning off the application of section 50(b)(1) is not supported by the Code. Therefore, these final regulations do not adopt this recommendation. 4 Under section 7701(a)(9) of the Code, “[t]he term `United States' when used in a geographical sense includes only the States and the District of Columbia.” One commenter asked for a process under which the Puerto Rico Department of Treasury (or any other agency designed by the Governor of Puerto Rico) is designated to receive, process, and/or administer elections for elective payments from applicable entities and instrumentalities of Puerto Rico, similar to the process for disbursements of Coronavirus Relief Funds under the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, 134 Stat. 281 (March 27, 2020). The Treasury Department and the IRS have determined that creating the suggested process is inappropriate for elective payment elections because section 6417 involves the filing of a tax return with the IRS. Accordingly, these final regulations do not adopt this comment. 2. Any State or Political Subdivision Thereof Section 6417(d)(1)(A)(ii) defines “applicable entity” to include any State or political subdivision thereof. The proposed regulations would have clarified that this includes the District of Columbia. No comments addressed this definition, so these final regulations adopt the definition as proposed. 3. Indian Tribal Governments Section 6417(d)(1)(A)(iv) states that an applicable entity includes an Indian tribal government (as defined in section 30D(g)(9)). To provide Indian tribal governments parity with State governments, proposed § 1.6417-1(c)(3) would have included subdivisions of Indian tribal governments in this definition. Proposed § 1.6417-1(k) defined the term Indian tribal government as the recognized governing body of any Indian or Alaska Native tribe, band, nation, pueblo, village, community, component band, or component reservation, individually identified (including parenthetically) in the most recent list published by the Department of the Interior in the Federal Register pursuant to section 104 of the Federally Recognized Indian Tribe List Act of 1994 (25 U.S.C. 5131). Although no comments were received that directly addressed the definition of an Indian tribal government provided in proposed § 1.6417-1(c)(3), these final regulations clarify the proposed definition by specifying that the most recent list published by the Department of the Interior in the Federal Register is the one prior to the date on which a relevant elective payment election is made. (Comments regarding Tribal entities other than Indian tribal governments are discussed elsewhere in this Summary of Comments and Explanation of Revisions.) 4. Alaska Native Corporations Section 6417(d)(1)(A)(v) provides that any Alaska Native Corporation (as defined in section 3 of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(m)) (ANC) is an applicable entity. The proposed regulations would have adopted this definition. The proposed regulations requested comments regarding the definition in proposed § 1.6417-1(c)(4) and whether additional guidance is necessary regarding consolidated groups with ANC common parents. The Treasury Department and the IRS did not receive comments related to this definition, but these final regulations adopt the proposed regulation and broaden it to apply to consolidated groups with any applicable entity as a common parent, as described in part I.B.5. of this Summary of Comments and Explanation of Revisions. 5. Rural Electric Cooperatives Section 6417(d)(1)(A)(vi) provides that any corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas is an applicable entity. The proposed regulations did not elaborate on this definition but requested comments on whether further clarification of the definition in proposed § 1.6417-1(c)(6) is necessary. A few commenters addressed this definition. Some of these commenters stated that “clarity would be better achieved” if the Treasury Department and the IRS would refer to tax-exempt electric cooperatives as applicable entities described in 501(c)(12) and taxable electric cooperatives as applicable entities described in section 1381(a)(2)(C) of the Code. One of these commenters stated that an electric cooperative may be described in section 45(e)(2)(A)(iii) as a not-for-profit electric utility that had or has received a loan or loan guarantee under the Rural Electrification Act of 1936. Another commenter asked that the final regulations also allow a “pre-1962” rural electric cooperative under section 1381(a)(2)(C) to be eligible to make an elective payment election. Another commenter asked that the final regulations clarify that rural electric cooperatives that file either Form 1120, U.S. Corporation Income Tax Return, or Form 990, Return of Organization Exempt from Income Tax, be eligible to make an elective payment election. The Treasury Department and the IRS have concluded that rural electric cooperatives as described in section 6417(d)(1)(A)(vi) include rural electric cooperatives that do not meet the requirements under section 501(c)(12), as cooperatives that meet the requirements under section 501(c)(12) are already considered tax-exempt entities in section 6417(d)(1)(A)(i). To avoid rendering section 6417(d)(1)(A)(vi) superfluous, it is necessary to include taxable (nonexempt) rural electric cooperatives in section 6417(d)(1)(A)(vi). Taxable (nonexempt) rural electric cooperatives are described in section 1381(a)(2)(C) as “any corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas.” Thus, these final regulations under § 1.6417-1(c)(6) clarify that section 6417(d)(1)(A)(vi) means “any corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas as described in section 1381(a)(2)(C) of the Code.” These final regulations do not include “any electric cooperative described in section 45(e)(2)(A)(iii)” in the definition because such section does not exist in the Code, and the Treasury Department and the IRS are unsure what cooperatives the commenter is referencing. One commenter recommended that the final regulations clarify that local, publicly owned utilities (for example, water and electric) and electric cooperatives (other than rural) are eligible entities under section 6417(d)(1)(A)(vi), stating that the proposed definition aligns with Congressional intent and that there are more than 2,800 public owned utilities and cooperatives in operation combined serving millions of customers across the United States. Because section 6417(d)(1)(A)(vi) requires that a cooperative be engaged in furnishing electric energy to persons “in rural areas,” these final regulations do not include these entities in the definition of rural electric cooperative. However, it is possible that publicly owned utilities and non-profit co-ops could qualify as applicable entities under other definitions described in these rules, such as if they are considered agencies or instrumentalities of a State, local, territorial, or Tribal government. Multiple commenters asked that the final regulations expand rural electric cooperatives to cover workers cooperatives that install solar panels. These commenters also requested clarification as to how to determine an organization is (1) operating on a cooperative basis; (2) furnishing electricity; and (3) furnishing electricity in a rural area. The commenters generally suggest adopting existing rules under subchapter T of chapter 1 of the Code (subchapter T). These final regulations do not adopt a specific rule covering workers cooperatives that install solar panels because the revision to the definition of rural electric cooperatives in the final regulations is sufficient to clarify the meaning of the term. As these final regulations include any corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas as described in section 1381(a)(2)(C), it is the law that applies to those corporations that will apply in making the determination with respect to any respective corporation. With respect to operating on a cooperative basis, a summary of the taxation of nonexempt rural electric cooperatives may be helpful in explaining the key principles. The rules for tax treatment of most nonexempt cooperatives and their patrons were codified with the enactment of subchapter T as part of the Revenue Act of 1962. Public Law 87-834 (H.R. 10650). However, section 1381(a)(2)(C) states that subchapter T is not applicable to an organization engaged in furnishing electric energy (or providing telephone service) to persons in rural areas. According to the Senate Finance Committee Report accompanying the 1962 Act, the intent of Congress was that nonexempt rural electric cooperatives would continue to be treated as under “present law” as of 1962. While subchapter T does not expressly control the taxation of nonexempt rural electric cooperatives, its foundations rest upon pre-1962 cooperative tax law. As a result, there are certain basic parallels between the tax treatment of nonexempt utility (electric and telephone) cooperatives and treatment of other cooperative organizations under subchapter T. Therefore, to extent that subchapter T reflects cooperative taxation as it existed prior to 1962, it is instructive in resolving certain issues facing rural electric cooperatives. This is because Congress stated that, in enacting subchapter T, it was merely codifying the long common law history of cooperative taxation (with the exception of ensuring at least one annual level of tax at the cooperative or patron level. See S. Rep. No. 1881, 87th Cong., 1st Sess. 113 (1962)). Arguably, the case law post-enactment is merely a continuation and refinement of the pre-enactment common law. Perhaps the most succinct definition of the term “cooperative” for Federal income tax purposes was provided by the U.S. Tax Court in Puget Sound Plywood, Inc. v. Commissioner, 44 T.C. 305 (1965), acq. 1966-1 C.B. 3: Under the cooperative association form or organization . . . , the worker-members of the association supply their own capital at their own risk; select their own management and supply their own direction for the enterprise, through worker meetings conducted on a democratic basis; and then themselves receive the fruits of their cooperative endeavors, through allocations of the same among themselves as coworkers, in proportion to the amounts of their active participation in the cooperative undertaking. The Tax Court went on to describe three guiding principles at the core of economic cooperative theory as, id. at 308: (1) Subordination of capital, both as regards control over the cooperative undertaking, and as regards the ownership of the pecuniary benefits arising therefrom; (2) democratic control by the worker-members themselves; and, (3) the vesting in and allocation among the worker-members of all fruits and increases arising from their cooperative endeavor ( i.e., the excess of operating revenues over the costs incurred in generating those revenues), in proportion to the worker-members active participation in the cooperative endeavor. The mechanism by which rural electric cooperatives achieve operation at cost is the patronage dividend (or