Key Takeaways

• The IRS and the Treasury Department published on June 14, 2023, proposed and temporary regulations relating to the one-time transfer election under § 6418.
• The proposed and temporary regulations clarify the process for making the one-time transfer election, including the pre-filing registration requirements.
• The proposed and temporary regulations provide much needed guidance to taxpayers that are seeking to transfer or acquire eligible credits.

Overview [1]

As covered in our prior alerts, the Inflation Reduction Act[2] modified and reinstated existing renewable energy credits, enacted new renewable energy credits and enacted under § 6418 an election that allows eligible taxpayers to sell one-time certain credits for cash. The one-time transfer provision has the potential to provide new sources of capital to developers and owners of renewable energy projects by allowing them to monetize eligible credits through a one-time sale as opposed to a tax equity financing structure or sale-leaseback transaction.

Summary

The Treasury Department and the IRS recently published proposed and temporary regulations on the one-time transfer provisions. The proposed regulations clarify a number of uncertainties relating to the one-time transfer provisions, including as follows:

• The proposed regulations confirm that the passive activity rules under § 469 apply to transferees of credits under § 6418. The preamble to the proposed regulations notes that the impact of this approach is that a transferee is considered to earn eligible credits through the conduct of a trade or business related to the eligible credits that the transferee does not materially participate in. As a result, certain transferees may be required to treat the eligible credits as passive activity credits.
• Eligible taxpayers are able to make an election to transfer only a portion of an eligible credit and also may make transfers during a taxable year to multiple transferees.
• Transfers that are made for noncash consideration are invalid. The proposed regulations, however, offer minimal guidance on what does and does not constitute noncash consideration.
• The definition of “paid in cash” is rigidly defined to mean payments made in United States dollars, including by check, cashier’s check, money order, wire transfer, automated clearing house (ACH) transfer or other bank transfer of immediately available funds.
• Transferees of eligible credits are subject to additional taxes, and potentially penalties, if the amount of the transferred specified credit portion claimed by the transferee exceeds the actual amount of the eligible credit.
• Transferees who acquire an eligible credit at a discount (i.e., the amount paid for the eligible credit is less than the amount of the eligible credit claimed) are not required to recognize income as a result of the discount.
• The proposed regulations provide guidance on the requirements to register before an election is made, the timing for making an election and the documentation requirements for registering and making an election.

The temporary regulations contain registration requirements for transfers of eligible credits under § 6418, generally requiring eligible taxpayers intending to transfer eligible credits under § 6418 to register with the IRS through an IRS electronic portal in advance of filing the return on which the election under § 6418 is made.

Below is a summary of the key aspects of the proposed and temporary regulations.

