# Transfer of Certain Credits

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-08926

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** April 30, 2024
- **Citation:** 89 FR 34770

## Text

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9993]
RIN 1545-BQ64
Transfer of Certain Credits

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final Regulations and removal of temporary regulations.

SUMMARY:

This document contains final regulations concerning the election under the Inflation Reduction Act of 2022 to transfer certain tax credits. The regulations describe rules for the election to transfer eligible credits in a taxable year, including definitions and special rules applicable to partnerships and S corporations and regarding excessive credit transfer or recapture events. In addition, the regulations describe rules related to a required IRS pre-filing registration process. These regulations affect eligible taxpayers that elect to transfer eligible credits in a taxable year and the transferee taxpayers to which eligible credits are transferred.

DATES:

Effective Date:
These regulations are effective on July 1, 2024.

Applicability Dates:
For dates of applicability,
see
§§ 1.6418-1(r), 1.6418-2(g), 1.6418-3(f), 1.6418-4(d), and 1.6418-(5)(j).

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, James Holmes at (202) 317-5114 and Jeremy Milton at (202) 317-5665 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

This document contains final regulations that amend the Income Tax Regulations (26 CFR part 1) to implement the statutory provisions of section 6418 of the Internal Revenue Code (Code), as enacted by section 13801(b) of Public Law 117-169, 136 Stat. 1818, 2009 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA).

Background

I. Overview of Section 6418

Section 6418(a) provides that, in the case of an eligible taxpayer that elects to transfer to an unrelated transferee taxpayer all (or any portion specified in the election) of an eligible credit determined with respect to the eligible taxpayer for any taxable year, the transferee taxpayer specified in such election (and not the eligible taxpayer) is treated as the taxpayer for purposes of the Code with respect to such credit (or such portion thereof). Under section 6418(b), any amount of consideration paid by the transferee taxpayer to the eligible taxpayer for the transfer of such credit (or such portion thereof) is (1) required to be paid in cash, (2) not included in the eligible taxpayer's gross income, and (3) not allowed as a deduction to the transferee taxpayer under any provision of the Code.

Section 6418(f)(2) defines the term “eligible taxpayer” to mean any taxpayer that is not described in section 6417(d)(1)(A) of the Code (that is, any taxpayer that is not an “applicable entity” by reason of section 6417(d)(1)(A)).

Section 6418(f)(1)(A) defines the term “eligible credit” to mean each of the following 11 credits:

(1) So much of the credit for alternative fuel vehicle refueling property allowed under section 30C of the Code that, pursuant to section 30C(d)(1), is treated as a credit listed in section 38(b) of the Code (section 30C credit);

(2) The renewable electricity production credit determined under section 45(a) of the Code (section 45 credit);

(3) The credit for carbon oxide sequestration determined under section 45Q(a) of the Code (section 45Q credit);

(4) The zero-emission nuclear power production credit determined under section 45U(a) of the Code (section 45U credit);

(5) The clean hydrogen production credit determined under section 45V(a) of the Code (section 45V credit);

(6) The advanced manufacturing production credit determined under section 45X(a) of the Code (section 45X credit);

(7) The clean electricity production credit determined under section 45Y(a) of the Code (section 45Y credit);

(8) The clean fuel production credit determined under section 45Z(a) of the Code (section 45Z credit);

(9) The energy credit determined under section 48 of the Code (section 48 credit);

(10) The qualifying advanced energy project credit determined under section 48C of the Code (section 48C credit); and

(11) The clean electricity investment credit determined under section 48E of the Code (section 48E credit).

Under section 6418(f)(1)(B), an election to transfer a section 45 credit, section 45Q credit, section 45V credit, or section 45Y credit is made separately with respect to each facility and for each taxable year during the credit period of the respective credit. Pursuant to section 6418(f)(1)(C) an eligible credit does not include any business credit carryforward or business credit carryback. Section 6418(g)(4) provides that an eligible taxpayer may not make an election to transfer credits for progress expenditures.

Pursuant to section 6418(e)(1), an eligible taxpayer must make an election to transfer any portion of an eligible credit on its original tax return for the taxable year for which the credit is determined by the due date of such return (including extensions of time) but such an election cannot be made earlier than 180 days after the date of the enactment of section 6418 by section 13801(b) of the IRA (that is, in no event earlier than 180 days after August 16, 2022, which is February 13, 2023). An eligible taxpayer cannot revoke an election to transfer any portion of a credit. Pursuant to section 6418(d), a transferee taxpayer takes the transferred eligible credit into account in its first taxable year ending with, or after, the eligible taxpayer's taxable year with respect to which the transferred eligible credit was determined. Section 6418(e)(2) provides that a transferee taxpayer may not make any additional transfers of a transferred eligible credit under section 6418.

II. Section 6418 Rules for Partnerships and S Corporations

Pursuant to section 6418(c), in the case of a partnership or an S corporation (as defined in section 1361(a)) that directly holds a facility or property for which an eligible credit is determined: (1) the election to transfer an eligible credit is made at the entity level and no election by any partner or shareholder is allowed with respect to such facility or property; (2) any amount received as consideration for a transferred eligible credit is treated as tax exempt income for purposes of sections 705 and 1366 of the Code; and (3) a partner's distributive share of the tax exempt income is based on the partner's distributive share of the transferred eligible credit.

III. Special Rules

Section 6418(g) provides special rules regarding the elective transfer of certain credits. Section 6418(g)(1) provides that, as a condition of, and prior to, any transfer of any portion of an eligible credit pursuant to section 6418(a), the Secretary of the Treasury or her delegate (Secretary) may require such information (including, in such form or manner as is determined appropriate by the Secretary, such information returns) or registration as the Secretary deems necessary for purposes of preventing

duplication, fraud, improper payments, or excessive payments under section 6418.

Pursuant to section 6418(g)(2), if the Secretary determines that there is an excessive credit transfer to a transferee taxpayer, then the tax imposed on the transferee taxpayer by chapter 1 of the Code (chapter 1), regardless of whether such entity would otherwise be subject to tax under chapter 1, is increased in the year of such determination by the amount of the excessive credit transfer plus 20 percent of such excessive credit transfer. The additional amount of 20 percent of the excessive credit transfer does not apply if the transferee taxpayer demonstrates to the satisfaction of the Secretary that the excessive credit transfer resulted from reasonable cause.

An excessive credit transfer is defined in section 6418(g)(2)(C) as, with respect to a facility or property for which an election is made under section 6418(a) for any taxable year, an amount equal to the excess of (i) the amount of the eligible credit claimed by the transferee taxpayer with respect to such facility or property for such taxable year; over (ii) the amount of the eligible credit that, without application of section 6418, would be otherwise allowable under the Code with respect to such facility or property for such taxable year.

Pursuant to section 6418(g)(3), if a section 48 credit, section 48C credit, or section 48E credit is transferred, the basis reduction rules of section 50(c) of the Code apply to the applicable investment credit property as if the transferred eligible credit was allowed to the eligible taxpayer. Further, if applicable investment credit property is disposed of, or otherwise ceases to be investment credit property with respect to the eligible taxpayer, before the close of the recapture period as described in section 50(a)(1), then certain notification requirements apply. The eligible taxpayer must notify the transferee taxpayer of a recapture event in such form and manner as the Secretary may provide. In addition, the transferee taxpayer must notify the eligible taxpayer of the recapture amount, if any, in such form and manner as the Secretary may provide.

Section 6418(h) directs the Secretary to issue regulations or other guidance as may be necessary to carry out the purposes of section 6418, including guidance providing rules for determining a partner's distributive share of the tax exempt income described in section 6418(c)(1).

IV. Notice 2022-50

On October 24, 2022, the Department of the Treasury (Treasury Department) and the IRS published Notice 2022-50, 2022-43 I.R.B. 325, to, among other things, request feedback from the public on potential issues with respect to the transfer election provisions under section 6418 that may require guidance. Stakeholders submitted more than 200 letters in response to Notice 2022-50.

V. Proposed and Temporary Regulations

On June 21, 2023, informed by the stakeholder feedback received in response to Notice 2022-50, the Treasury Department and the IRS published proposed regulations under section 6418 (REG-101610-23) in the
Federal Register
(88 FR 40496) to provide guidance on transfer elections (proposed regulations). The proposed regulations included proposed § 1.6418-4, which contained proposed rules identical to the text of temporary regulations (TD 9975) at § 1.6418-4T. Those temporary regulations also were published on June 21, 2023, in the
Federal Register
(88 FR 40086) to provide guidance on the mandatory information and registration requirements for transfer elections. The preamble to the proposed regulations discusses stakeholder feedback received in response to Notice 2022-50 and explains in greater detail the provisions of the proposed regulations.

VI. 6417 Final Regulations

On March 11, 2024, the Treasury Department and the IRS published final regulations under section 6417 (TD 9988) in the
Federal Register
(89 FR 17546) to provide guidance on the section 6417 elective payment election (section 6417 final regulations). Among other things, the section 6417 final regulations provide guidance on the definition of applicable entity under section 6417(d)(1)(A).

Summary of Comments and Explanation of Revisions

This Summary of Comments and Explanation of Revisions summarizes comments submitted in response to the proposed regulations and the revisions to the proposed regulations reflected in these final regulations. The Treasury Department and the IRS received more than 80 written comments in response to the proposed regulations. The comments are available for public inspection at
https://www.regulations.gov
or upon request. A hearing was conducted in person and telephonically on August 23, 2023, during which 10 presenters provided testimony. After full consideration of the comments received and testimony provided, these final regulations adopt the proposed regulations with modifications in response to such comments and testimony as described in this Summary of Comments and Explanation of Revisions.

Comments merely summarizing or interpreting the proposed regulations, recommending statutory revisions to section 6418 or other statutes, or addressing issues that are outside the scope of this rulemaking, such as the calculation of eligible credits (including any bonus credit amounts) or recommended changes to IRS forms, are beyond the scope of these regulations and are generally not described in this preamble.

I. General Rule and Definitions

Proposed § 1.6418-1 would have described general rules related to the transfer of eligible credits. Proposed § 1.6418-1(a) would have provided an overview of a transfer of eligible credits, and paragraphs (b) through (q) would have provided definitions of terms under the section 6418 regulations. Commenters addressed certain aspects of the proposed definitions, as described in this part I. To the extent a definition in § 1.6418-1(b) through (q) is not addressed in this part I and no comment addressed it, such definition is adopted by this Treasury Decision as proposed.

A. Eligible Taxpayer

Section 6418(f)(2) defines the term “eligible taxpayer” to mean any taxpayer that is not described in section 6417(d)(1)(A). Proposed § 1.6418-1(b) would have clarified that the term “eligible taxpayer” means any taxpayer (as defined in section 7701(a)(14) of the Code), other than one described in section 6417(d)(1)(A) and § 1.6417-1(b). The intended cite in the proposed regulations was to § 1.6417-1(c), rather than § 1.6417-1(b). As the preamble to the proposed regulations noted, the term “taxpayer” in section 7701(a)(14) means “any person subject to any internal revenue tax” and generally includes entities that have a United States employment tax or excise tax obligation even if they do not have a United States income tax obligation.