capital credit). The payment of patronage dividends (and operation at cost) is critical to achieving cooperative status as defined by Puget Sound, so any organization must analyze this issue to determine whether it is operating on a cooperative basis. The comments related to the definition of “furnishing” electricity for purposes of section 6417(d)(1)(A)(vi) varied. For example, some commenters suggested using the language in § 1.1381-1(b)(4) as the standard, and some suggested the term should not be limited to generating and transmitting electricity. One commenter suggested that a percentage of rural nameplate capacity be applied for purposes of the definition of “furnishing” electricity, while another commenter stated that a more than de minimis standard should be used to meet furnishing requirements. Consistent with the determination that section 6417(d)(1)(A)(vi) will cover rural electric cooperatives described in section 1381(a)(2)(C), the Treasury Department and the IRS conclude that “furnishing” electricity under section 6417(d)(1)(A)(vi) should be interpreted in the same manner as the language in § 1.1381-1(b)(4), which provides “[a]ny organization which is engaged in generating, transmitting, or otherwise furnishing electric energy.” The purpose of this language in § 1.1381-1(b)(4) is to identify rural electric cooperatives described in section 1381(a)(2)(C). Using a similar interpretation for purposes of section 6417 means that a cooperative furnishing electric energy under § 1.1381-1(b)(4) would meet this portion of the definition. Such a cooperative would not be subject to subchapter T as a result of section 1381(a)(2)(C), assuming the electricity is provided to rural areas. With respect to this conclusion, the Treasury Department and the IRS note that some of the commenters identified themselves as cooperatives subject to the provisions of subchapter T. The definition of applicable entity in section 6417(d)(1)(A)(vi) would not include a cooperative that is subject to subchapter T, as a cooperative cannot be both subject to subchapter T and excepted from subchapter T. Further, the definition of furnishing in § 1.1381-1(b)(4), and thus for purposes of section 6417, does not include the activity of installation of energy equipment (such as the installation of solar panels), as that alone is not the generation or other furnishing of electricity. Thus, organizations evaluating whether their operations include furnishing electricity for purposes of section 6417 should take this into account. Consistent with including rural electric cooperatives described in section 1381(a)(2)(C) and the use of § 1.1381-1(b)(4) to determine whether a cooperative is “furnishing” electricity, the Treasury Department and the IRS reach a similar conclusion with respect to defining “rural” for purposes of section 6417 by reference to § 1.1381-1(b)(4). Section 1.1381-1(b)(4) provides that the term rural area has the meaning assigned to [it] in section 5 of the Rural Electrification Act of 1936, as amended (7 U.S.C. 924). Currently 7 U.S.C. 924(b) provides that the term `rural area' is deemed to mean any area of the United States not included within the boundaries of any incorporated or unincorporated city, village, or borough having a population in excess of 5,000 inhabitants. 6. Tennessee Valley Authority Section 6417(d)(1)(A)(iii) states that the Tennessee Valley Authority is an applicable entity. The proposed regulations would have adopted this definition. No commenters addressed this definition, so these final regulations adopt the definition as proposed. 7. An Agency or Instrumentality of Certain Applicable Entities Proposed § 1.6417-1(c)(7) would have clarified that an agency or instrumentality of (1) any U.S. territory or a political subdivision thereof; (2) any State, the District of Columbia, or political subdivision thereof; or (3) an Indian tribal government or a subdivision thereof is also an applicable entity eligible to make an elective payment election. The proposed regulations requested comments on this approach to defining applicable entities and on whether further guidance is necessary. Commenters addressed both the scope of the definition and whether it should be expanded to include Federal agencies and instrumentalities. i. Scope of the Definition of “Agency” and “Instrumentality” Several commenters asked for additional clarity on the definition of agencies and instrumentalities, such as whether joint powers authorities, housing authorities, transit authorities, air authorities, publicly owned utilities, or tax-exempt entities in the water sector are included (and one commenter requested a similar clarification pertaining to political subdivisions). Various commenters mentioned application of Rev. Rul. 57-128, 1957-1 C.B. 311, while two of these commenters asked how the facts and circumstances analysis in the revenue ruling would apply to their specific facts. One commenter requested a rule stating that whether an entity is an agency or an instrumentality is determined based on (or at least influenced by) State or local law. Finally, one commenter asked that the final regulations allow tribes to determine what is an agency or instrumentality of an Indian tribal government. The determination of whether an entity is an agency, instrumentality, or a political subdivision (or subdivision in the case of an Indian tribal government) is governed by Federal tax law that is outside the scope of these final regulations. Federal tax determinations of whether an entity is an agency or instrumentality of any government typically are analyzed on a facts and circumstances basis. In determining whether an entity is an agency or instrumentality for Federal tax purposes, Federal courts have applied a test similar to the six-factor test in Rev. Rul. 57-128, which generally provides guidance on whether an entity is an instrumentality for purposes of the exemption from employment taxes under sections 3121(b)(7) and 3306(c)(7). See, e.g., Bernini v. Federal Reserve Bank of St. Louis, Eighth District, 420 F. Supp. 2d 1021 (E.D. Mo. 2005) and Rose v. Long Island Railroad Pension Plan, 828 F.2d 910, 918 (2d Cir. 1987), cert. denied, 485 U.S. 936 (1988). Rev. Rul. 57-128 looks to the following six factors: (1) Whether the organization is used for a governmental purpose and performs a governmental function; (2) Whether performance of the organization's function is on behalf of one or more States or political subdivisions; (3) Whether there are any private interests involved, or whether the States or political subdivisions involved have the powers and interests of an owner; (4) Whether control and supervision of the organization is vested in public authority or authorities; (5) If express or implied statutory or other authority is necessary for the creation and/or use of such an instrumentality, and whether such authority exists; and (6) The degree of financial autonomy and the source of its operating expenses. The Treasury Department and the IRS are unaware of any different Federal tax authority or standard that applies to determine whether an entity qualifies as an instrumentality of an Indian tribal government for Federal tax purposes. The application of the facts-and-circumstances analysis in Rev. Rul. 57-128 to any particular entity is outside the scope of this rulemaking. With respect to political subdivisions, Rev. Rul. 78-276, 1978-2 C.B. 256, states that the term “political subdivision” has been defined consistently for all Federal tax purposes as denoting either (1) a division of a State or local government that is a municipal corporation, or (2) a division of such State or local government that has been delegated the right to exercise sovereign power by the State or local government. The three generally acknowledged sovereign powers are the power to tax, the power of eminent domain, and the police power. See Commissioner v. Estate of Shamberg, 3 T.C. 131 (1944), acq., 1945 C.B. 6, aff'd 144 F.2d 998 (2d Cir. 1944), cert denied, 323 U.S. 792 (1945). It is not necessary that all three sovereign powers enumerated in Shamberg be delegated. See Rev. Rul. 77-164, 1977-1 C.B. 20. However, possession of only an insubstantial amount of any or all sovereign powers is not sufficient. In determining whether an entity is a division of a State or local governmental unit, important considerations are the extent that the entity is (1) controlled by the State or local government unit, and (2) motivated by a wholly public purpose. See., e.g., Rev. Rul. 78-276, 1978-2 C.B. 256 and Rev. Rul. 83-131, 1983-2 C.B. 184. Determination of agency, instrumentality, or political subdivision (or subdivision in the case of an Indian tribal government) status is based on all the facts and circumstances, and additional guidance on this subject is beyond the scope of these final regulations. Generally, however, taxpayers may request a private letter ruling from the IRS Office of Chief Counsel to apply applicable law to the organization's specific set of facts. See Rev. Proc. 2024-1, I.R.B. 2024-1 (containing procedures for letter rulings) and Rev. Proc. 2024-3, I.R.B. 2024-1 (containing a list of areas of the Code relating to matters on which the IRS will not issue letter rulings). One commenter asked that an instrumentality be eligible to make an elective payment election with respect to its assets that are operated and maintained by a private partner under a public-private partnership. While it is not clear what kind of entity the commenter means by “public-private partnership,” if the arrangement is treated as a partnership for Federal tax purposes, then the partnership would not be an applicable entity listed in section 6417(d)(1)(A). See part I.B.4 of this Summary of Comments and Explanation of Revisions. ii. Federal Agencies and Instrumentalities Several commenters asked that the final regulations include Federal agencies and instrumentalities within the definition of applicable entity. Commenters specifically mentioned the United States Postal Service, Federal hydropower agencies, Federal Power Marketing Administrations (PMAs), the Army Corps of Engineers, and the Bureau of Reclamation. One commenter stated that the proposed regulations did not provide a justification for why Federal agencies or instrumentalities were not included. This commenter did, however, note that, absent statutory authorization to the contrary, agency-collected user fees and charges already must be deposited in the Treasury General Fund. Several commenters suggested that the cross-reference in section 6417(b)(6)—the provision setting out the list of applicable credits—to section 168(h)(2)(A)(i) should be read to provide Federal agencies and instrumentalities with the ability to make an elective payment election for at least section 45W credits. Similarly, one commenter asked that PMAs be able to apply, file, and receive all elective payments under section 6417 on behalf of the power generating agencies of regional Federal power programs. This commenter stated that PMAs serve as the Federal entities responsible for facilitating the funding of and ensuring repayment for the regional power program, both expensed annual maintenance and capital improvements, and that it would be beneficial to eliminate unnecessary overlap, confusion, and administrative burdens to efficiently use elective payments for applicable projects. Section 6417(a)(1), however, authorizes an election of an applicable credit only by an applicable entity under section 6417(d)(1)(A). Although the Treasury Department and the IRS solicited comments on the issue, no commenter addressed how appropriations issues raised by including Federal agencies and instrumentalities (beyond the Tennessee Valley Authority, which is specifically listed in the statute) or PMAs within the definition of applicable entities could or should be resolved. The Treasury Department and the IRS have thus retained the proposed approach and have not extended the definition of applicable entities to those additional entities in these final regulations. 