Discussion

1. Transfers of Credits

• Definition of Taxpayer: Defines “eligible taxpayer” to mean any person subject to any internal revenue tax other than those described in § 6417(d)(1)(A). This definition clarifies that persons who have U.S. federal employment tax or excise tax obligations but not U.S. federal income tax obligations may qualify as eligible taxpayers who are able to elect to transfer certain credits to unrelated taxpayers rather than use the credits against their U.S. federal income tax liabilities.
• Partial Transfers: Eligible taxpayers may make an election to transfer any specified portion of an eligible credit. The proportionate amount of an eligible credit must be specifically identified and must include the proportionate share of each bonus credit amount.
• Credits That Are Carried Forward or Backward – Eligible Credits: Confirms that credits that are carried forward or backward are not eligible credits and thus cannot be transferred.
• Determination of Credits: An eligible credit is separately determined for each single eligible credit property. In addition, each eligible credit includes any bonus credit amounts (i.e., an eligible taxpayer may not separately transfer the bonus credit portion of a credit). Furthermore, an eligible taxpayer may only transfer eligible credits that are generated either by eligible credit property owned by the eligible taxpayer or by conduct of the eligible taxpayer that gives rise to the underlying eligible credit.
• Elections – Property or Facility Basis: Elections to transfer credits under § 30C, § 48 and § 48C are made on a property-by-property basis, while credits under § 45, § 45U, § 45V, § 45X, § 45Y, § 45Z and § 48E are made on a facility-by-facility basis. Elections to transfer credits under § 45Q are on the basis of a unit of carbon capture equipment. The preamble to the proposed regulations provides that, for purposes of the § 48 credit, energy property is comprised of all components of property necessary to generate electricity up to the point of transmission or distribution.
• At-Risk Rules: Certain at-risk rules under § 49 apply to transfers of investment credits by partnerships or S corporations. In general, if the credit base of an eligible investment credit property is limited to a partner or an S corporation shareholder as a result of § 49, then the amount of the eligible credit available to the partner or S corporation shareholder is also limited.
• Partnership Allocations: A transferor partnership must generally determine a partner’s distributive share of any tax-exempt income resulting from the receipt of consideration for the transfer based on such partner’s proportionate distributive share of the eligible credit that would otherwise have been allocated to such partner absent the transfer of the specified credit portion (i.e., otherwise eligible credit).
• Partnership Transfer of a Portion of an Eligible Credit: There are special rules for allocations of tax-exempt income resulting from a transfer of a specified credit portion of less than all of an eligible credit. The proposed regulations allow a transferor partnership to determine, either in a manner described in the partnership agreement or as the partners otherwise agree, the portion of each partner’s eligible credit amount to be transferred and the portion of each partner’s eligible credit amount to be retained and allocated to such partner.
• Partnerships – One-Time Transfers: To prevent the avoidance of the one-time transfer rule, the proposed regulations treat a transferred specified credit portion purchased by a transferee partnership as an “extraordinary item.” As an extraordinary item, the specified credit portion purchased by the partnership is deemed to occur on the date the transferee partnership first makes a cash payment to the eligible taxpayer (assuming they have the same taxable years).
• Carrybacks: A three-year carryback (as opposed to a one-year carryback) is allowed for credits under § 30C, § 45, § 45Q, § 45U, § 45V, § 45X, § 45Y, § 45Z, § 48, § 48C and § 48E via transfer.

2. Paid in Cash

• Disallowed Transfers: Transfers that are made for noncash consideration are disallowed. The proposed regulations, however, offer little guidance on what may constitute consideration other than cash. For example, there is no discussion of guarantees or indemnitees and whether they violate the paid in cash requirement. The only discussion of either is in the context of recapture events, and the discussion notes that an indemnification of a transferee in the event of a recapture event is not prohibited by § 6418.
• Paid in Cash: This term is defined as a payment made in United States dollars, including by check, cashier’s check, money order, wire transfer, ACH transfer or other bank transfer of immediately available funds. In addition, the payment must directly relate to the specified credit portion.
• Timing of Cash Payments and Advanced Payments: An advanced payment does not violate the paid in cash requirement if the payment is made within the period beginning on the first day of the eligible taxpayer’s taxable year during which a specified credit portion is determined and ending on the date for completing a transfer election statement. The proposed regulations thus confirm that advanced commitments to purchase eligible credits in advance of the date a specified credit portion is transferred can satisfy the paid in cash requirement so long as all cash payments are made during the time period noted above.
• Anti-Abuse Provision: The proposed regulations contain an anti-abuse provision that disallows a transfer election under § 6418 where the parties to the transaction engage in a transfer with the principal purpose of avoiding tax liability. Examples of this include a transaction where an eligible taxpayer under- or overcharges for services to a customer who is also purchasing credits.