A commenter recommended that an eligible taxpayer also include any person that does not have a United States internal revenue tax obligation, such as a taxpayer that is only subject to the taxes of a territory of the United States. Broadening the definition of eligible taxpayer in section 6418(f)(2) is beyond the definition of taxpayer in section 7701(a)(14) and is not supported by section 6418. Section 6418(f)(2) defines eligible taxpayer as “any taxpayer” not described in section 6417(d)(1)(A). Section 7701(a)(14)

provides the definition of taxpayer for purposes of the Code. Pursuant to section 7701(a), the definition under section 7701(a)(14) apples to all Code provisions unless a different definition is otherwise distinctly expressed or the definition in section 7701(a)(14) is manifestly incompatible with the intent of section 6418. Under section 6418, there is no distinct expression that the term “taxpayer” should include those not subject to any United States tax obligations, and there is no indication that the definition in section 7701(a)(14) is incompatible with the intent of section 6418. Thus, it is appropriate to use the definition of taxpayer in section 7701(a)(14) for purposes of defining eligible taxpayer for purposes of section 6418, and these regulations finalize the definition of eligible taxpayer as proposed.

A commenter requested a clarification that a partnership wholly or partially owned by applicable entities described in section 6417(d)(1)(A) qualifies as an eligible taxpayer under section 6418(f)(2). The Treasury Department and the IRS agree that if such a partnership has not elected to be treated as an applicable entity with respect to the section 45Q credit, section 45V credit, or section 45X credit, it can otherwise qualify as an eligible taxpayer. Section 6418(f)(2) defines eligible taxpayer as a taxpayer other than one described in section 6417(d)(1)(A). Under section 6417 and the section 6417 final regulations, a partnership (regardless of the tax status of its partners) can only be treated as an applicable entity with respect to the section 45Q credit, section 45V credit, or section 45X credit and only if the partnership makes an elective payment election. Further, section 7701(a)(14) defines the term “taxpayer” as any person subject to any internal revenue tax. The term “person” is defined in section 7701(a)(1) and includes a partnership. Consequently, if a partnership has not elected to be treated as an applicable entity with respect to the section 45Q credit, section 45V credit, or section 45X credit, it can qualify as an eligible taxpayer.

The same commenter also sought to clarify that a partnership that has one or more applicable entity partners described in section 6417(d)(1)(A) is entitled to transfer the entirety of the eligible credits determined with respect to a property or facility held directly by the partnership without a reduction of the eligible credits allocable to the applicable entity partners. The Treasury Department and the IRS agree that such a partnership is entitled to transfer the entirety of the eligible credits determined with respect to a property or facility held directly by the partnership; however, section 50(b)(3) and (4) may limit the amount of eligible investment tax credits (ITCs) determined with respect to any tax-exempt or government entity partner.

B. Eligible Credit Property

Section 6418(a) states that an eligible taxpayer can elect to transfer all (or any portion specified in the election) of an eligible credit determined with respect to such eligible taxpayer. Proposed § 1.6418-1(a) would have provided that an eligible taxpayer may make a transfer election to transfer any specified portion of an eligible credit determined with respect to any eligible credit property of the eligible taxpayer for any taxable year. Proposed § 1.6418-1(d) would have defined the term “eligible credit property” as the unit of property of an eligible taxpayer with respect to which the amount of an eligible credit is determined. Proposed § 1.6418-1(d)(1) through (11) would have described the unit of property that is considered an eligible credit property for each of the 11 eligible credits.

A commenter recommended that the final regulations use the same concept of a unit of property as is used for the various underlying eligible credit provisions (for example, energy property or energy project for purposes of section 48, and qualified facility for purposes of section 45). The proposed regulations referenced the statutory rules for each eligible credit to determine the appropriate unit of measurement for section 6418 registration and election and provided additional information relevant for each eligible credit. For example, proposed § 1.6418-1(d)(2) would have provided that, in the case of a section 45 credit, the relevant unit of property is a qualified facility described in section 45(d). Likewise, proposed § 1.6418-1(d)(9) would have provided that, in the case of a section 48 credit, the relevant unit of property is an energy property described in section 48, or, at the option of the taxpayer, an energy project described in section 48(a)(9)(A)(ii) and defined in guidance. The proposed regulations, without modification, are consistent with this comment. Thus, these final regulations, consistent with the proposed regulations, base the definition of an eligible credit property on the underlying Code provisions for the eligible credits and no further changes are necessary.

Another commenter asked for clarification that section 48 credits determined with respect to energy property qualifying as “energy storage technology” under section 48(c)(6)(A) would be eligible credits that could be transferred under section 6418. The preamble to the proposed regulations provided in part that energy property is comprised of all components of property necessary to generate electricity up to the point of transmission or distribution. The commenter raised that “energy storage technology” is specifically designated as “energy property” under section 48(a)(3)(A)(ix), but unlike other forms of “energy property,” it does not generate electricity. The Treasury Department and the IRS confirm that, to the extent a section 48 credit is determined with respect to energy property held by an eligible taxpayer, whether the credit is with respect to energy storage technology or other energy property, such credit is an eligible credit that can be transferred under section 6418 by the eligible taxpayer.

Other commenters recommended revising the definition of eligible credit property for purposes of section 45Q. Proposed § 1.6418-1(d)(3) would have provided that an eligible credit is determined, for purposes of section 45Q, based on a
single process train of carbon capture equipment
described in § 1.45Q-2(c)(3). Commenters recommended that, for the section 45Q credit, the definition of eligible credit property be a component of a single process train for the capture, disposal, utilization, or injection of qualified carbon oxide, rather than a single process train of carbon capture equipment described in § 1.45Q-2(c)(3). Other commenters urged that the final regulations reconcile the proposed rules with Rev. Rul. 2021-13, 2021-30 I.R.B. 152, under which a taxpayer need own only one component in a single process train to be the person to whom the section 45Q credit is attributable to (assuming the taxpayer also meets the requirements of section 45Q(a), as applicable). The Treasury Department and the IRS agree that guidance under section 45Q does not require a taxpayer to own every component of a single process train and have revised the language under § 1.6418-1(d)(3) (defining eligible credit property with respect to the section 45Q credit) to state “[i]n the case of a section 45Q credit, a component of carbon capture equipment within a
single process train
described in § 1.45Q-2(c)(3).”

C. Paid in Cash

Section 6418(b)(1) requires that any amount paid by a transferee taxpayer to an eligible taxpayer as consideration for a transfer be paid in cash. Proposed § 1.6418-1(f) would have defined the

term “paid in cash” to mean a payment in United States dollars that (1) is made by cash, check, cashier's check, money order, wire transfer, automated clearing house (ACH) transfer, or other bank transfer of immediately available funds; (2) is made within the period beginning on the first day of the eligible taxpayer's taxable year during which a specified credit portion is determined and ending on the due date for completing a transfer election statement (as provided in proposed § 1.6418-2(b)(5)(iii)); and (3) may include a transferee taxpayer's contractual commitment to purchase eligible credits with United States dollars in advance of the date a specified credit portion is transferred to such transferee taxpayer if all payment of United States dollars are made in a manner described in proposed § 1.6418-1(f)(1) and during the time period in proposed § 1.6418-1(f)(2).

Several commenters recommended revising the proposed paid in cash rule so that advanced payments could be made for eligible credits that will be determined in later taxable years. For example, commenters specifically requested that the final regulations allow upfront payments for transfers of eligible credits that are production tax credits (PTCs) that are expected to be determined in a future taxable year. Commenters suggested that such a rule would more closely align the timing of payments for eligible credits that are PTCs with the timing of payments for eligible credits that are ITCs. Commenters raised that upfront payments for PTCs determined in future taxable years are standard in tax equity transactions and that allowing for upfront payments for future PTCs under section 6418 would more closely align transferability with traditional tax equity structures. Another commenter asked for clarification that the use of certain loan structures would not violate the paid in cash rule. Specifically, the commenter requested confirmation that loans, including security arrangements, made on arm's length terms by a transferee taxpayer or a third party to an eligible taxpayer would not be treated as an upfront payment under an eligible credit purchase and sale agreement or otherwise recharacterized.

Allowing advanced payments prior to the taxable year an eligible credit is determined may more closely align the section 6418 regulations with current tax equity transactions. However, proposed § 1.6418-1(f)(2) would have specifically provided a timing safe harbor that is intended to provide certainty as to the treatment of payments of United States dollars made during the prescribed time period. Allowing advanced payments would also raise several complex legal and administrative issues, such as whether an excessive credit transfer has occurred or if the eligible taxpayer has gross income if prepaid eligible credits were not transferred in a later tax year. No commenter addressed the administrative and legal challenges of allowing for advanced payments. Based on these reasons, the Treasury Department and the IRS have adopted the paid in cash definition of the proposed regulations without change.

Further, the Treasury Department and the IRS note that there is no prohibition on either a transferee taxpayer or another third-party loaning funds to an eligible taxpayer, including loans secured by an eligible credit purchase and sale agreement, provided such loans are at arm's length and treated as loans for Federal tax purposes. Whether such loans are treated as upfront payments for eligible credits or otherwise recharacterized is an analysis based on the facts and circumstances of the loan and is otherwise outside the scope of these final regulations.

D. Specified Credit Portion

Section 6418(a) provides that an eligible taxpayer can elect to transfer all (or any portion specified in the election) of an eligible credit determined with respect to such taxpayer. Proposed § 1.6418-1(h) would have defined the term “specified credit portion” to mean a proportionate share (including all) of an eligible credit determined with respect to a single eligible credit property of the eligible taxpayer that is specified in a transfer election. The proposed regulations further provided that a specified credit portion of an eligible credit reflects a proportionate share of each bonus credit amount that is taken into account in calculating the entire amount of eligible credit determined with respect to a single eligible credit property. Thus, under the proposed regulations, an eligible taxpayer would not be permitted to sever bonus credit amounts taken into account to determine an eligible credit from the base eligible credit determined with respect to the relevant eligible credit property and separately transfer any bonus credit amount or base eligible credit amount (horizontal credit transfer). Instead, an eligible taxpayer would be permitted to transfer the entire eligible credit (or portion of the entire eligible credit, which would include a proportionate amount of any component bonus credit amounts taken into account to determine the entire eligible credit) determined with respect to a single eligible credit property (vertical credit transfer).

Several commenters recommended that the final regulations allow for horizontal credit transfers and that the term “portion” in section 6418(a) should be broadly construed. As support, commenters contended that horizontal credit transfers would increase flexibility and marketability of eligible credits and allow eligible taxpayers to better allocate credit risk among various transferee taxpayers. Commenters also asserted that requiring vertical credit transfers favors large investors with sufficient resources for diligence, finance, and risk tolerance. One commenter stated that requiring vertical credit transfers will increase the burden of tax administration because auditing a transferee taxpayer's portion of a vertical credit transfer would require a larger audit team and auditors conversant with the rules applicable to the underlying eligible credits and the rules applicable to the bonus credit amounts. Another commenter suggested the final regulations allow for eligible taxpayers to elect either a vertical or a horizontal credit transfer for each specified credit portion.

Each eligible credit determined with respect to a single eligible credit property is a single eligible credit that cannot be separated into a base credit amount and bonus credit amounts for purposes of making transfer elections. The language in section 6418(a) that refers to a portion specified in the election is better understood to refer to a percentage of a single overall eligible credit amount, rather than to a particular “layer” of credit. Further, while commenters suggested allowing horizontal transfers of eligible credits, none of the commenters fully addressed the potential administrative issues with the approach. For example, allowing horizontal credit transfers would add another layer of compliance due to the need for taxpayers and the IRS to track all base and bonus credit amounts separately. Moreover, a bonus credit amount is not itself an eligible credit but only an amount taken into account to determine the single eligible credit with respect to an eligible credit property. In this regard, the pre-filing registration portal does not allow for registration numbers associated only with bonus credit amounts. Thus, these final regulations adopt the definition of specified credit portion in proposed § 1.6418-1(h) without change.