8. Electing Taxpayers Certain taxpayers that are not listed in section 6417(d)(1)(A) or described in the preceding paragraphs may nevertheless make an election to be treated as an applicable entity with respect to applicable credit property giving rise to a section 45Q credit, section 45V credit, or section 45X credit, as described more fully in part III of this Summary of Comments and Explanation of Revisions. Proposed § 1.6417-1(g) would have defined an “electing taxpayer” as any taxpayer that is not an applicable entity, but makes an election in accordance with proposed §§ 1.6417-2(b), 1.6417-3, and, if applicable, 1.6417-4, to be treated as an applicable entity for a taxable year with respect to applicable credits determined with respect to an applicable credit property described in proposed § 1.6417-1(e)(3), (5), or (7). No commenters addressed this definition; thus, these final regulations adopt the definition as proposed. B. Entities Related to an Applicable Entity or an Electing Taxpayer Proposed § 1.6417-2(a) would have provided rules for elective payment elections made by entities related to applicable entities or electing taxpayers. Commenters addressed several of these proposed rules. 1. Disregarded Entities Proposed § 1.6417-1(f) defined “disregarded entity” as an entity that is disregarded as an entity separate from its owner for Federal income tax purposes. Proposed § 1.6417-2(a)(1)(ii) would have provided that, if an applicable entity or electing taxpayer is the owner (directly or indirectly) of a disregarded entity that directly holds an applicable credit property, the applicable entity may make an elective payment election for applicable credits determined with respect to the applicable credit property held directly by the disregarded entity. Several commenters asked that the final regulations clarify whether Tribal corporations formed under section 17 of the Indian Reorganization Act of 1934 are considered applicable entities. In response, these final regulations clarify the definition of disregarded entity under § 1.6417-1(f), consistent with the current rule in § 301.7701-1(a)(3), to expressly state that the term includes a Tribal corporation incorporated under section 17 of the Indian Reorganization Act of 1934, as amended (25 U.S.C. 5124), or under section 3 of the Oklahoma Indian Welfare Act, as amended (25 U.S.C. 5203), that is not recognized as an entity separate from the tribe for Federal tax purposes, and therefore is disregarded as an entity separate from its owner for purposes of section 6417. One commenter asked that the final regulations treat an applicable entity that is the sole shareholder of an S corporation as eligible to make an elective payment election for all applicable credits determined with respect to applicable property held by the S corporation, in the same manner as an applicable entity that is the owner of a disregarded entity would be eligible to make an elective payment election for all applicable credits determined with respect to applicable credit property held by the disregarded entity. Another commenter asked that any entity wholly owned by an applicable entity be treated as an applicable entity. This commenter anticipated that many applicable entities will want to create special purpose entities to own their tax credit eligible projects, but that the classification of such entities as an applicable entity can be uncertain. As an example, the commenter suggested that a city that would normally issue bonds through an industrial development authority that is treated as an agency or instrumentality of the city may want the industrial development authority to create a wholly-owned corporation or limited liability company to be the owner of the project. The commenter stated that it may be difficult to determine whether such wholly-owned entity of an industrial development authority would also be treated as an agency or instrumentality since it is based on a facts and circumstances analysis. Moreover, under § 301.7701-2(b)(6), the commenter pointed out that a limited liability company that is wholly owned by an agency or instrumentality of a State or local governmental unit may be treated as a separate corporation and, therefore, may not be treated as a disregarded entity. In sum, the commenter stated that it saw no policy reason why an entity wholly owned by an applicable entity should not be treated as an applicable entity. The Treasury Department and the IRS have determined that special rules disregarding an entity's Federal tax status for purposes of section 6417(d)(1)(A) are not appropriate. Section 6417(d)(1)(A) is specific as to the types of entities afforded applicable entity status. Any regarded entity that has a Federal tax status separate from its owner(s) and is not separately listed in section 6417(d)(1)(A) cannot be treated as an applicable entity. This is consistent with the rule for taxable C corporations discussed in part I.B.2 of this Summary of Comments and Explanation of Revisions. 2. Taxable C Corporations The proposed regulations would have provided that, because a taxable C corporation is an entity separate from its owner, proposed § 1.6417-1(c)(1) would not include a C corporation that is not itself an applicable entity described in proposed § 1.6417-1(c)(1) as an applicable entity, even if its owner is an applicable entity described in proposed § 1.6417-1(c)(1). However, an electing taxpayer may include a taxable C corporation (including a member of a consolidated group). These final regulations adopt § 1.6417-1(c)(1) as proposed. 3. Undivided Ownership Interests Proposed § 1.6417-2(a)(1)(iii) would have provided that, if an applicable entity is a co-owner in an applicable credit property through an arrangement properly treated as a tenancy-in-common (TIC) for Federal income tax purposes, or through an organization that has made a valid election under section 761(a) of the Code to be excluded from the application of subchapter K of chapter 1 (subchapter K), then the applicable entity's undivided ownership share of the applicable credit property will be treated as a separate applicable credit property owned by such applicable entity, and the applicable entity may make an elective payment election for the applicable credits determined with respect to such applicable credit property. Commenters addressed TICs, valid section 761(a) elections, and joint ownership under section 48E. i. Tenancies in Common and Organizations That Have Made a Valid Election Under Section 761(a) Several commenters asked for additional guidance and examples illustrating how an applicable entity's undivided ownership share of applicable credit property is determined in the context of renewable energy projects such as wind and solar projects, clean hydrogen projects, and electric vehicle infrastructure. These comments are beyond the scope of these final regulations. The ownership share of a party to a transaction will be determined based upon the agreement of the parties and other relevant facts and circumstances. Several commenters stated that the mechanisms for co-ownership allowed under the proposed regulations are in common practice today and would allow applicable entities to join with other entities in developing applicable credit properties without precluding elective payment election choices by project participants. However, other commenters stated that TICs and joint operating agreements (JOAs) that have validly elected out of subchapter K are not commonly used in the renewable energy marketplace (even by private entities) and can deprive participants of limited liability. These commenters stated that these arrangements may be less familiar to applicable entities as compared to traditional partnership structures used between public and private entities for the development of clean energy projects. Commenters also opined that applicable entities may not be sufficiently resourced to navigate these newer commercial law relationships and would be disadvantaged compared to non-applicable entities, who can avail themselves of partnership structures in the form of limited partnerships or limited liability companies, which provide most members with limited liability for State law purposes. Commenters asked for clear guidance and clarifications as to how a renewable energy project could meet the requirements for electing out of subchapter K. For example, one commenter asked how § 1.761-2(a) could be applicable in the context of a jointly operated renewable energy project. Section 1.761-2(a) provides, in relevant part, that an unincorporated organization the members of which are able to compute their income without the necessity of computing partnership taxable income, and that is not an organization classifiable as an association, may be excluded from the application of subchapter K if the organization is availed of (1) for investment purposes only and not for the active conduct of a business, or (2) for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or extracted. Specifically, the commenter stated that it is unclear how parties jointly operating a renewable energy project can do so without conducting a business selling services or property produced (that is, selling electricity). 