II. Rules for Making Transfer Elections

A. In General

Proposed § 1.6418-2 would have provided general rules for an eligible taxpayer to make a transfer election under section 6418 with respect to any eligible credit determined with respect to such taxpayer. Proposed § 1.6418-2(a)(1) would have provided that an eligible taxpayer can make an election as provided in proposed § 1.6418-2. Proposed § 1.6418-2(a)(2) through (4) would have provided rules regarding making multiple transfer elections, rules for determining the eligible taxpayer in certain ownership situations, and rules describing circumstances in which no transfer election is allowed. Commenters addressed aspects of these proposed rules, as discussed in this part II of the Summary of Comments and Explanation of Revisions. These final regulations generally adopt the rules as proposed, with the modifications described in this part II of the Summary of Comments and Explanation of Revisions.

Proposed § 1.6418-2(a)(2) would have provided that an eligible taxpayer may make multiple transfer elections to transfer one or more specified credit portion(s) to multiple transferee taxpayers, provided that the aggregate amount of specified credit portions transferred with respect to any single eligible credit property does not exceed the amount of the eligible credit determined with respect to the eligible credit property. A commenter asked for clarification of whether an eligible taxpayer may transfer all or a portion of an eligible credit to more than one taxpayer. The Treasury Department and IRS confirm that the proposed regulations, as drafted, would have allowed an eligible taxpayer to make multiple transfer elections of specified credit portions of an eligible credit determined with respect to an eligible credit property subject to the limitation that such portions, in the aggregate, cannot exceed the amount of the determined eligible credit. Because proposed § 1.6418-2(a)(2) would have already provided this result, a revision to the proposed rules is unnecessary, and these final regulations adopt the proposed rule without change.

Proposed § 1.6418-2(a)(3) would have provided rules for transfer elections in certain ownership situations, specifically with respect to ownership through a disregarded entity, as an undivided ownership interest, as a member of a consolidated group (as defined in § 1.1502-1), and for partnerships and S corporations. One commenter asked for clarity as to whether a grantor trust is treated as a disregarded entity in determining ownership of an eligible credit property, and, if a grantor trust directly holds an eligible credit property, which party registers the property and makes a transfer election. The Treasury Department and the IRS agree that these final regulations should provide rules for transfer elections if eligible property is held directly by a grantor trust. Accordingly, the final regulations add § 1.6418-2(a)(3)(v) to provide that if an eligible taxpayer is a grantor or any other person that is treated as the owner of any portion of a trust as described in section 671 of the Code, then the eligible taxpayer may make a transfer election in the manner provided in § 1.6418-2 for any eligible credits determined with respect to eligible credit property held directly by the portion of the trust that the eligible taxpayer is treated as owning under section 671.

Proposed § 1.6418-2(a)(4) would have described three circumstances in which no transfer election can be made. First, consistent with section 6418(g)(4), the proposed regulations would have precluded any election with respect to any amount of an eligible credit determined based on progress expenditures that is allowed pursuant to rules similar to the rules of section 46(c)(4) and (d) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990). Second, consistent with section 6418(b)(1), proposed § 1.6418-2(a)(4)(ii) would have precluded a transfer election if an eligible taxpayer receives any amount not paid in cash (as defined in proposed § 1.6418-1(f)) as consideration in connection with the transfer of a specified credit portion. Third, consistent with section 6418(a), proposed § 1.6418-2(a)(4)(iii) would have provided that no election is allowed if eligible credits are not determined with respect to an eligible taxpayer. As a result, proposed § 1.6418-2(a)(4)(iii) would have provided as an example that a section 45Q credit allowable to an eligible taxpayer because of an election under section 45Q(f)(3)(B), or a section 48 credit allowable to an eligible taxpayer because of an election made under section 50(d)(5) and § 1.48-4, although described in proposed § 1.6418-1(c)(2), is not an eligible credit that can be transferred because such credit is not determined with respect to the eligible taxpayer.

A commenter suggested that the final regulations allow transfers of section 48 ITCs before the taxable year in which the energy property is placed in service. While not explicitly referenced, the commenter appears to be requesting that progress expenditures (under section 48(b)) be permitted to be transferred under section 6418. Section 6418(g)(4) and proposed § 1.6418-2(a)(4)(i) both directly prohibit making a transfer election if an eligible credit is related to progress expenditures. Based on this, these final regulations adopt the rule in proposed § 1.6418-2(a)(4)(i) without change.

Multiple commenters advocated that the proposed regulations be modified to permit a taxpayer that is allowed a section 45Q credit due to an election under section 45Q(f)(3)(B) to make a transfer election with respect to the section 45Q credit. Commenters generally suggested that the proposed rule is incorrect because (1) ownership of the single process train is not necessary for credit determination, and (2) a taxpayer claiming the credit and making an election under section 45Q(f)(3)(B) does in fact determine the credit because of their activities. Commenters relied in part on the language in proposed § 1.6418-2(d)(1), which states that “[f]or an eligible credit to be determined with respect to an eligible taxpayer, the eligible taxpayer must own the underlying eligible credit property or,
if ownership is not required, otherwise conduct the activities giving rise to the underlying eligible credit
[emphasis added].”

A taxpayer that is allowed a section 45Q credit as a result of an election under section 45Q(f)(3)(B) is not the taxpayer with respect to which the section 45Q credit is determined. Under section 45Q(f)(3)(A)(ii), a section 45Q credit is attributable to the person that owns the carbon capture equipment
and
physically or contractually ensures the capture and disposal, utilization, or use as a tertiary injectant of such qualified carbon oxide. Further, under § 1.45Q-1(h)(3), it is the taxpayer described in § 1.45Q-1(h)(1) to whom the section 45Q credit is attributable (electing taxpayer), that may elect to allow the person that enters into a contract with the electing taxpayer to dispose of the qualified carbon oxide (disposer), utilize the qualified carbon oxide (utilizer), or use the qualified carbon oxide as a tertiary injectant to claim the credit (section 45Q(f)(3)(B) election). Contrary to commenters' assertions, it is not sufficient for a party to only conduct carbon capture activities to be eligible for a section 45Q credit. Further, the ownership requirement in the section 45Q statute and regulations means the commenters' suggestions that the language in proposed § 1.6418-2(d)(1) allows a section 45Q credit to be

determined with respect to an eligible taxpayer if the party “otherwise conducts the activities giving rise to the underlying applicable credit” is misplaced. That language in proposed § 1.6418-2(d)(1) applies only in the case of an eligible credit for which ownership of property is not required, which is not the case with respect to a section 45Q credit. Thus, these final regulations clarify in § 1.6418-2(d)(1) that the only eligible credit for which ownership is not required is the section 45X credit. While the activities of a contractor may be necessary for a section 45Q credit to be determined, ultimately, the credit is attributable to and determined by the person that both owns the equipment and physically or contractually ensures the capture and disposal, injection, or utilization of such qualified carbon oxide. Thus, these final regulations adopt the proposed regulations without change on this issue.

A commenter asked that separate, unrelated taxpayers to which section 45Q credits and section 45Z credits are determined with respect to the same qualified facility each be permitted to make a separate transfer election with respect the section 45Q credits or section 45Z credits determined with respect to such taxpayer. Specifically, the commenter requested clarification as to who is an eligible taxpayer if more than one eligible credit (for example, a section 45Q credit and a section 45Z credit) is determined with respect to two unrelated, eligible taxpayers for units of property or a facility within the same general geographic location. The commenter stated that the qualified facility definition under section 45Z(d)(4) should not preclude an owner and producer taxpayer from making a transfer election, even if an unrelated taxpayer who is eligible for the section 45Q credit makes a transfer election in the same taxable year.

It is beyond the scope of these final regulations to address underlying requirements of eligible credits, such as the requirements of sections 45Q and 45Z, and who may be eligible for those credits. The Treasury Department and the IRS will consider this comment in connection with drafting additional guidance under sections 45Q and 45Z.

Several commenters recommended that the final regulations allow transfer elections following a lease passthrough election under the rules of section 50(d)(5), both generally and with specific additional rules (such as, revising § 1.48-4 to require a lessor to commit to not making an election to transfer under section 6418 and requiring the lessee to complete pre-filing registration). One commenter stated that the proposed regulations are inconsistent with existing tax law, suggesting that the original inclusion of the lease passthrough election obviated the need to engage in more complicated sale-leaseback transactions in order to calculate the credit based on fair market value of a property rather than on its cost. The commenter posited that the proposed regulations would upend that balance by putting sale-leaseback transactions on unequal footing with lease passthrough structures in the context of a contemplated transfer of eligible credits, which the commenter thought was precisely the outcome that Congress sought to avoid in 1962 at the time of the introduction of the ITC.

There is a distinction between sale-leaseback transactions under section 50(d)(4) and lease passthrough elections under former section 48(d) (pursuant to section 50(d)(5)). In the latter case, it is the owner or lessor that is the party with respect to which the credit is determined, and not the lessee that is allowed to claim the credit as a result of the election. Therefore, the lessee does not meet the requirement of section 6418(a), which requires the eligible credit to be determined with respect to the eligible taxpayer making the transfer election. For the reasons stated, these final regulations adopt the proposed rule without change.

B. Manner and Due Date of Making a Transfer Election

1. In General

Proposed § 1.6418-2(b)(1) would have provided that an eligible taxpayer must make a transfer election to transfer a specified credit portion on the basis of a single eligible credit property. As an example, the proposed regulations would have provided that an eligible taxpayer that determines eligible credits with respect to two eligible credit properties would need to make a separate transfer election with respect to any specified credit portion determined with respect to each eligible credit property. Because no comments were received on proposed § 1.6418-2(b)(1), these final regulations adopt this provision without change. Some commenters requested that grouping of eligible credit properties be permitted for purposes of registration and making a transfer election. These comments are discussed in part IV of this Summary of Comments and Explanation of Revisions.

2. Special Rules for Certain Eligible Credits

Section 6418(f)(1)(B) provides that, in the case of any eligible credit under sections 45, 45Q, 45V, or 45Y, an election is made (1) separately with respect to each facility for which a credit is determined, and (2) for each taxable year during the 10-year period beginning on the date such facility was originally placed in service (or, in the case of a section 45Q credit, for each taxable year during the 12-year period beginning on the date the single process train of carbon capture equipment was originally placed in service). Proposed § 1.6418-2(b)(2) would have provided rules consistent with section 6418(f)(1)(B). Because no comments were received on proposed § 1.6418-2(b)(2), these final regulations adopt this provision without change.

3. Manner of Making a Valid Transfer Election

Proposed § 1.6418-2(b)(3) would have provided rules for making a valid transfer election and included that a transfer election is made based on each specified credit portion with respect to a single eligible credit property. To make a valid transfer election, an eligible taxpayer as part of filing an annual tax return (or a return for a short year within the meaning of section 443 of the Code), must include the following: (1) a properly completed relevant source credit form for the eligible credit for the taxable year that the eligible credit was determined; (2) a properly completed Form 3800, General Business Credit (or its successor); (3) a schedule attached to the Form 3800 (or its successor) showing the amount of eligible credit transferred for each eligible credit property, except as otherwise provided in guidance; (4) a transfer election statement as described in proposed § 1.6418-2(b)(5); and (5) any other information related to the election specified in guidance. While comments were received on individual aspects of this proposed rule as described later in this Summary of Comments and Explanation of Revisions, there were no comments received on proposed § 1.6418-2(b)(3), and so these final regulations adopt the proposed rule without substantive change. However, the final regulations clarify that the registration number received during the required pre-filing registration (as described in proposed § 1.6418-4) related to an eligible credit property with respect to which a transferred eligible credit was determined must be included on a

properly completed relevant credit source form.