5 5 The commenter also raised Rev. Proc. 2002-22, 2002-1 CB 733 (specifying the conditions under which the IRS will consider a request for a private letter ruling that an undivided fractional interest in rental real property is not an interest in a business entity), and noted that: “if the parties to a joint venture combine capital or services with the intent of conducting a business or enterprise and of sharing the profits and losses from the venture, a partnership (or other business entity) is created.” Another commenter asked for clarity on what a delegation of authority under § 1.761-2(a)(3)(iii) would cover for a JOA of applicable credit property that produces electricity. Section 1.761-2(a)(3)(iii) provides, in relevant part, that a participant to a JOA may delegate authority to sell its share of any property produced or extracted, but not for a period in excess of the minimum needs of the industry, and in no event for more than one year. This commenter also asked for examples of compliant JOAs that would allow electricity generated through the joint ownership of applicable credit property to be sold pursuant to a power purchase agreement. Commenters also requested guidance permitting a single entity or taxpayer to handle the administrative affairs and day-to-day management activities of operating an applicable credit property on behalf of the other joint owners without impacting the owners' ability to be properly excluded from the application of subchapter K. One commenter stated that it would be useful to illustrate a range of JOAs likely to result in exclusion from the application of subchapter K and suggested that key elements of such fact patterns might include: an agreement to share revenues in proportion with the co-owners' respective ownership interests; an agreement to share revenues out of proportion with the co-owners' respective ownership interests; an agreement in which rights to dispose of property or take other significant actions are reserved to a subset of the co-owners; and/or an agreement to receive debt financing based on the anticipation of funds expected to result from an elective payment election in a case in which the lender is not a co-owner. A commenter stated that it would also be helpful to clarify the application of § 1.761-2(a)(3)(iii) to co-ownership ventures in cases in which co-owners generate and sell power as a collective rather than on their separate accounts, or alternatively if the collective entity sells power to each of the participating co-owners and then those co-owners sell power to third parties on their own accounts but the collective may sell some other services or property incidental to the activity for which the credit is determined. This commenter highlighted that, in California and some other States, local government agencies often pool resources under a Joint Powers Authority (JPA). The commenter asked that guidance clarify the conditions under which a JPA could be treated as an organization that has made a valid election under section 761(a) of the Code to be excluded from the application of subchapter K, including if the JPA is a separate legal entity and sells power under its own account. One commenter stated that existing guidance allowing for clean energy arrangements to validly elect out of subchapter K, including through the use of TIC structures, is limited and should be updated. This commenter stated that a partnership is defined in the Code and in the Treasury Regulations under sections 761 and 7701, but the distinction between an arrangement treated as a partnership for Federal tax purposes and one that has validly elected out of subchapter K, including a valid TIC, is not well defined in the energy generation context. The commenter pointed out that pre-IRA partnership guidance, including guidance allowing for the use of tax-equity partnership structures, is widely used as a basis for structuring projects within the renewable industry and is well understood. However, existing guidance for arrangements in the energy generation context that will not be treated as a partnership for Federal tax purposes is limited and outdated. The commenter urged the Treasury Department and the IRS to provide clear, updated, and timely guidance on clean energy arrangements that would not be treated as partnerships for Federal tax purposes. The Treasury Department and the IRS agree that additional guidance is needed on joint ownership arrangements of applicable credit property that produce electricity that can be excluded from the application of subchapter K. As a result, the Treasury Department and the IRS have proposed regulations in the Proposed Rules section of this edition of the Federal Register that would add certain exceptions to the requirements contained in the regulations under section 761(a) and provide an example. These exceptions generally would allow any applicable entity described in section 6417(d)(1)(A) and § 1.6417-1(c) that jointly owns applicable credit property that produces electricity to (1) own its interests through an entity (other than an entity required to be treated as a corporation under the Code) and (2) delegate its authority to an agent to sell its share of the electricity produced from such applicable credit property for a period of more than 1 year, provided that the delegation authority to the agent is not for more than 1 year. See Election to Exclude Certain Unincorporated Organizations Owned by Applicable Entities from the Application of Subchapter K, REG-101552-24, in the Proposed Rules section of this edition of the Federal Register . ii. Applying the Undivided Ownership Interests Rule to Qualified Property One commenter requested some clarifying edits to address how proposed § 1.6417-2(a)(1)(iii), the rule for undivided ownership interests, would operate with respect to a section 48E credit. This commenter noted that proposed § 1.6417-1(e)(12) defines “applicable credit property” for purposes of section 48E as “a qualified facility described in section 48E(b)(3);” however, section 48E(b) allows a section 48E credit to be claimed only with respect to a qualified investment in a qualified facility. The commenter asked for clarification on what part of the qualified investment is owned by such joint tenant, and suggested adding language to the final regulations to clarify that an applicable entity should be able to claim applicable credits with respect to the applicable credit property in proportion to its share of qualified property. The Treasury Department and the IRS agree with the commenter that a section 48E credit is determined, in part, based on an applicable entity's qualified investment with respect to a qualified facility, but do not believe that further language is needed because this concept is already covered in the language under proposed § 1.6417-2(a)(1)(iii), which provides that an applicable entity will be treated as owning a separate applicable credit property equal to its undivided ownership share. An applicable entity's undivided ownership share is determined under Federal income tax ownership principles and is outside the scope of these final regulations. Thus, these final regulations do not adopt the commenter's suggestion. 4. Partnerships The proposed regulations would have provided that partnerships and S corporations are not applicable entities described in section 6417(d)(1)(A), but requested comments on whether any entity described in section 6417(d)(1)(A)(i) through (vi) or proposed § 1.6417-1(c) could include an entity organized as a partnership or S corporation for Federal tax purposes. No commenter stated that an entity described in section 6417(d)(1)(A)(i) through (vi) or proposed § 1.6417-1(c) could include an entity organized as a partnership or S corporation for Federal tax purposes. Therefore, these final regulations adopt the rule as proposed. Under the proposed regulations and these final regulations, a partnership or an S corporation is eligible to make the elective payment election only with respect to a section 45V credit, section 45Q credit, and section 45X credit (assuming all the other requirements to make the election with respect to these credits are met). This rule applies no matter how many of the partners or shareholders are applicable entities described in section 6417(d)(1)(A) and § 1.6417-1(c), including if all of the partners or shareholders are applicable entities described in section 6417(d)(1)(A) and § 1.6417-1(c). However, as the proposed regulations noted, because section 6418(f)(2) defines “eligible taxpayer” for purposes of transfer eligibility as “any taxpayer which is not described in section 6417(d)(1)(A)” (and thus not in proposed § 1.6417-1(c)), such a partnership or S corporation would be an eligible taxpayer described in section 6418(f)(2) and may be eligible to transfer eligible credits. 6 6 The Treasury Department and the IRS acknowledge that section 6418 does not contain a provision parallel to section 6417(d)(2) providing that section 50(b)(3) and (4)(A)(i) do not apply to limit the determination of a credit in section 6417. Thus, section 50(b)(3) and (4)(A)(i) may limit eligible investment tax credits determined with respect to a partnership or S corporation with applicable entity partners or shareholders for purposes of section 6418. A number of commenters requested that the final regulations allow applicable entities to make elective payment elections through an entity treated as a partnership for Federal tax purposes, either if all the partners in the partnership are applicable entities described in section 6417(d)(1)(A) or if at least one partner in the partnership is an applicable entity described in section 6417(d)(1)(A). Commenters advocating for including partnerships composed entirely of applicable entities as an applicable entity stated that such a rule would help cover capital needs, diversify risk, and fill gaps in expertise between applicable entities. Commenters advocating for mixed partnerships (that is, partnerships consisting of both applicable entities and entities that are not applicable entities) said that not allowing applicable entities to make elective payment elections for applicable credit property held through mixed partnerships would reduce economic incentives to invest in clean energy, undermining the objectives of the IRA. Several commenters stated that applicable entities lack the required resources to engage in green energy projects themselves and asked that the final regulations permit a partnership to make an elective payment election with respect to the portion of the underlying credits allocable to an applicable entity. A few commenters stated that structures eligible to elect out of subchapter K have numerous requirements and complexities that limit their usefulness. One commenter recommended that the final regulations either (1) allow a partnership to make an elective payment election on one hundred percent of the credits so long as the partnership is majority owned by an applicable entity, or (2) allow a partnership with majority applicable entity ownership to make an elective payment election on the portion of credits allocable to such applicable entities. Based on the language in section 6417(c)(1) that treats a partnership as the owner of any applicable credit property held directly by the partnership and requires a partnership to make any elective payment election with respect to such property, these final regulations retain the proposed regulations' entity view of partnerships under section 6417(c)(1). Because an entity described in section 6417(d)(1)(A)(i) through (vi) or proposed § 1.6417-1(c) does not include an entity treated as a partnership for Federal tax purposes (or as an S corporation), these final regulations do not adopt commenters' suggestions and do not allow entities treated as partnerships for Federal tax purposes (or S corporations) to make elective payment elections, except with respect to a section 45V credit, section 45Q credit, and section 45X credit. However, these restrictions do not apply to entities, whether comprised of only applicable entities or