4. Due Date and Original Return Requirement of a Transfer Election

Section 6418(e)(1) states that an election under section 6418(a) to transfer any portion of an eligible credit must be made not later than the due date (including extensions of time) for the return of tax for the taxable year for which the credit is determined, but in no event earlier than 180 days after the date of the enactment of this section. Proposed § 1.6418-2(b)(4) would have provided that a transfer election must be made on an original return not later than the due date (including extensions) for the original return of the eligible taxpayer for the taxable year for which the eligible credit is determined. The proposed regulations stated that no transfer election could be made or revised on an amended return or by filing an administrative adjustment request under section 6227 of the Code (AAR). The preamble to the proposed regulations clarified that an original return includes a superseding return filed on or before the due date (including extensions). The proposed regulations also did not provide for relief under §§ 301.9100-1 through 301.9100-3 (9100 relief) for a late transfer election.

Some commenters asked that a transfer election be permitted on an amended return or AAR and/or that a taxpayer be permitted an extension of time under the 9100 relief procedures to make a late election. Commenters raised concerns that the amount of information required to obtain a registration number and file a transfer election is substantial, and that given there are bound to be omissions and misstatements, an eligible taxpayer should have the ability to cure errors or omissions on an amended return or pursuant to an AAR. Further, commenters urged that 9100 relief should be available in situations in which the parties acted in good faith with respect to a transfer election.

The section 6418 transfer election process is novel and eligible taxpayers may experience inadvertent errors or omissions. The statutory text of section 6418(e), however, provides that a transfer election must not be made “later than the due date (including extensions of time) for the return of tax for the taxable year for which the credit is determined.” The preamble to the proposed regulations provided that eligible taxpayers could make a transfer election on a superseding return up until the extended due date for the return.

Neither the Code nor regulations define a superseding return, but administrative IRS guidance provides that a superseding return is a return filed subsequent to the originally-filed return but before the due date for filing the return (including extensions). For example, if an eligible taxpayer subject to an automatic 6-month extension files an original return on the due date (excluding extensions) and then files a subsequent return within the automatic extension period, the subsequent return would generally be considered a superseding return. Unlike a superseding return, an amended return is a return filed after the taxpayer filed an original return and after the due date for filing the return (including extensions).

Accordingly, these final regulations modify proposed § 1.6418-2(b)(4) by clarifying that a transfer election filed by an electing taxpayer may be made or revised on a superseding return, but not on an amended return or AAR. These final regulations further clarify that a transfer election cannot be made for the first time on an amended return, withdrawn on an amended return, or made or withdrawn by filing an AAR, although a numerical error with respect to a properly claimed transfer election may be corrected on an amended return or by filing an AAR if necessary. This clarification is intended to address situations in which an eligible taxpayer intended to make a transfer election but made a reporting error with respect to an element of a valid election (for example, miscalculating the amount of the eligible credit on the original return or making a typographical error in the process of inputting a registration number), and to allow the eligible taxpayer to correct any errors that would result in a denial of the transfer election. The provision cannot be used to revoke a transfer election made on an original return or to make a transfer election for the first time on an amended return. In addition, the eligible taxpayer's original return (including a superseding return), which must be signed under penalties of perjury, must contain all of the information, including a registration number, required by these final regulations. In order to correct an error on an amended return or AAR, an eligible taxpayer must have made an error in the information included on the original return such that there is a substantive item to correct; a taxpayer cannot correct a blank item or an item that is described as being “available upon request.”

The Treasury Department and the IRS note that the rules described in this part II.B.4 of the Summary of Comments and Explanation of Revisions, regarding the original return requirement, apply to transfer elections made on an originally filed return of the eligible taxpayer. A transferee taxpayer, however, may take a transferred specified credit portion into account on a properly filed amended return or AAR, or correct the amount of the transferred specified credit portion on a properly filed amended return or AAR to, for example, avoid a determination by the IRS that the transferee taxpayer is subject to an excessive credit transfer under § 1.6418-5(a). Excessive credit transfers are discussed in more detail in part V.A of this Summary of Comments and Explanation of Revisions.

An eligible taxpayer may file an amended return or an AAR to adjust the amount of the eligible credit following a timely and properly filed transfer election. Such an adjustment may affect the information that was reported on the transfer election statement under § 1.6418-2(b)(5)(ii), for example, the total amount of the credit determined with respect to the eligible credit property and any corresponding specified credit portion being transferred. Some commenters suggested that the final regulations provide clarity for a taxpayer that may need to correct the amount of an eligible credit reported on its tax return. The final regulations modify proposed § 1.6418-2(b)(4) to provide that an eligible taxpayer may, after making a timely and complete transfer election, file an amended return or AAR, if applicable, to adjust the amount of the eligible credit reported on the eligible taxpayer's original return if the amount of the eligible credit was incorrectly reported on the original return. Under § 1.6418-2(b)(4)(ii)(B), to the extent the eligible taxpayer's correction of an eligible credit results in an increase in the amount of the eligible credit reported, such amount must be reflected on the credit source forms with the eligible taxpayer's amended return or AAR, if applicable. However, such increase cannot be reflected by either the eligible taxpayer or the transferee taxpayer as a transferred specified credit portion on the transfer election statement, in accordance with the rules set forth in § 1.6418-2(b)(4)(i). Those rules, regarding the due date and original return requirement of a transfer election, are described in greater detail in part II.B.3 and 4 of the Summary of Comments and Explanation of Revisions.

Under § 1.6418-2(b)(4)(ii)(C), to the extent the eligible taxpayer's correction of an eligible credit results in a decrease in the amount of the eligible credit

reported, such amount must be reflected on the credit source forms with the eligible taxpayer's amended return or AAR, if applicable, and the transfer election statement reducing the amount of the credit reported. The amount of the decrease first reduces the amount of the eligible credit that is retained, if any (and thus not transferred) by the eligible taxpayer. Any portion of such decrease that remains after reducing the eligible credit retained by the eligible taxpayer then reduces the amount reported by the transferee taxpayer. If the eligible credit was transferred to more than one transferee taxpayer, the reduction to each transferee taxpayer's specified credit portion is on a pro rata basis. The amount of any cash consideration retained by the eligible taxpayer after accounting for any reduction in the amount of the eligible credit transferred to the transferee taxpayer(s) cannot be excluded from gross income. These rules are further described in § 1.6418-2(e)(2). The final regulations provide examples illustrating these rules.

If an eligible taxpayer has made an adjustment such that the specified credit portion is reduced, depending on the facts and circumstances, a transferee taxpayer may be at risk for an excessive credit transfer, should the IRS make such a determination prior to the transferee taxpayer making its own adjustment to correct the specified credit portion through a qualified amended return under § 1.6664-2(c)(3). The eligible taxpayer itself may have income to include to the extent it received a payment that directly relates to the excessive credit transfer.

These final regulations do not mandate a reporting or notification requirement on the eligible taxpayer or the transferee taxpayer in the event of an adjustment that occurs after a timely and properly filed transfer election. The eligible taxpayer and the transferee taxpayer may freely contract for such a requirement. Nevertheless, this part II.B.4 of the Summary of Comments and Explanation of Revisions acknowledges that an adjustment to the eligible credit determined by an eligible taxpayer may impact the tax liability of a transferee taxpayer.

Additionally, these final regulations modify the proposed regulations to permit an extension of time under § 301.9100-2(b) to allow for an automatic six-month extension of time from the due date of the return (excluding extensions) to make the election prescribed in section 6418(e)(1). A transfer election is a statutory election because its due date is prescribed by statute. As such, the section 9100 relief procedures only apply insofar as the late election is being filed pursuant to § 301.9100-2(b), which requires that the taxpayer timely filed its return for the year the election should have been made. Relief under this provision will only apply to taxpayers that have not received an extension of time to file a return after the original due date (excluding extensions). Taxpayers eligible for this relief must take corrective action under § 301.9100-2(c) and follow the procedural requirements of § 301.9100-2(d).

5. Transfer Election Statement

Proposed § 1.6418-2(b)(5)(i) generally would have defined a transfer election statement as a written document that describes the transfer of a specified credit portion between an eligible taxpayer and transferee taxpayer and would have provided rules for both an eligible taxpayer and transferee taxpayer to attach a transfer election statement to their respective return. The proposed regulations would have provided that any document can be used that meets the requirements of proposed § 1.6418-2(b)(5)(ii), with the document labeled as a “Transfer Election Statement” that is attached to a return. The information required in proposed § 1.6418-2(b)(5)(ii) would not otherwise have limited any other information that the eligible taxpayer and transferee taxpayer may agree to provide in connection with the transfer of any specified credit portion. The proposed regulations would have provided that the statement must be signed under penalties of perjury by an individual with authority to legally bind the eligible taxpayer and must also include the written consent of an individual with authority to legally bind the transferee taxpayer.

Proposed § 1.6418-2(b)(5)(ii) described the information required in a transfer election statement, which generally would have included: (1) information related to the transferee taxpayer and the eligible taxpayer; (2) a statement that provides the necessary information and amounts to allow the transferee taxpayer to take into account the specified credit portion with respect to the eligible credit property; (3) an attestation that the parties are not related (within the meaning of section 267(b) or 707(b)(1)); (4) a statement or representation from the eligible taxpayer that it has or will comply with all relevant requirements to make a transfer election; (5) a statement or representation from the eligible taxpayer and the transferee taxpayer acknowledging the notification of recapture requirements under section 6418(g)(3) and the section 6418 regulations (if applicable); and (6) a statement or representation from the eligible taxpayer that it has provided the required minimum documentation to the transferee taxpayer.

A commenter requested clarification on whether a transfer election statement can be a partnership agreement. Unless otherwise provided in guidance, any document, including a written partnership agreement, can serve as a transfer election statement if the document otherwise meets the requirements of proposed § 1.6418-2(b)(5)(i) and includes the information outlined in proposed § 1.6418-2(b)(5)(ii). The Treasury Department and the IRS did not include a specific rule in these final regulations allowing for a partnership agreement to be treated as a transfer election statement because the language in proposed § 1.6418-2(b)(5) was already broad enough to allow for such an agreement to qualify.

Another commenter recommended that an eligible taxpayer be required, in a form accompanying its annual tax return, to list all tax credits it generated in the year by credit type, the total amount of those tax credits it sold, a schedule of projects to which the sold credits relate, the parties to whom it sold, and the remaining credits it retained. The Treasury Department and the IRS note that the registration and transfer election process will require an eligible taxpayer to list all eligible credits it determined and transferred during a taxable year. Additionally, an eligible taxpayer will be required to file the relevant credit source forms and the Form 3800, which will include the type of credits the eligible taxpayer determined and if it claimed any credits against its tax liability. At this time, the Treasury Department and the IRS do not think it is necessary for tax administration purposes for an eligible taxpayer to report the parties to whom it transferred eligible credits as part of the registration process. This is because the IRS matches the registration numbers obtained by an eligible taxpayer in the registration process with the transferee taxpayers that claim transferred specified credit portions against their tax liability. Because no changes are necessary to proposed § 1.6418-2(b)(5)(i) and (ii), these final regulations adopt these provisions without substantive change.