comprised of a mix of applicable and non-applicable entities, that have made a valid election out of subchapter K under section 761(a), including through the exception for certain joint ownership arrangements of applicable credit property identified in the proposed regulations under section 761 described in part I.B.3.i of this Summary of Comments and Explanation of Revisions. A few commenters asked that taxable entities be permitted to serve as an administrative member or manager of a State law entity to which an applicable entity owns all of the other interests without creating a partnership for Federal tax purposes, provided that such taxable entities do not receive distributive shares of partnership items or partnership distributions. These final regulations do not attempt to establish any additional criteria by which a taxpayer can provide administrative or managerial services for an applicable entity without creating a partnership between the taxpayers for Federal tax purposes. However, as previously described, the Treasury Department and the IRS are simultaneously issuing proposed regulations under section 761 in the Proposed Rules section of this edition of the Federal Register that provide additional guidance for certain renewable energy arrangements that can validly elect out of subchapter K. Multiple commenters asked that the final regulations provide further clarity on Tribal entities and allow co-ownership of projects. A few commenters asked that the final regulations allow Tribal Energy Development Organizations (TEDOs), or other wholly owned Tribal enterprises, to be applicable entities regardless of how they are chartered. Some commenters asked that the final regulations allow tribes to form special purpose vehicles under an LLC structure to jointly own renewable energy projects and employ the distributive share rules for allocating the “applicable credit” to each LLC member, regardless of the tax status of that member. Commenters also asked that inter-governmental partnerships, whether formed under State law such as JPAs, or formed under Tribal law as inter-tribal consortiums, should be eligible to make an elective payment election. While it is possible that in certain cases a Tribal law entity (including a TEDO) and/or inter-governmental partnership could be an applicable entity, such a determination is outside the scope of these final regulations. However, the Treasury Department and the IRS are actively working on guidance regarding the Federal tax status of Tribal law entities organized and controlled by tribes. The Treasury Department and the IRS will not release final guidance in advance of additional Tribal consultation. Commenters also stated that, if the Treasury Department and the IRS allow for section 6417 elections to be made on behalf of applicable entity partners, the final regulations should make conforming clarifications, including clarifying that the “applicable credit” that is reduced to zero under section 6417(e) is only the portion of the credit for which a section 6417 election has been made and clarifying the distributive share rules. Because these final regulations do not allow section 6417 elections to be made on behalf of applicable entity partners, these final regulations do not adopt the suggested conforming changes. 5. Consolidated Groups Proposed § 1.6417-2(a)(1)(v) would have provided that, for members of a consolidated group (as defined in § 1.1502-1) the common parent of which is an Alaska Native Corporation, any member that is an electing taxpayer may make an elective payment election with respect to applicable credits determined with respect to the member. Proposed § 1.6417-2(a)(2)(vi) would have provided the same rule with respect to electing taxpayers. See § 1.1502-77 (providing rules regarding the status of the common parent as agent for its members). The proposed regulations would also have provided that a member of a consolidated group is required to complete pre-filing registration as a condition of, and prior to, making an elective payment election. The preamble to the proposed regulations stated that an ANC may be the common parent of a consolidated group of corporations (ANC-parented group) and noted that some stakeholders had inquired whether non-ANC members of an ANC-parented group may separately make an elective payment election with respect to a section 45V credit, section 45Q credit, or section 45X credit determined with respect to such member. In response, the preamble to the proposed regulations stated that a non-ANC member of an ANC-parented group may qualify as an electing taxpayer eligible to make elections under section 6417(d)(1)(B), (C), or (D), based on its own corporate status. See § 1.1502-80(a). As with any other electing taxpayer, a non-ANC member of an ANC-parented group would be required to complete pre-filing registration (as would be required under proposed § 1.6417-5) and must make its elective payment election under section 6417(d)(1)(B), (C), or (D) with respect to an applicable section 45V credit, section 45Q credit, or section 45X credit determined with respect to the member. See § 1.1502-77 (providing rules regarding the status of the common parent as agent for its members). The preamble to the proposed regulations requested comments (1) regarding the definition in proposed § 1.6417-1(c)(4) and whether additional guidance is necessary regarding consolidated groups with ANC common parents; (2) whether additional guidance is necessary to address any uncertainty that may exist regarding the application of section 6417 in the context of a consolidated group with members that are cooperatives subject to the rules of subchapter T of chapter 1; and (3) regarding the application of section 6417 to consolidated groups with electing taxpayers (for example, whether special rules are necessary for consolidated groups to apply the “denial of double benefit” rule under proposed § 1.6417-2(e)(2)). No commenter addressed these issues relating to ANCs. However, the Treasury Department and the IRS have determined that the text of proposed § 1.6417-2(a)(1)(v), which referred to consolidated groups “of which an Alaska Native Corporation is the common parent,” was too limiting and should apply to any consolidated group with an applicable entity parent. Therefore, these final regulations expand the definition by removing the specific reference to Alaska Native Corporations in § 1.6417-2(a)(1)(v) and broaden the rule to apply to any consolidated group of which an applicable entity is the common parent. A few commenters requested confirmation that the “entity-specific” rules of section 6417 apply to an elective payment election made by a partnership that has as its only partners two or more members of the same consolidated group and suggested an example confirming the treatment. The commenters wanted confirmation that the election would be made by the partnership, as required by section 6417(c)(1) and proposed § 1.6417-4(a), rather than by the partnership's members, as provided in proposed § 1.6417-2(a)(2)(vi). The Treasury Department and the IRS agree that any entity treated as a partnership for Federal tax purposes, and not any of its partners (regardless of the identity or Federal tax status of the partners), would make an elective payment election with respect to section 45Q credits, section 45V credits, or section 45X credits pursuant to section 6417(c)(1) and § 1.6417-4(a), but disagree that an example illustrating this point is needed. 6. Pooled Investment Vehicles The proposed regulations did not provide a special rule for employee plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA) if they choose to invest through pooled investment vehicles, whether the vehicles are organized as partnerships or otherwise. One commenter stated that ERISA plans typically make investments through pooled investment vehicles, which often are organized as limited partnerships or LLCs, and take minority interests in them in order to avoid subjecting the vehicles to fiduciary, prohibited transaction, and other rules under ERISA's “plan asset” rules. The commenter believed that, if pooled investment vehicles are not considered to be applicable entities, then employee plans generally cannot benefit from elective payment elections under section 6417 with respect to some or all of the applicable credits listed in section 6417(b). The commenter suggested that ERISA plan fiduciaries might choose not to invest in applicable credit activities at all. The commenter requested that the final regulations provide a mechanism by which ERISA plan investors indirectly investing through pooled investment vehicles can make an elective payment election. The Treasury Department and the IRS understand the commenter's concern that ERISA plans may be discouraged from investing in certain entities engaged in applicable credit activities under the proposed regulations. Other applicable entities have similar concerns that investments in certain entities engaged in applicable credit activities under the proposed regulations will not be investments in applicable entities. While there are rules outside of these final regulations that may impact how ERISA plans make investments, there is no indication in section 6417 that ERISA plans can or should be subject to rules different than those that apply to other applicable entities. Thus, these final regulations do not provide a special rule for ERISA plans investing in pooled investment vehicles that would allow ERISA plans to be eligible to make an elective payment election if investing through a partnership structure. II. Rules for Making Elective Payment Elections A. In General Proposed § 1.6417-2 would have provided general rules for an applicable entity or electing taxpayer to make an elective payment election under section 6417 with respect to any applicable credit determined with respect to such entity. Commenters addressed many aspects of these proposed rules, which are discussed in this part II of the Summary of Comments and Explanation of Revisions. These final regulations adopt the rules as proposed, with the modifications described in this part II. B. Manner of Making the Election Section 6417(a) provides that the elective payment election is made “at such time and in such manner as the Secretary may provide,” and proposed § 1.6417-2(b) would have provided the particular requirements for properly and timely making the election. 1. Return Requirements Proposed § 1.6417-2(b)(1)(i) would have provided that an applicable entity makes an elective payment election on the applicable entity's or electing taxpayer's annual tax return, as defined in proposed § 1.6417-1(b), in the manner prescribed by the IRS in guidance, along with any required completed source credit form(s) with respect to the applicable credit property, a completed Form 3800, General Business Credit (or its successor), and any additional information, including supporting calculations, required in instructions to the relevant forms. To avoid any confusion about how the elective payment election should be made, proposed § 1.6417-1(b) would have defined “annual tax return,” for purposes of the section 6417 regulations, as follows: (1) for any taxpayer normally required to file an annual tax return with the IRS, such annual return (including the Form 1065, U.S. Return of Partnership Income, for partnerships and the Form 990-T, Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)), for organizations with unrelated business income tax or a proxy tax under section 6033(e)); (2) for any taxpayer that is not normally required to file an annual tax return with the IRS (such as taxpayers located in the U.S. territories), the return they would be required to file if they were located in the United States, or, if no such return is required (such as for a State; the District of Columbia; or local or Indian tribal governments), the Form 990-T; and (3) for taxpayers filing a return for a taxable year of less than 12 months (short year), the short year tax return. These final regulations make minor, nonsubstantive edits to the definition in the proposed regulations to avoid using the phrase annual tax return in defining the term. Several commenters requested that the IRS use a new or different form than Form 990-T or revise certain forms (including Forms 990, 990-T, 1120, 3468, 3800, 8038-CP, and 8911). Several commenters also requested a detailed list of the documents required to complete the filing process, information on how to complete required forms, or reduced information requirements for filers who had previously not been required to file any returns with the IRS. The Treasury Department and the IRS recognize that some taxpayers may not have experience or a historical filing obligation and will consider providing simplified instructions or the need for a new form in future years. The Treasury Department and IRS are committed to developing educational and outreach tools to assist tribes, government entities, their instrumentalities, and exempt organizations to complete the forms required solely to make an elective payment election. It is outside of the scope of these final regulations to address comments related to individual forms or the kind of documentation that may be required to complete those forms. Thus, these final regulations adopt the rules as proposed. Several commenters requested confirmation that, for those taxpayers that normally file the Form 1120 with the IRS, the Form 1120 can be used to make the elective payment election. The Treasury Department and the IRS confirm that this is the intent of the language in § 1.6417-1(b)(1), which states “[f]or any taxpayer normally required to file an annual tax return with the IRS, such annual return,” and have added the Form 1120, as well as other examples of annual tax forms, to the parenthetical. Other commenters requested that the elective payment election could be made on the Form 1120-W. As the Form 1120-W is not an annual income tax return, these final regulations do not adopt that suggestion. 2. Original Return Requirements Proposed § 1.6417-2(b)(1)(ii) would have provided that an elective payment election must be made on an original return (including any revisions on a superseding return) filed not later than the due date (including extensions of time) for the original return for the taxable year for which the applicable credit is determined. The proposed regulations stated that no elective payment election may be made “or revised” on an amended return or by filing an administrative adjustment request (AAR) under section 6227 of the Code. The proposed regulations also did not provide for relief under § 301.9100-1 through 301.9100-3 (9100 relief) for an elective payment election that is not timely filed. Multiple commenters asked that an elective payment election be permitted on an amended return or AAR and/or that a taxpayer be permitted an extension of time under the 9100 relief procedures to make a late election. Commenters stated that not allowing a late election is an unreasonable result for new market entrants and creates significant barriers for entities with limited resources. Some commenters recommended that applicable entities should be allowed to make the elective payment election on late returns and also be able to claim a six-month automatic extension of time to file the election under § 301.9100-2(b). Commenters requested that the final regulations provide some form of relief for taxpayers that acted in good faith and made a reasonable effort in complying, particularly for new filers who may not have had a prior filing obligation. Commenters further suggested that providing additional time to make an election would increase market participation and promote equity. In response to these comments, these final regulations remove the words “or revised” in § 1.6417-2(b)(1)(ii) and provide “[n]o elective payment election may be made for the first time on an amended return, withdrawn on an amended return, or made or withdrawn by filing an administrative adjustment request under section 6227, although a numerical error with respect to a properly claimed elective payment election may be corrected on an amended return or by filing an administrative adjustment request under section 6227 if necessary.” This clarification is intended to address situations in which a taxpayer intended to make an elective payment election but made a reporting error with respect to an element of a valid election (for example, miscalculating the amount of the credit on the original return or making a typographical error in the process of inputting a registration number), and to allow the taxpayer to correct any errors that would result in a disallowance of the election or to correct an excessive payment before an excessive payment determination is made by the IRS. Consistently, it is appropriate to allow taxpayers to correct errors that would result in a larger payment than indicated on the original return as long as such larger amount is accurate. This provision cannot be used to revoke an election or to make an election for the first time on an amended return. In addition, the taxpayer's original return, which must be signed under penalties of perjury, must contain all of the information, including a registration number, required by these final regulations. To properly correct an error on an amended return or AAR, a taxpayer must have made an error in the information included on the original return such that there is a substantive item to correct; a taxpayer cannot correct a blank item or an item that is described as being “available upon request.” These final regulations also modify the proposed regulations to permit an extension of time under § 301.9100-2(b) to allow for an automatic six-month extension of time from the due date of the return (excluding extensions) to make the election prescribed in section 6417(d)(3), which provides relief for applicable entities or electing taxpayers who have a filing obligation and file by the due date of the return. The elective payment election is a statutory election because its due date is prescribed by statute. As such, the section 9100 relief procedures apply only insofar as the late election is being filed pursuant to § 301.9100-2(b), which requires that the taxpayer timely filed its return for the year the election should have been made. Relief under this provision applies only to taxpayers that have not received an extension of time to file a return after the original due date. Taxpayers eligible for this relief must take corrective action under § 301.9100-2(c) within the six-month extension period and follow the procedural requirements of § 301.9100-2(d). A few commenters requested clarification on superseding returns. One commenter stated that the proposed regulations appeared ambiguous regarding whether a return filed after the original due date, but within the automatic extension period, is considered a superseding return. This commenter recommended clarifying that this would be considered a superseding return. Neither the Code nor regulations define a superseding return, but administrative IRS guidance provides that a superseding return is a return filed subsequent to the originally-filed return but before the due date for filing the return (including extensions). For example, if an applicable entity subject to an automatic 6-month extension files an original return on the due date (excluding extensions) and then files a subsequent return within the automatic extension period, the subsequent return would generally be considered a superseding return. Unlike a superseding return, an amended return is a return filed after the taxpayer filed an original return and after the due date for filing the return (including extensions). One commenter stated that the reference to a superseding return seems to be an acknowledgment that some taxpayers will use a provisional tax return filed on the due date (before extensions) to hasten the election process. This commenter asked whether, if a taxpayer files a provisional return on March 15, 2024, and files a superseding return on September 15, 2024, the taxpayer would be treated as making payment against tax under section 6417(d)(4) on March 15, 2024. The Treasury Department and the IRS note that the designation “provisional” return has no basis in the Code or regulations and accordingly, such returns are not treated differently by the IRS upon filing. Taxpayers are reminded that a tax return is signed under penalties of perjury that the return is true, correct, and complete. If an original return is filed on March 15, 2024, and contains a valid elective payment election, the taxpayer is treated as making a payment against tax on that day. A superseding return could increase or reduce the amount of the net elective payment election. If the amount is increased, the additional elective payment is treated as paid on the date the superseding return was filed. Taxpayers should be aware that filing a superseding return could result in a delay in processing the additional elective payment amount. If the net elective payment amount is reduced because of the superseding return, the taxpayer could be subject to interest and, if the taxpayer fails to pay the difference with the superseding return, penalties. 3. Pre-Filing Registration Requirements Proposed § 1.6417-2(b)(2) would have specified that pre-filing registration (as is required under § 1.6417-5T and would be required under proposed § 1.6417-5) is a condition of any amount being treated as a payment that is made by an applicable entity under section 6417(a). The proposed regulations stated that an elective payment election will not be effective with respect to applicable credits determined with respect to an applicable credit property unless the applicable entity or electing taxpayer receives a valid registration number for the applicable credit property and provides the registration number for each applicable credit property on its Form 3800 (or its successor) attached to the tax return, in accordance with guidance. These final regulations clarify in § 1.6417-2(b)(2) that a valid registration number must also be included on any required completed source credit form(s) with respect to the applicable credit property. Additional information about the pre-filing registration process is described in part V of this Summary of Comments and Explanation of Revisions. 