Proposed § 1.6418-2(b)(5)(iii) described the time by which a transfer election statement must be completed. The proposed rule provided that a transfer election statement can be completed at any time after the eligible taxpayer and transferee taxpayer have sufficient information to meet the

requirements of proposed § 1.6418-2(b)(5)(ii), but, for any year, the transfer election statement cannot be completed after the earlier of: (1) the filing of the eligible taxpayer's return for the taxable year for which the specified credit portion is determined with respect to the eligible credit; or (2) the filing of the transferee taxpayer's return for the year in which the specified credit portion is taken into account. Because no comments were received on proposed § 1.6418-2(b)(5)(iii), these final regulations adopt this provision without change.

Proposed § 1.6418-2(b)(5)(iv) would have defined required minimum documentation as the minimum documentation that the eligible taxpayer is required to provide to a transferee taxpayer. This documentation included: (1) information that validates the existence of the eligible credit property; (2) if applicable, documentation substantiating that the eligible taxpayer has satisfied the requirements to include any bonus credit amounts (as defined in proposed § 1.6418-1(c)(3)); and (3) evidence of the eligible taxpayer's qualifying costs in the case of a transfer of an eligible credit that is part of the investment credit or the amount of qualifying production activities and sales amounts, in the case of a transfer of an eligible credit that is a production credit. Proposed § 1.6418-2(b)(5)(v) would have specified that a transferee taxpayer, consistent with § 1.6001-1(e), would be required to retain the required minimum documentation provided by the eligible taxpayer so long as the contents thereof may become material in the administration of any internal revenue law.

Several commenters recommended that the final regulations increase the amount of required minimum documentation that an eligible taxpayer must provide to a transferee taxpayer to make a valid transfer election under section 6418(a). One commenter urged that all of the records that would be necessary for an eligible taxpayer to substantiate the claimed tax credit should be provided to the transferee taxpayer. Other commenters stated that more robust minimum documentation requirements should be imposed, including specific disclosure requirements and minimum documentation that an eligible taxpayer must provide to a transferee taxpayer concerning compliance with labor laws and an affirmation that the eligible taxpayer has undertaken best efforts to establish compliance. Another commenter asked for confirmation that the required minimum documentation is the same for all taxpayers.

In providing for the required minimum documentation that an eligible taxpayer must provide to a transferee taxpayer, the intention was to require a baseline of information that is necessary for validating an eligible taxpayer's claim of eligibility to an eligible credit, while not overburdening the eligible taxpayer with production requirements or altering the arm's length arrangement between the parties. Further, the proposed regulations did not limit the amount or type of information that a transferee taxpayer can require prior to agreeing to an eligible credit transfer. This means that while the required minimum documentation requirements are the same for all taxpayers, any particular agreement between an eligible taxpayer and transferee taxpayer may go beyond the required minimum documentation based on the arrangement of the parties. The proposed regulations allowed sufficient flexibility for market participants to determine if more information is necessary in a particular transaction, while balancing the burden of producing the required minimum documentation required to make a transfer election. Thus, these final regulations adopt proposed § 1.6418-2(b)(5)(iv) and (v) without substantive change.

Another commenter requested clarification that any responsibility to engage in regular reporting of certified payroll, apprentice labor hour reports, or other obligation under the prevailing wage and apprenticeship requirements for transferred specified credit portions remain with the eligible taxpayer. Because an eligible taxpayer determines any increased credit amount applicable to the prevailing wage and apprenticeship requirements, proposed regulations under section 45 would provide that the requirements relevant to determining the credit, including the correction and penalty provisions described in section 45(b)(7)(B) and 45(b)(8)(D), would remain with the eligible taxpayer who determined the credit. On August 30, 2023, the Treasury Department and the IRS published proposed regulations under section 45 (REG-100908-23) in the
Federal Register
(88 FR 60018) (section 45 proposed regulations) that would also provide that the general recordkeeping requirements for prevailing wage and apprenticeship (PWA) requirements would remain with an eligible taxpayer who transfers a specified credit portion that includes an increased credit amount. The section 45 proposed regulations would not require regular reporting of certified payroll or apprentice labor hour reports to the IRS. The responsibility of determining a credit is initially with the eligible taxpayer, and the transfer of an eligible credit does not relieve an eligible taxpayer of this responsibility or the responsibility to substantiate. Thus, the responsibility for substantiating a PWA increased credit amount does not shift to the transferee taxpayer, although a transferee taxpayer may be treated as the relevant taxpayer for other purposes under the IRA under section 6418(a). In light of the section 45 proposed regulations, the Treasury Department and the IRS have determined that no clarification is needed under proposed § 1.6418-2(b)(5)(iv) and (v) and thus, these final regulations adopt these provisions without substantive change.

C. Limitations After a Transfer Election Is Made

Proposed § 1.6418-2(c)(1) would have provided that a transfer election with respect to a specified credit portion is irrevocable. No comments were received on this rule, and these final regulations adopt the rule without change.

Consistent with section 6418(e)(2), proposed § 1.6418-2(c)(2) would have provided that a specified credit portion may only be transferred pursuant to a transfer election once. A transferee taxpayer cannot make a transfer election of any specified credit portion transferred to the transferee taxpayer. As described in the Explanation of Provisions in the preamble to the proposed regulations, the proposed rule would have disallowed any arrangement in which the Federal income tax ownership of a specified credit portion transfers first from an eligible taxpayer to a dealer or intermediary and then, ultimately, to a transferee taxpayer. In contrast, the Explanation of Provisions in the preamble to the proposed regulations provided that an arrangement using a broker to match eligible taxpayers and transferee taxpayers should not violate the no additional transfer rule, assuming the arrangement at no point transfers the Federal income tax ownership of a specified credit portion to the broker or any taxpayer other than the transferee taxpayer.

Commenters advocated for the final regulations to allow certain transactions with brokers, or other taxpayers, that were disallowed under proposed § 1.6418-2(c)(2) based on the no additional transfer rule of section 6418(e)(2). Those commenters posited that allowing such transactions would increase the number of participants entering the credit purchasing market. Another commenter recommended that

the final regulations apply the no additional transfer rule in proposed § 1.6418-2(c)(2) to prohibit only successive transfers made by a transferee taxpayer specified in the transfer election, assuming the intent of the rule is not to prohibit the development of a liquid trading market or derivative activity by third parties other than the eligible taxpayer. The commenter stated that if the intent of the rule is to prevent the development of such a market or activities, then the final regulations should contain clear and administrable rules based upon the other timing rules provided in the proposed regulations because applying normal “benefits and burdens of ownership” principles, as described in the Explanation of Provisions in the preamble to the proposed regulations, to transfers of eligible credits is not workable.

The Treasury Department and the IRS agree that it is unnecessary to apply benefits and burdens of ownership principles to transfers of eligible credits under section 6418, but no changes are needed to proposed § 1.6418-2(c)(2) because it does not reference those principles. To clarify the rules, to make a transfer election, all the requirements of § 1.6418-2(b) must be satisfied. Until the requirements are satisfied, then there is no valid transfer, no transferee taxpayer, and the requirements of § 1.6418-2(c)(2) are not applicable. To the extent there are brokers or other taxpayers providing liquidity, it is noteworthy that any payments received by those taxpayers related to eligible credits will be taxable because the provisions of section 6418 will not prevent the inclusion of gross income for such taxpayers, or for any amounts received by an eligible taxpayer other than amounts paid by a transferee taxpayer in consideration for the eligible credit. Further, if brokers, or others, are transferred a specified credit portion after satisfying the rules of § 1.6418-2(b) such that they are considered transferee taxpayers, then the prohibition of section 6418(e)(2) and the requirements of § 1.6418-2(c)(2) will prevent a second transfer by such transferee taxpayer.

A commenter recommended that the final regulations clarify that agreements for the right to purchase eligible credits may be transferred and are not subject to the rule in proposed § 1.6418-2(c)(2). Specifically, the commenter raised that the statutory language prohibiting multiple transfers with respect to any portion of an eligible credit does not prohibit a transferee taxpayer that entered into an agreement with an eligible taxpayer for the right to purchase eligible credits for a number of years from transferring that right to another transferee taxpayer as long as the eligible credits themselves have not been transferred to the original transferee taxpayer first. These final regulations do not adopt a specific rule related to this situation because it describes a transaction that is outside of section 6418. As previously described, until the requirements of a valid transfer election are satisfied, then there is no valid transfer and no transferee taxpayer.

Several commenters asked for clarity on when a transfer has occurred or recommended the point at which a transfer has occurred. For example, one commenter recommended a rule that once the amount of the credit has been determined, the specified credit portion is considered to have been transferred on the earliest date on which payment for credit has been made, the last day of the eligible taxpayer's taxable year, or (if earlier) the date the transfer election statement has been filed. To clarify, a transfer of a specified credit portion does not technically occur until an eligible taxpayer satisfies all the requirements in § 1.6418-2(b) to make a valid transfer election. However, it is important to note that the technical transfer date does not necessarily control for other purposes of section 6418. For example, under the paid in cash rule, amounts can be paid with respect to the specified credit portion as early as the beginning of the taxable year in which the related eligible credit is determined.

D. Determining the Eligible Credit

Section 6418(a) states that an eligible taxpayer may elect to transfer an eligible credit determined with respect to such taxpayer. Proposed § 1.6418-2(d) would have provided rules to clarify how an eligible taxpayer determines an eligible credit. Under proposed § 1.6418-2(d)(1), an eligible taxpayer can only transfer eligible credits determined with respect to the eligible taxpayer. The proposed regulations would have provided that, for an eligible credit to be determined with respect to an eligible taxpayer, the eligible taxpayer must own the underlying eligible credit property or, if ownership is not required, conduct the activities giving rise to the underlying eligible credit.

A commenter suggested that, in the absence of clear statutory language indicating that ownership of underlying eligible credit property or conducting activities giving rise to the underlying eligible credit is a prerequisite to transferability, such requirements should not be imposed under proposed § 1.6418-2(d)(1). The text of section 6418(a), which requires the eligible credit to be determined with respect to the eligible taxpayer, and the text of the underlying eligible credit provisions confirm the requirement that ownership of underlying eligible credit property or conducting activities giving rise to the underlying eligible credit is a prerequisite to transferability. However, as discussed in part 2.A of this Summary of Comments and Explanation of Revisions, these final regulations clarify that the only eligible credit for which an eligible taxpayer does not have to own an underlying eligible credit property, and instead can merely conduct activities, is section 45X. This revision should help clarify the “determined with respect to” requirements of section 6418.

A commenter noted that section 50(b)(1) limits the use of certain eligible credits in the territories and requested that the final regulations provide an exception to section 50(b)(1) to allow eligible taxpayers in U.S. territories to transfer all eligible credits. Since before the enactment of the IRA, section 50(b)(1) has limited the use of certain credits (including ITCs, vehicle-related credits, and energy efficiency incentives) for property used in the U.S. territories. Section 50(b)(1) provides that no credit can be determined with respect to any property that is used predominantly outside the United States
1

unless section 168(g)(4)(G) applies. Section 168(g)(4)(G) provides an exception for any property that is owned by a domestic corporation or by a United States citizen other than a citizen entitled to the benefits of sections 931 or 933, and that is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States. The IRA did not amend these provisions; instead, the IRA specifically referenced section 50(b)(1) in section 30C and did not exclude section 48, 48C, or 48E from the application of section 50(b)(1). Without specific language in section 6418 or in the underlying eligible credits addressing section 50(b)(1), or other compelling evidence of Congressional intent, a special rule turning off the application of section 50(b)(1) is not supported by the Code. Therefore, these final regulations do not adopt this recommendation.