4. Due Date Requirements Section 6417(d)(3)(A)(i) provides that any election under section 6417(a) must be made not later than (1) in the case of any government, or political subdivision, described in section 6417(d)(1) and for which no return is required under section 6011 or 6033(a), such date as is determined appropriate by the Secretary, or (2) in any other case, the due date (including extensions of time) for the return of tax for the taxable year for which the election is made, but in no event earlier than 180 days after the date of the enactment of section 6417 (February 13, 2023). Section 6417 is applicable to taxable years beginning after December 31, 2022. Proposed § 1.6417-2(b)(3) would have implemented this provision as follows. In the case of any taxpayer for which no income tax return is required under section 6011 or 6033(a) of the Code (such as a governmental entity), the elective payment election must be made no later than the due date (including an extension of time) for the original return that would be due under section 6033(a) if such applicable entity were described in that section. Under section 6072(e) of the Code, that date is the 15th day of the fifth month after the taxable year determined by section 441 of the Code. Subject to the issuance of guidance that specifies the manner in which an entity for which no Federal income tax return is required under section 6011 or 6033(a) of the Code could request an extension of time to file, the proposed regulations would have provided that an automatic paperless six-month extension from the original due date is deemed to be allowed. In the case of any taxpayer that is not normally required to file an annual tax return with the IRS (such as those located in the U.S. territories), the proposed regulations would have provided that the elective payment election must be made no later than the due date (including extensions of time) that would apply if the taxpayer was located in the United States (such as the 15th day of the fourth month after the end of the year for individuals filing Form 1040 or for corporations filing Form 1120). For example, an individual in a U.S. territory would be required to make the elective payment election on or before the 15th day of April following the close of the calendar year, or, if the individual filed an extension, on or before the 15th day of October following the close of the calendar year. The proposed regulations would have provided that, in any other case, the elective payment election must be made no later than the due date (including extensions of time) for the original return for the taxable year for which the election is made, but in no event earlier than February 13, 2023. Commenters did not address the second or third provisions, and they are adopted without change. However, with respect to the first provision, these final regulations simplify the provision in proposed § 1.6417-2(b)(3), which stated that an elective payment elective must be made no later than, “[i]n the case of any taxpayer for which no Federal income tax return is required under section 6011 or 6033(a) of the Code, the due date (including an extension of time) for the original return that would be due under section 6033(a) if such applicable entity were described in that section. Under section 6072(e), that date is the 15th day of the fifth month after the taxable year determined by section 441 of the Code,” to simply provide that an elective payment election must be made no later than, “[i]n the case of any taxpayer for which no Federal income tax return is required under sections 6011 or no Federal return is required under 6033(a) of the Code [ ], the 15th day of the fifth month after the taxable year.” Commenters asked that the final regulations clarify the determination of taxable year for an entity that does not have a filing requirement under section 6011 or 6033(a), stating that the reference to “the taxable year determined by section 441 of the Code” is confusing and that the Code provides latitude to taxpayers in determining their applicable taxable year (including calendar year, fiscal year, and short years as applicable). Commenters gave the example of an applicable entity that is filing Form 990-T for the sole reason of making an elective payment election for an applicable credit. If the applicable entity uses a fiscal year beginning July 1 and ending June 30, placed in service a project for which an applicable credit was determined during the first six months of 2023, and used its fiscal year for purposes of establishing a taxable year, then the applicable entity would be ineligible to make an elective payment election for such project because the fiscal year during which the project was placed in service began on July 1, 2022, which is a fiscal year beginning before December 31, 2022. Commenters noted that similarly situated taxpayers who file their returns on a calendar year basis would be eligible to make an elective payment election. Commenters requested that they be allowed to choose a calendar taxable year for purposes of making an elective payment election, or, alternatively, that they be permitted to file using a short year beginning January 1, 2023, and ending on the date of their next fiscal year. These final regulations delete the reference to section 441 and clarify that, for purposes of section 6417, an applicable entity that is not required to file a Federal income tax return pursuant to section 6011 or Federal return pursuant to section 6033(a) (such as a State; the District of Columbia; an Indian tribal government; any U.S. territory; a political subdivision of a State, the District of Columbia, or a U.S. territory, or a subdivision of an Indian tribal government; certain agencies or instrumentalities of a State, the District of Columbia, an Indian tribal government, or a U.S. territory; or a taxpayer excluded from filing pursuant to section 6033(a)(3)), but is filing solely to make an elective payment election, may choose whether to file its first Form 990-T (and thus adopt a taxable year for purposes of section 6417) based upon a calendar or fiscal year, provided that such entity maintains adequate book and records, including a reconciliation of any difference between its regular books of account and its chosen taxable year, to support making an elective payment election on the basis of its chosen taxable year. This should allow an applicable entity that is not required to file a Federal income tax return pursuant to section 6011 or Federal return pursuant to section 6033, but has placed in service an applicable credit property in 2023, to file Form 990-T based on a calendar year and make an elective payment election with respect to the applicable credit property regardless of when the property was placed in service during 2023. These final regulations continue to provide, consistent with the proposed regulations, that, subject to issuance of guidance that specifies the manner in which an entity for which no Federal income tax return is required under section 6011 or no Federal return is required under section 6033(a) could request an extension of time to file and make the elective payment election, an automatic paperless six-month extension from the 15th day of the fifth month after the taxable year is deemed to be allowed. The Treasury Department and the IRS note that a taxpayer that has filed a Federal income tax return under section 6011 or a Federal return under section 6033(a) with the IRS must continue to use that taxable year unless the taxpayer requests a change of annual accounting period pursuant to section 442 of the Code. 5. Irrevocability Requirement Proposed § 1.6417-2(b)(4) would have provided that any election under section 6417(a), once made, is irrevocable and applies with respect to any applicable credit for the taxable year for which the election is made. Under section 6417, the election period applies for a period of years with respect to certain applicable credits. Specifically, for a section 45 credit or section 45Y credit, the election applies to the 10-year period beginning on the date the facility was originally placed in service. For a section 45Q credit, the election applies to the 12-year period beginning on the date the equipment was originally placed in service. For a section 45V credit, the election applies to all subsequent taxable years with respect to the facility. Electing taxpayers make the election for one five-year period per applicable credit property, but are allowed one revocation per applicable credit property, as provided in section 6417(d)(1)(D), (d)(3)(C), and (d)(3)(D), and would have been provided in proposed § 1.6417-3 (as described in part III of this Explanation of Provisions). No commenters addressed the irrevocability rule, and these final regulations adopt the rule without change. 6. No Partial Elections Proposed § 1.6417-2(b)(5) would have provided that an elective payment election applies to the entire amount of applicable credit(s) determined with respect to each applicable credit property that was properly registered for the taxable year, resulting in an elective payment amount that is the entire amount of applicable credit(s) determined with respect to the applicable entity or electing taxpayer for a taxable year. As a result, the proposed regulations would require that an applicable entity make an elective payment election for the entire amount of the credit determined with respect to each applicable credit property. A few commenters advocated for allowing partial elections, stating that this flexibility would be helpful. The Treasury Department and the IRS note that the statute and the proposed regulations already provide considerable flexibility because taxpayers can register none, some, or all of their applicable credit properties. Further, as opposed to section 6418(a), which allows an eligible taxpayer to elect to transfer all (or any portion specified in the election) of an eligible credit, section 6417(a) provides that an applicable entity making an election is treated as making a payment against the income tax “equal to the amount of” the applicable credit, which does not provide the flexibility to make an election equal to a portion of the applicable credit. Thus, these final regulations adopt the proposed regulations without change. C. Determination of Applicable Credit Proposed § 1.6417-2(c) would have provided three rules relating to the determination of any applicable credit: (1) special rules for tax-exempt organizations and government entities; (2) a special rule for investment-related credit property acquired with income that is exempt from taxation under subtitle A; and (3) a rule that credits must be determined with respect to the applicable entity or electing taxpayer. 