1
Under section 7701(a)(9), “[t]he term `United States' when used in a geographical sense includes only the States and the District of Columbia.”

E. Treatment of Payments Made in Connection With a Transfer Election

Section 6418(b)(1) through (3) provides rules related to the treatment of payments made in connection with a transfer. Proposed § 1.6418-2(e)(1) through (4) would have provided guidance related to these rules, including that such amounts are required to be paid in cash, are not includable in the gross income of the eligible taxpayer and are not deductible by the transferee taxpayer, as well as an anti-abuse rule that included examples illustrating the anti-abuse rule.

1. Cash Requirement

Section 6418(b)(1) requires that any amount paid by a transferee taxpayer for an eligible credit must be paid in cash. Consistent with section 6418(b)(1), proposed § 1.6418-2(e)(1) would have provided that an amount paid by a transferee taxpayer to an eligible taxpayer would be consideration for a transfer of a specified credit portion only if it is paid in cash (as defined in proposed § 1.6418-1(f)), directly relates to the specified credit portion, and is not described in proposed § 1.6418-5(a)(3) (describing payments related to an excessive credit transfer). Consistent with section 6418(b)(2), proposed § 1.6418-2(e)(2) would have provided that any amount paid to an eligible taxpayer as consideration for a transfer of a specified credit portion is not includible in the gross income of the eligible taxpayer. Correspondingly and consistent with section 6418(b)(3), proposed § 1.6418-2(e)(3) would have provided that no deduction is allowed to the transferee taxpayer for consideration that is paid as consideration for a transfer of a specified credit portion.

2. Anti-Abuse Provision

Section 6418(h) authorizes the Secretary to issue regulations or other guidance that may be necessary to carry out the purposes of section 6418. To prevent transactions contrary to the purposes of section 6418, the proposed regulations would have included an anti-abuse provision in proposed § 1.6418-2(e)(4). This rule would have provided that a transfer election of any specified credit portion, and therefore the transfer of that specified credit portion to a transferee taxpayer, may be disallowed, or the Federal income tax consequences of any transaction(s) effecting such a transfer may be recharacterized, in circumstances in which the parties to the transaction have engaged in the transaction or a series of transactions with the principal purpose of avoiding any Federal tax liability beyond the intent of section 6418. For example, under the proposed rule, an amount of cash paid by a transferee taxpayer would not be considered as paid in connection with the transfer of a specified credit portion in proposed § 1.6418-2(e)(1) if a principal purpose of a transaction or series of transactions was to allow an eligible taxpayer to avoid gross income. Conversely, an amount of cash paid by a transferee taxpayer would have been considered paid in connection with the transfer of a specified credit portion under proposed § 1.6418-2(e)(1) if a principal purpose of a transaction or series of transactions was to increase a Federal income tax deduction of a transferee taxpayer.

The proposed regulations included two examples in § 1.6418-2(e)(4)(ii) and (iii) to illustrate the application of the anti-abuse rule. In the first example, to avoid recognizing gross income, the eligible taxpayer (Taxpayer A) undercharges for services to the transferee taxpayer (Customer B) in combination with the transfer of a specified credit portion, and so the transaction is recharacterized. Specifically, Taxpayer A normally charges $20 for the same services without the purchase of the eligible credit, and the average transfer price of the eligible credit between unrelated parties is $80 paid in cash for $100 of an eligible credit. The example provides that Taxpayer A instead charges Customer B $100 for the eligible credit and $0 for the services. In the second example, to increase a transferee taxpayer's (Customer D) deduction, an eligible taxpayer (Taxpayer C) overcharges for property and undercharges for the eligible credit. Specifically, Taxpayer C normally charges $20 for the same property without the transfer of the eligible credit, and the average transfer price of an eligible credit between unrelated parties is $80 paid in cash for $100 of the eligible credit. The example provides that Taxpayer C instead charges Customer D $80 for the property and $20 for the eligible credit. In both examples, the proposed regulations would have recharacterized the transactions.

A number of commenters made suggestions related to the proposed anti-abuse rule and examples. One commenter urged the Treasury Department and the IRS to take all possible precautionary measures to protect taxpayer interests and prevent abuse. Another commenter, while acknowledging that concerns raised by the anti-abuse rule and the examples are fair and appropriate, recommended as an alternative that the final regulations only include the general anti-abuse rule and remove the specific rules and examples. The commenter suggested that the IRS could rely on generally applicable principles and the anti-abuse rule to recharacterize abusive transactions and separately issue sub-regulatory guidance to provide safe harbors for cases in which the anti-abuse rule will not be asserted. The commenter also suggested that the IRS could issue further clarifying guidance if a publicly available and readily commoditized market develops. While the commenter did not expressly describe the specific rules it recommended be removed, the Treasury Department and the IRS infer that the commenter was referring to the language describing situations that had a principal purpose of eligible taxpayers avoiding the recognition of gross income or of transferee taxpayers increasing deductions. Other commenters, however, recommended that the final regulations include additional specific examples or safe harbors to determine those situations that would not be considered abusive. In considering all of these commenters' views, the Treasury Department and IRS have determined that taxpayers would benefit from having fact patterns in these final regulations that are likely to represent situations in which abuse could be present. Thus, these final regulations adopt the anti-abuse provision of the proposed regulations, but with certain revisions in response to commenters that are described in the following paragraphs.

A commenter noted a discrepancy in the language of the anti-abuse rule in proposed § 1.6418-2(e)(4)(i), making it unclear whether the standard of the anti-abuse rule was that parties to the transaction have engaged in the transaction or a series of transactions with “the” or “a” principal purpose of tax avoidance. As noted by the commenter, the use of “the” or “a” represent different standards. To demonstrate the difference, the commenter compared the regulations under section 269 of the Code (employing a “the principal purpose” standard) with the regulations under section 881 of the Code (section 881 regulations) (employing a “one of the principal purposes” standard). The proposed rule was intended to apply the anti-abuse provision if a transaction was entered into with “a” principal purpose of avoidance of tax beyond the intent of section 6418. In response to the comment, these final regulations are

clarified. This “a” principal purpose standard is similar to other anti-abuse standards, such as the standard in the section 881 regulations cited by the commenter or the anti-abuse rule in § 1.45D-1(g) (relating to the new markets tax credit determined under section 45D (section 45D credit)). This standard is appropriate based on the goals of preventing fraud and improper payments and in accordance with section 6418(h) to provide rules necessary to carry out the purposes of section 6418.

Another commenter requested clarification on the meaning of the phrase “will be considered paid” in proposed § 1.6418-2(e)(4)(i), noting that the proposed regulations would have provided that an “amount of cash paid by a transferee taxpayer will not be considered as paid in connection with the transfer of a specified credit portion under paragraph (e)(1) of this section if a principal purpose of a transaction or series of transactions is to allow an eligible taxpayer to avoid gross income.” The commenter stated, however, that the next sentence in proposed § 1.6418-2(e)(4)(i) provides: “[c]onversely, an amount of cash paid by a transferee taxpayer
will be considered paid
in connection with the transfer of a specified credit portion under paragraph (e)(1) of this section if a principal purpose of a transaction or series of transactions is to increase a Federal income tax deduction of a transferee taxpayer [emphasis added].” The commenter believed that the “will be considered paid” in the quoted second sentence should read as “will not be considered paid” similar to the quoted first sentence. The Treasury Department and the IRS clarify that the proposed rule is written as intended, and no changes to the proposed rule are made based on this comment. The quoted second sentence is describing a situation in which a transferee taxpayer paid less for an eligible credit and more for an item or service that resulted in a deduction. In this scenario, it is correct that the amount “will be considered paid” in connection with the transfer of the specified credit portion, and not with respect to the purchase of the item that was deductible.

Commenters requested clarification of the language in the examples in proposed § 1.6418-2(e)(4)(ii) and (iii) that referred to the “the average transfer price of the eligible credit between unrelated parties” in determining whether the transactions are subject to recharacterization under the proposed anti-abuse rule. Commenters raised concerns about the availability of pricing information, including specifically in the case of the section 45U credit. A commenter thought that there will be insufficient publicly available pricing information, and if the available data are limited and incomplete, price averages will not yield reliable results. That same commenter noted that if the IRS develops the requisite data to determine an average transfer price for each eligible credit, organizing such data and publishing it regularly would be administratively burdensome. Further, commenters were concerned that the average price would not take into account the facts and circumstances of an arrangement, which commenters believed relevant for determining price. The commenter recommended changing “the average transfer price of the eligible credit between unrelated parties” to “an arm's length price of the eligible credit without regard to other commercial relationships” could solve potential issues with the language in the proposed regulations. The commenter stated that the recommendation would also resolve a separate comment related to the use of the term “unrelated party” in the proposed regulations by clarifying that the intent was the price be determined without regard to other commercial relationships.

In response, these final regulations adopt the commenter's suggested language and revise the examples in proposed § 1.6418-2(e)(4)(ii) and (iii) accordingly. This change is made in acknowledgment that average price data may not be currently available, may take more time to develop, and will most likely be dependent on the facts and circumstances of the transaction (for example, the risk profile of the project). The language suggested by the commenter will still allow average transfer price data to be used to the extent it is relevant. The intent of using an average transfer price was to suggest an objective criterion for evaluating a transaction, along with using the pricing information of the eligible taxpayer in the determination. While the language “an arm's length price of the eligible credit without regard to other commercial relationships” has the potential to add more subjectivity to the determination, concerns with respect to determining the average transfer price of a certain eligible credit, including those with limited markets, outweigh any benefit with respect to retaining a potentially more objective standard.

Another commenter requested clarification on whether a transfer of a credit for cash consideration could ever be fully respected in cases in which the cash consideration for such credit transfer is greater or less than the average transfer price of the eligible credit between unrelated parties. Any deviation from an average transfer price of an eligible credit should not necessarily require recharacterization under the anti-abuse rule; however, the revisions made to the examples in proposed § 1.6418-2(e)(4)(ii) and (iii) should help clarify this issue. The intent of the anti-abuse rule is to allow recharacterization if the price paid is not economically supportable and is unreasonable based on the facts and circumstances of the transaction.

Another commenter asked that the final regulations include considerations of whether an eligible taxpayer is viewed as transferring credits at a discount without avoiding tax liabilities. For example, if an eligible taxpayer is willing to transfer eligible credits at a discount and receive income from product sales or services that is in accordance with such eligible taxpayer's acceptable investment rate of return, the commenter wanted to know whether the anti-abuse rule would be applicable. In the commenter's hypothetical, the eligible taxpayer appears to be decreasing the price of eligible credits to encourage customers to purchase products or services but not making a corresponding increase to the price of its products or services, which could avoid recognizing gross income. However, the facts and circumstances would dictate whether the eligible taxpayer and the transferee taxpayer were engaging in the transaction with a principal purpose of avoiding any Federal income tax liability beyond the intent of section 6418.

The Treasury Department and the IRS have concluded that it is premature to adopt any safe harbor or a list of abuse examples in these final regulations in § 1.6418-2(e)(4) but will continue to study transactions between eligible taxpayers and transferee taxpayers to determine if it is appropriate to adopt an objective safe harbor or clarify other examples of abusive practices.

F. Transferee Taxpayer's Treatment of Eligible Credit

1. Taxable Year

Pursuant to section 6418(d), a transferee taxpayer takes the transferred eligible credit into account in its first taxable year ending with, or after, the eligible taxpayer's taxable year with respect to which the transferred eligible credit was determined. Proposed § 1.6418-2(f)(1) would have adopted this rule and further explained that to the extent the taxable years of an eligible taxpayer and a transferee taxpayer end on the same date, the

transferee taxpayer will take the specified credit portion into account in that taxable year. To the extent the taxable years of an eligible taxpayer and a transferee taxpayer end on different dates, the transferee taxpayer will take the specified credit portion into account in the first taxable year that ends after the taxable year of the eligible taxpayer.

Commenters requested clarification on whether a taxpayer that has a 52-53-week taxable year can rely on § 1.441-2(c)(1) to allow its taxable year that otherwise ends the last Saturday in December to be treated as ending on December 31. Otherwise, a transferee taxpayer with a 52-53-week taxable year would have to wait until the following taxable year to take into account an eligible credit that was transferred by an eligible taxpayer with a calendar year. A similar delay could result if the eligible taxpayer had a 52-53-week taxable year ending in January and the transferee taxpayer has a taxable year ending on December 31. Section 1.441-2(c)(1) provides, in relevant part, that for purposes of determining the effective date (for example, of legislative, regulatory, or administrative changes) or the applicability of any provision of the internal revenue laws that is expressed in terms of taxable years beginning, including, or ending with reference to the first or last day of a specified calendar month, a 52-53-week taxable year is deemed to begin on the first day of the calendar month nearest to the first day of the 52-53-week taxable year, and is deemed to end or close on the last day of the calendar month nearest to the last day of the 52-53-week taxable year, as the case may be. While the fact patterns from commenters do not fall within the explicit language of § 1.441-2(c)(1), the Treasury Department and the IRS conclude it is consistent to adopt a similar rule with respect to taxable year ends for purposes of section 6418(d). Thus, these final regulations include a rule in § 1.6418-2(f)(1)(ii) providing that, for purposes of determining the taxable year in which a credit is taken into account under section 6418(d) and § 1.6418-2(f)(1)(i), a 52-53-week taxable year of an eligible taxpayer and transferee taxpayer is deemed to end on or close on the last day of the calendar month nearest to the last day of the 52-53-week taxable year, as the case may be. Thus, in the fact patterns described by commenters, the transferee taxpayer and the eligible taxpayer would have the same year end, and the transferee taxpayer would not have to wait until the following year-end to take the eligible credit into account.

Another commenter asked when a transferee taxpayer with a taxable year that is a calendar year can take into account an eligible credit transferred from an eligible taxpayer that has a fiscal year ending June 30, if the eligible taxpayer's project was placed in service on November 1, 2023, and the eligible taxpayer proposes to transfer the eligible credit to the transferee taxpayer on November 15, 2023 (and assuming all other requirements of section 6418 were met). It appears this comment is seeking clarity on whether it is possible for an eligible taxpayer to determine an eligible credit during its taxable year beginning July 1, 2023, and ending June 30, 2024, and transfer the eligible credit in November 2023 to a transferee taxpayer with a taxable year ending December 31, 2023, for the transferee taxpayer to use in calculating its 2023 tax liability. Section 6418(d)(1) requires that a transferee taxpayer take a specified credit portion into account in a taxable year ending with or after the taxable year of the eligible taxpayer to which the eligible credit was determined. In this fact pattern, the transferee taxpayer's taxable year ends after the eligible taxpayer's taxable year. The transferee taxpayer cannot take into account the eligible credit until its first taxable year ending after June 30, 2024, meaning that the transferee taxpayer would have to wait until it filed its 2024 tax return (not considering whether the transferee taxpayer was able to use the eligible credit against its estimated tax payments as described in part II.F.5 of this Summary of Comments and Explanation of Revisions). The eligible taxpayer's taxable year end of June 30, 2023, does not impact this analysis, as there was no eligible credit determined with respect to the eligible taxpayer in that taxable year. Further, even if a credit was determined in the taxable year ending June 30, 2023, because section 6418 only applies to taxable years beginning after December 31, 2022, no eligible credits generated in such year are eligible to be transferred.

2. No Gross Income for a Transferee Taxpayer Upon Claiming a Transferred Specified Credit Portion

Proposed § 1.6418-2(f)(2) would have provided that a transferee taxpayer does not have gross income upon claiming a transferred specified credit portion even if the amount of cash paid to the eligible taxpayer was less than the amount of the transferred specified credit portion, assuming all other requirements of section 6418 are met. For example, a transferee taxpayer who paid $9X for $10X of a specified credit portion that the transferee taxpayer then claims on its return does not result in the $1X difference being included in the gross income of the transferee taxpayer.

A commenter suggested that the proposed rule conflicted with
Palmer
v.
Commissioner,
302 U.S. 63 (1937), which held that the purpose of a bargain purchase determines its tax treatment; that is, if it is intended as compensation, then it is so treated for Federal tax purposes. Based on the case, the commenter thought that it is not possible to determine that a bargain purchase of a tax credit is not gross income to the purchaser, as the proposed regulations provided, without examining the facts and circumstances surrounding the transaction.

Proposed § 1.6418-2(f)(2) does not conflict with
Palmer.
The proposed rule presumes that the eligible taxpayer and the transferee taxpayer negotiated the consideration paid for the specified credit portion at arm's length and that the difference between the specified credit portion and the consideration paid for the credit (the “discount”) reflects the transferee taxpayer's assumption of the risk of an excess credit transfer or recapture event. The proposed rule does not preclude the IRS from parsing the net consideration paid for the specified credit portion and analyzing whether the net consideration reflects a reduction due to an amount separately owed by the transferor to the transferee due to the receipt of services or property from the transferee. In such situation, the proposed rule does not preclude the IRS from asserting that a portion of the discount is income to the transferee taxpayer under
Palmer
or the anti-abuse rule in § 1.6418-2(e)(4) if a portion of the discount, in fact, constitutes compensation to the transferee taxpayer under section 61. Section 6418(a) is unambiguous that the transferee taxpayer is treated as the eligible taxpayer for purposes of the Code. Because the eligible taxpayer does not recognize gross income from generating or claiming a transferred specified credit portion under the Code, the Treasury Department and the IRS interpret section 6418(a) to provide the transferee taxpayer with the same treatment upon claiming a transferred specified credit portion acquired at a discount. Section 6418(a) is also unambiguous that the income exclusion is limited to the claiming of the eligible credit and does not cover compensation paid to the transferee taxpayer.

For these reasons, these final regulations adopt proposed § 1.6418-2(f)(2) without substantive change.

3. Transferee Taxpayer Treated as the Eligible Taxpayer

Consistent with the language in section 6418(a), proposed § 1.6418-2(f)(3)(i) would have provided that a transferee taxpayer (and not the eligible taxpayer) is treated as the taxpayer for purposes of the Code with respect to the transferred specified credit portion. Proposed § 1.6418-2(f)(3)(i) further explained that an eligible taxpayer must apply the rules necessary to determine the amount of an eligible credit prior to making the transfer election for a specified credit portion, and therefore a transferee taxpayer does not re-apply rules that relate to a determination of an eligible credit, such as the rules in sections 49 or 50(b). However, a transferee taxpayer must apply rules that relate to computing the amount of the specified credit portion that is allowed to be claimed in the taxable year by the transferee taxpayer, such as the rules in sections 38 or 469, as applicable.

a. Passive Credit Rules Generally

Proposed § 1.6418-2(f)(3)(ii) provided a more specific rule regarding application of section 469 to a transferee taxpayer. This proposed rule provided that a specified credit portion transferred to a transferee taxpayer is treated as determined in connection with the conduct of a trade or business and, if applicable, such transferred specified credit portion is subject to the rules in section 469 (passive credit rules).

Many comments were received regarding the application of section 469 to transferred specified credit portions. One commenter supported applying the passive credit rules to transferee taxpayers and believed that a more restrictive rule would better prevent potential fraud and abuse. Similarly, another commenter raised that allowing individuals to be credit purchasers raises important potential concerns about fraud and abuse since individuals, particularly those who are less affluent, may have less ability to perform due diligence on the transferred eligible credits and may become targets of fraudulent schemes. Most commenters, however, asserted that the passive credit rules should not apply to transferee taxpayers or that the rules should only apply in limited circumstances.

Some commenters argued that applying the rules will limit the market of potential purchasers of eligible credits to corporate entities with large tax liabilities and thus, exclude other taxpayers as potential investors. Other commenters contended that if the passive credit rules did not apply to transferee taxpayers, participation of individuals could materially increase, which would strengthen the transferability market and support the IRA's renewable energy and job creation goals. One commenter supported providing a carveout from the application of the passive credit rules for projects that generate less than 5 megawatts of energy. A few commenters requested that if the application of the passive credit rules remains, the Treasury Department and the IRS should allow for some amount of non-passive income tax liability flowing from operating S corporations and limited liability companies to be eligible to be offset by transferred eligible credits.

Many commenters addressed the rule in proposed § 1.6418-2(f)(3)(ii) that would treat a specified credit portion transferred to a transferee taxpayer as determined in connection with the conduct of a trade or business. One commenter generally supported the position that an eligible credit is earned in connection with the conduct of a trade or business, as that reflects how an eligible credit would arise. Other commenters, however, contended that treating transferred specified credit portions as earned in connection with a trade or business is inconsistent with the language in section 6418(a), which states that the transferee taxpayer is treated as the taxpayer with respect to a transferred credit. Some commenters stated that the language in section 6418(a) should be read as only transferring the rights of the credit to the transferee rather than subjecting the transferee to the passive credit rules. Another commenter argued that section 469 cannot apply to an activity that is not owned directly, or indirectly, by the taxpayer. A few commenters urged that instead of treating transferred specified credit portions as determined in connection with the conduct of a trade or business, it would be appropriate to treat transferee taxpayers as engaged in an investment activity and specified credit portions as determined in connection with such investment activity. As support for this position, these commenters cited Rev. Rul. 2010-16, 2010-26 I.R.B. 769, which addresses the application of the passive credit rules to section 45D credits earned through certain factual situations. Although unclear, another commenter appeared to assert that a transferred specified credit portion should be treated as a capital asset under section 1221 to a transferee taxpayer and that
Palmer
v.
Commissioner, supra,
is misapplied.

The language in section 6418 is most straightforwardly understood to not support disregarding the passive credit rules for transferred specified credit portions or applying the rules in a different manner than they apply to other general business credits arising in a trade or business. In enacting the novel credit delivery mechanisms of sections 6417 and 6418 as part of the IRA, Congress considered the application of the rules governing the determination and the utilization of tax credits. In cases in which Congress desired to alter the application of certain rules, they provided as such. For example, Congress generally turned off section 38(c) and sections 50(b)(3) and (4)(A)(i) in the case of elective pay under section 6417. Like section 38(c), the application of section 469 can materially affect whether a taxpayer can use tax credits to offset its tax liability. There is no carveout for section 469 in section 6418. Instead, section 469 provides in relevant part that a credit is subject to the passive credit rules if the credit arises in the conduct of a trade or business in which the taxpayer does not materially participate in the year to which it is attributable, and the credit is a general business credit under section 38. All of the eligible credits listed in section 6418(d) arise in the conduct of a trade or business and are general business credits under section 38. As a result, section 469 applies to the use of such eligible credits unless Congress provides otherwise, and commenters did not point to strong statutory or other evidence that Congress intended a different result. Moreover, any differences in the application of the passive credit rules among taxpayers is a result of section 469(a) and not the result of section 6418 or the proposed regulations.