1. Special Rules for Tax-Exempt Organizations and Government Entities In accordance with section 6417(d)(2), proposed § 1.6417-2(c)(1) would have provided that, in the case of any applicable entity that makes the election described in section 6417(a), any applicable credit is determined (1) without regard to the restrictions regarding use of property by tax-exempt organizations and government entities found in sections 50(b)(3) and (4)(A)(i); and (2) by treating any property with respect to which such credit is determined as used in a trade or business of the applicable entity. Proposed § 1.6417-2(c)(2) would have elaborated on the effect of the “trade or business” rule in section 6417(d)(2) and proposed § 1.6417-2(c)(1)(ii). Proposed § 1.6417-2(c)(2)(i) would have allowed tax-exempt and government entities to take advantage of applicable credits even outside of the unrelated business taxable income context (provided other requirements are met) by allowing the entity to treat an item of property as if it is of a character subject to an allowance of depreciation (such as under sections 30C and 45W); to produce items “in the ordinary course of a trade or business of the taxpayer” (such as in sections 45V and 45X); and to state that an item of property is one for which depreciation (or amortization in lieu of depreciation) is allowable (such as in sections 48, 48C, and 48E). No commenter addressed this rule, but these final regulations made nonsubstantive edits to this proposed version. Proposed § 1.6417-2(c)(2)(ii) would have allowed the entity to apply the capitalization and accelerated depreciation rules (such as sections 167, 168, 263 and 263A of the Code) that apply to determining the basis and the depreciation allowance for property used in a trade or business. One commenter asked whether applicable entities can use section 266 of the Code to capitalize carrying charges. In response, these final regulations add section 266 to the list of capitalization and accelerated depreciation rules that applicable entities can use in § 1.6417-2(c)(2)(ii). Proposed § 1.6417-2(c)(2)(iii) would have made limitations on the use of credits generally applicable to persons engaged in the conduct of a trade or business applicable to the making of an elective payment election under section 6417, such as the at-risk rules of section 49 of the Code in the context of investment credits determined under sections 48, 48C, and 48E, and the passive activity rules under section 469 of the Code that apply to all applicable credits. For section 49 to apply to investment tax credits for which an elective payment election is made, the property must be placed in service by an applicable entity or electing taxpayer described in section 465(a)(1) of the Code (for example, an individual or a C corporation with respect to which the stock ownership requirements of section 542(a)(2) of the Code are met). For section 469 to apply to applicable credits for which an elective payment election is made, the applicable entity or electing taxpayer would need to be described in section 469(a)(2) (that is, an individual, estate or trust, a closely held C corporation, or a personal service corporation). Thus, for any applicable entity or electing taxpayer for which section 49 or 469 generally applies, those limitations apply with respect to the determination of applicable credits for purposes under section 6417. The proposed regulations requested comments on whether any additional clarification is needed regarding the application of sections 49 and 469 to applicable entities or electing taxpayers determining the amount of an applicable credit. Two commenters asked that the final regulations clarify that section 49 does not apply to limit credits available to tribes or Tribal entities that use direct loan or Federal loan guarantee programs. The Treasury Department and the IRS note that section 49 generally applies only to individuals and C corporations meeting the stock ownership requirements of section 542(a)(2), and that section 49 reduces the credit base only by the amount of nonqualified nonrecourse financing, as defined in section 49(a)(1)(D)(ii). Both of these determinations are dependent on the facts and circumstances and are outside of the scope of these final regulations. Proposed § 1.6417-2(c)(2)(iv) would have stated that the trade or business rule does not create any presumption that the trade or business is related (or unrelated) to a tax-exempt entity's exempt purpose. One commenter asked whether nonprofits will owe tax on Solar Renewable Energy Credits (SREC) sales and how selling the SRECs upfront versus selling them over time might change the result. This comment is outside the scope of these final regulations. Another commenter asked that the final regulations provide that income from applicable credit property does not give rise to unrelated business income tax (UBIT). Whether income from applicable credit property gives rise to UBIT is a fact-intensive inquiry under sections 511 through 514 of the Code and it is outside the scope of these final regulations. As these comments do not require revisions to the proposed rule, these final regulations adopt the § 1.6417-2(c)(2)(iv) as proposed. In addition, these final regulations clarify that the trade or business rule subjects the applicable entity to the credit limitation that applies when there is an excess benefit, as described in part II.C.2 of this Summary of Comments and Explanation of Revisions. See § 1.6417-2(c)(2)(v) and (c)(3)(ii). 2. Special Rule for Investment-Related Credit Property Acquired With Amounts, Including Income From Certain Grants and Forgivable Loans, That Are Exempt From Taxation Under Subtitle A Proposed § 1.6417-2(c)(3) would have provided a special rule for investment credit property acquired with amounts, including income from certain grants and forgivable loans, that are exempt from taxation under subtitle A (tax exempt amounts) and would have expanded the rule to “investment-related tax credits” (that is, to other credits that are determined as a percentage of a property's basis). The special rule stated that, for purposes of section 6417, any tax exempt amounts used to purchase, construct, reconstruct, erect, or otherwise acquire an applicable credit property described in sections 30C, 45W, 48, 48C, or 48E (investment-related credit property) are included in basis for purposes of computing the applicable credit amount determined with respect to the investment-related credit property, regardless of whether basis is required to be reduced (in whole or in part) by such amounts under general tax principles. Without this rule, applicable entities that use tax exempt amounts to purchase, construct, reconstruct, erect, or otherwise acquire investment-related credit property may not be able to take full advantage of investment-related tax credits with respect to such property because general tax principles may require applicable entities to reduce the basis in such property, for general business credit purposes, by the amount paid for with tax exempt amounts. This special rule, by not reducing basis for tax-exempt amounts for purposes of computing the applicable credit amount, conferred excess tax benefits under general tax principles applicable to taxable entities. The proposed regulations contained a “no excess benefit” rule in proposed § 1.6417-2(c)(3) to give effect to the requirement in section 6417(d)(2)(B) that the investment-related credit property be treated as used in a trade or business of an applicable entity (and thus subject to general tax principles that apply to taxable entities). The proposed no excess benefit rule would have reduced the applicable credit amount with respect to “restricted tax exempt amounts,” which taxable entities are generally not entitled to include in the basis of corresponding investment-related credit property under general tax principles, if the sum of such restricted tax-exempt amounts plus the applicable credit exceeded the cost of the applicable credit property. Specifically, proposed § 1.6417-2(c)(3) would have provided that, if an applicable entity receives tax exempt amounts for the specific purpose of purchasing, constructing, reconstructing, erecting, or otherwise acquiring an investment-related credit property (restricted tax exempt amount), and any restricted tax exempt amounts plus the applicable credit otherwise determined with respect to that investment-related credit property exceeds the cost of the investment-related credit property, then the amount of the applicable credit is reduced so that the total amount of applicable credit plus the amount of any restricted tax exempt amounts equals the cost of investment-related credit property. This no excess benefit rule was a subset of the special rule for investment credit property acquired with tax exempt amounts in that it applied only to restricted tax exempt amounts; in other words, it only applied to tax exempt amounts that are conditioned on being used for the specific purpose of purchasing, constructing, reconstructing, erecting, or otherwise acquiring an investment credit property and did not apply to other tax exempt amounts. Proposed § 1.6417-2(c)(5) contained three examples illustrating these rules. One commenter strongly supported the special rule for investment-related credit property acquired with income that is exempt from taxation as reasonable and necessary, stating that it (1) places applicable entities on similar footing as taxable entities with respect to impacts on basis, (2) makes funding count equally for investment tax credits (that are determined as a percentage of basis) and production tax credits (which are not tied to basis), and (3) is consistent with the purposes in section 6417. Several other commenters expressed appreciation for this “stackability” feature of the proposed regulations. However, some commenters did not support the no excess benefit part of the rule, stating that section 6417 does not contain any limitation on determining the amount of an elective payment for an applicable credit if the applicable entity has received grants or forgivable loans not subject to Federal income tax. These commenters opined that not only does section 6417 not authorize promulgation of such a rule, but the proposed rule is inconsistent with the intent of section 6417, which, in the commenters' view, is generally to permit applicable entities to receive an elective payment of an applicable credit in an amount otherwise allowable under the Code. These final regulations generally adopt the proposed special rule for investment-related credit property acquired with amounts, including income from certain grants and forgivable loans, that are exempt from taxation, with modifications discussed in this Part II.C.2 of the Summary of Comments and Explanation of Provisions section. First, these final regulations seek to clarify that the no excess benefit rule is a subset of the general rule by separating the special rule into two parts: (1) an “amounts included in basis” rule (allowing tax exempt amounts to count toward basis) and (2) a “no excess benefit from restricted tax exempt amounts” rule (not allowing restricted tax exempt amounts plus the a [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-04604. Public record. Not legal advice.