Also, the application of section 469 to a transferee taxpayer is not inconsistent with the language in section 6418(a) that provides a transferee taxpayer “shall be treated as the taxpayer” for purposes of the Code with respect to a transferred credit. Absent section 6418, any taxpayer that has determined a general business credit under section 38 in the conduct of a trade or business is subject to section 469. While section 469 may not apply, for example, because a taxpayer is not a person described in section 469(a)(2), or may not result in a passive activity credit because a taxpayer materially participated in the trade or business or has sufficient passive activity income, all taxpayers have to consider whether section 469 is applicable to the use of any general

business credit arising in the conduct of a trade or business. Thus, it is not inconsistent to apply section 469 to a transferee taxpayer that is treated as the taxpayer for purposes of the Code with respect to a transferred credit. Moreover, an eligible credit generated through the conduct of a trade or business and transferred does not lose its status as a section 38 credit or its status of having arisen in a trade or business solely because the credit is transferred. If such attributes did not transfer under section 6418, eligible credits earned and used by eligible taxpayers would be subject to different limitations than transferred eligible credits used by transferee taxpayers. Lastly, the Treasury Department and the IRS agree with commenters that not applying the passive credit rules to transferred specified credit portions could increase the risk of fraud and abuse.

It is also inappropriate to treat transferred specified credit portions as determined in connection with the conduct of an investment activity or as a capital asset. Specifically, the facts and analysis in Rev. Rul. 2010-16 are distinguishable from transfers of specified credit portions under section 6418. Rev. Rul. 2010-16 held that if an acquisition, either directly or indirectly through a partnership, of a qualified equity investment in a community development entity (CDE) is not in connection with the conduct of a trade or business (or in anticipation of a trade or business), the section 45D credit will not be a passive activity credit under section 469. The determination of a section 45D credit does not require the conduct of a trade or business. Instead, a section 45D credit is determined based on the percentage of the amount paid to a CDE for a qualified equity investment at original issue and can be determined through a mere investment activity. Under the facts of Rev. Rul. 2010-16, the section 45D credit was not a passive activity credit under section 469 to either the individual or the partnership investors because it did not arise in the conduct of a trade or business. Conversely, eligible credits under section 6418 can only be determined (or arise) in connection with the conduct of a trade or business. Moreover, eligible credits are not determined through (or do not arise in connection with) an investment activity by a transferee taxpayer. Instead, all eligible credits are determined with respect to (or arise in connection with) the conduct of a trade or business owned by an eligible taxpayer. Eligible credits are transferred after they are determined. Thus, they cannot be redetermined in connection with an investment activity by a transferee. For these reasons, the final regulations do not adopt commenters' suggestions to not apply the passive credit rules to transferred specified credit portions or to apply the passive credit rules in a different manner than as provided in the proposed regulations. For a discussion of the application of
Palmer
v.
Commissioner, supra,
to section 6418,
see
part II.F.2 of this Summary of Comments and Explanation of Revisions.

A comment was received stating that the proposed regulations were silent on the rule of section 48(a)(3)(C) requiring the property to be used in a trade or business or held for the production of income. Any rules applicable to the underlying eligible credits are beyond the scope of the final regulations; however, the Treasury Department and the IRS note that any rules that relate to the determination of the eligible credit apply to the eligible taxpayer as described in proposed § 1.6418-2(d).

b. Material Participation and Grouping Rules

Proposed § 1.6418-2(f)(3)(ii) provided that in applying section 469, a transferee taxpayer is not considered to own an interest in the eligible taxpayer's trade or business at the time the work was done (as required for material participation under § 1.469-5(f)(1)) (material participation rules). Accordingly, a transferee taxpayer will not ordinarily materially participate within the meaning of section 469(h) in order to be treated as participating in the activity. Proposed § 1.6418-2(f)(3)(ii) also provided that a transferee taxpayer cannot change the characterization of its participation (or lack thereof) in the eligible taxpayer's trade or business by using any of the grouping rules under § 1.469-4(c) (grouping rules). Generally, § 1.469-4(c) allows a taxpayer to satisfy the material participation standard for a specific activity by virtue of having materially participated in a separate but related trade or business.

Comments were received in connection with the application of the material participation and grouping rules under section 469 to transferred specified credit portions. One commenter supported treating a transferee as not materially participating in the trade or business that generates an eligible credit if they did not actually do so. Other commenters asserted that the final rules should clarify that a transferee taxpayer that actually owns an interest in an eligible taxpayer, and materially participates in the credit generating activity, is treated as owning an interest in the eligible taxpayer's trade or business at the time the work was done. One commenter requested that transferee taxpayers that conduct an activity directly relating to and necessary for the generation of an eligible credit (but do not own an interest in the eligible taxpayer's credit generating trade or business) be treated as materially participating in the credit generating activity for purposes of section 469. Another commenter supported an approach that would permit taxpayers subject to the passive credit rules that satisfy the material participation requirement with respect to a specific activity (but do not own an interest in the activity that generates to the specified credit portion) to treat purchased credits from that activity as nonpassive. The same commenter raised that the application of the grouping rules under § 1.469-4(c) could be used to expand the potential purchasers of credits but acknowledged that this approach would be difficult to administer. Other commenters suggested that the language in section 6418(a) treating the transferee taxpayer as the taxpayer for purposes of the Code with respect to the transferred specified credit portion supports attributing the activities or all characteristics of an eligible taxpayer to a transferee taxpayer for purposes of applying the passive credit rules.

The Treasury Department and the IRS agree that in the limited circumstance of a transferee taxpayer who materially participates in an eligible credit generating activity within the meaning of section 469(h) in which the transferee taxpayer owns an interest at the time the work is done, the transferee taxpayer should be permitted to purchase eligible credits generated from the activity (assuming the transferee taxpayer is not related to the eligible taxpayer within the meaning of section 267(b) or section 707(b)(1)) and treat those purchased credits as not arising in connection with a passive activity. It is not workable to expand the material participation rules under section 469 for purposes of transferred specified credit portions in a meaningful manner without substantially increasing administrative burdens. For example, such a view would presumably require ownership of the underlying eligible credit property to be attributed to a transferee taxpayer. This formulation would be impracticable for purposes of section 50(c) and section 6418(g)(3)(A), which require an eligible taxpayer to make basis adjustments for transferred ITCs. Commenters did not address how to overcome the technical and

administrative complexities in attributing the activities or attributes of an eligible taxpayer to a transferee taxpayer for purposes of applying the passive credit rules. Additionally, allowing a transferee taxpayer to change the characterization of an eligible credit based on grouping with its own activities is inconsistent with the grouping rules under § 1.469-4(c) and would create significant administrative complexity. As such, these final regulations clarify that a transferee taxpayer who directly owns an interest in an eligible taxpayer's trade or business at the time the work was done (as required for the material participation rules), is not deemed to fail the requirements of section 469(h). However, these final regulations do not adopt commenters' suggestions to expand the material participation or grouping rules for purposes of applying the passive credit rules to transferred specified credit portions.

Lastly, commenters wanted confirmation that an individual transferee taxpayer can use eligible credits acquired as a result of a transfer election to offset passive income tax liability if the approach from the proposed regulations is adopted. The Treasury Department and the IRS confirm that if an individual transferee taxpayer does not materially participate (within the meaning of §§ 1.469-5 and 1.469-5T) in the activity that generates a specified credit portion, a transferred specified credit portion will be treated to the transferee taxpayer as arising in connection with a passive activity.

4. Transferee Taxpayer Requirements To Take Into Account a Transferred Specified Credit Portion

Section 6418(d) provides the taxable year that a transferee taxpayer takes a transferred eligible credit into account but does not provide rules on how a transferee taxpayer can take a transferred specified credit portion into account. To that end, proposed § 1.6418-2(f)(4) would have required (1) a properly completed Form 3800, General Business Credit (or its successor), taking into account a transferred eligible credit as a current general business credit, including all registration number(s) related to the transferred eligible credit; (2) the transfer election statement described earlier in this preamble attached to the return; and (3) any other information related to the transfer election specified in guidance. Because no comments were received on proposed § 1.6418-2(f)(4), these final regulations adopt this provision without change.

5. Estimated Tax Payments

The preamble to the proposed regulations explained that a transferee taxpayer could take into account a specified credit portion that it has purchased, or intends to purchase, to calculate its estimated tax payments, though the transferee taxpayer remains liable for any additions to tax in accordance with sections 6654 and 6655 of the Code to the extent the transferee taxpayer has an underpayment of estimated tax.

Commenters generally acknowledged that the preamble to the proposed regulations provided that transferred credits could be taken into account for purposes of calculating estimated tax but asked that the final regulations include a specific rule on how transferred credits should be taken into account. Commenters also offered particular circumstances for the Treasury Department and the IRS to consider in formulating a potential rule regarding transferred credits and estimated tax. One commenter requested that credits purchased in the first quarter could be applied against the transferee taxpayer's first quarter estimated tax payment if the taxpayer relied on a “prior year safe harbor” under section 6655(d)(2)(B). Another commenter requested clarification that the transferred credits should apply to a transferee's tax liability when the credit is determined. Another commenter requested that the final regulations should permit a transferee taxpayer to make an election to take into account the specified credit portion in the first taxable year in which such credit was determined by the eligible taxpayer.

The addition of a specific rule on estimated tax payments is unnecessary. The appropriateness of a transferee taxpayer taking the eligible credit into account for purposes of determining its quarterly estimated tax liability depends on the facts and circumstances. Nevertheless, as a clarification, because section 6418 generally contemplates a transferee taxpayer effectively stepping in the shoes of the eligible taxpayer from whom the transferee taxpayer was transferred the eligible credit, it follows that a transferee taxpayer can take into account the eligible credit for purposes of determining its quarterly estimated tax liability no earlier than an eligible taxpayer would. Further, if a transferee taxpayer is required to take a transferred eligible credit into account in a taxable year that has not yet begun because of the application of section 6418(d) and § 1.6418-2(f)(1), then a transferee taxpayer cannot take the eligible credit into account for purposes of determining quarterly estimated tax liability until after the start of that later year. As noted in the preamble to the proposed regulations and confirmed in this part II.F.5 of the Summary of Comments and Explanation of Revisions, the transferee taxpayer remains liable for any additions to tax in accordance with sections 6654 and 6655 to the extent the transferee taxpayer has an underpayment of estimated tax.

For example, if a calendar year eligible taxpayer enters into an agreement with a calendar year transferee taxpayer during calendar year 2024 to transfer an eligible credit, and such credit is determined with respect to the eligible taxpayer in calendar year 2024, then assuming a timely and complete transfer election is made, the transferee taxpayer can take the transferred credit into account when calculating the required annual payment and quarterly estimated tax installments for calendar year 2024. The transferee taxpayer cannot treat the transferred credit as a payment of estimated tax. If any portion of the eligible credit that is ultimately transferred to a transferee taxpayer under section 6418(a) is subsequently adjusted to an amount less than what was agreed upon by the eligible taxpayer and the transferee taxpayer in calendar year 2024, the transferee taxpayer may be liable for any additions to tax under sections 6654 or 6655, given the reduced credit amount being transferred.

Commenters requested clarification of the phrase “intends to purchase” as used in the preamble to the proposed regulations. The phrase captures a situation in which the taxpayer plans to complete a transaction that meets the requirements of proposed § 1.6418-2(b) so that the taxpayer would qualify as a transferee taxpayer with respect to a specified credit portion, but has not yet done so. This phrase illustrates that all the requirements of proposed § 1.6418-2(b) do not have to be met for a transferee taxpayer to take the expected eligible credit into account in its estimated tax calculations, though the transferee taxpayer remains liable for any additions to tax in accordan

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-08926. Public record. Not legal advice.