3. Passive Activity Rules

• General Application: Credits that are transferred are treated as earned in connection with the conduct of a trade or business and are therefore subject to the passive activity rules under § 469. However, a transferee is not considered, as a result of a transfer election, to have owned an interest in the eligible taxpayer’s business at the time the work was done to generate the credit and thus may not claim to be engaged in the activities of the eligible taxpayer’s trade or business. In addition, a transferee may not change the characterization of an eligible credit based on grouping it with their own activities under Treas. Reg. § 1.469-4(c). The consequence is that a transferee is considered to earn eligible credits through the conduct of a trade or business related to the eligible credit that the transferee does not materially participate in for purposes of § 469. As such, a transferee may be required to treat the specified credit portion as passive activity credits to the extent the specified credit portion exceeds passive tax liability. The preamble requests comments on whether there are circumstances in which it would be appropriate to not apply the passive activity rules under § 469 to a transferee taxpayer or to attribute the participation of an eligible taxpayer to a transferee.
• Partnerships: Amounts received from transferring a specified credit portion by a transferor partnership are treated as arising from an investment activity and not from the conduct of a trade or business.

4. Income Inclusions

• Discounts: Transferees who acquire an eligible credit at a discount (i.e., the amount paid for the eligible credit is less than the amount of the eligible credit claimed) are not required to recognize income as a result of the discount.
• Partnerships: A partner’s distributive share of tax-exempt income resulting from the receipt of cash by a transferor partnership for a transfer-specified credit portion is based on the partner’s proportionate distributive share of the eligible credit.

5. Logistics on Transfers

• Transfers to Multiple Taxpayers: There is no limitation on the number of transfer elections or the number of transferee taxpayers for which an eligible taxpayer may make a transfer election unless the transfer would exceed the available eligible credit to be transferred.
• Transfers by Disregarded Entities: The owner of a disregarded entity is to make the transfer election under § 6418.
• Timing of Election: The election under § 6418 must be made before the due date (including extensions) for the tax return for the taxable year for which the eligible credit is determined. The election must be filed on an original return and may not be made or revised on an amended return. Once made, an election is irrevocable. The election must be made for each taxable year an eligible taxpayer elects to transfer specified credit portions.
• Basis of Election – Single Eligible Credit Property: Eligible taxpayers must make a transfer election for each single eligible credit property. The proposed regulations clarify that an eligible taxpayer who has two eligible credit properties must make a separate transfer election for each property. The IRS, however, requests in the preamble comments on whether: (1) additional guidance is needed regarding eligible credit property; and (2) taxpayers should be allowed to make an election to group certain eligible credit properties.
• Manner of Election: Generally, a taxpayer makes a valid transfer election as part of filing a return and must include with their return: (a) a properly completed relevant source credit form for the eligible credit; (b) a properly completed IRS Form 3800, General Business Credit, including reporting the registration number received during the required prefiling registration and a schedule attached to Form 3800 showing the amount of eligible credit transferred for each eligible credit property; and (c) a transfer election statement.
• Transfer Election Statement: In general, the transfer election statement is a written document that describes the transfer of a specified credit portion. The statement must include: (1) the name, address and Taxpayer Identification Number of the transferee and the eligible taxpayer; (2) information and amounts related to the specified credit portion and eligible credit property, including: (a) a description of the eligible credit, the total amount of the credit determined with respect to the eligible credit property and the amount of the specified credit portion; (b) the taxable year of the eligible taxpayer and the first taxable year in which the specified credit portion will be taken into account by the transferee; (c) the amount of cash consideration and the date it was paid; and (d) the registration number related to the eligible credit property; (3) a statement that the parties are not related; (4) a statement from the eligible taxpayer that they have complied with all relevant requirements to make a transfer election and that they are aware of the recapture requirements; and (5) a statement or representation from the eligible taxpayer that they have provided the certain minimum documentation to the transferee that validates the existence of the eligible credit property, any bonus credit amounts and evidence of credit qualification.
• Timing for Transfer Election Statement: The transfer election statement must be completed before the earlier of when the eligible taxpayer files their return for the taxable year for which the specific credit portion is determined or the transferee files their return for the taxable year in which the specified credit portion is taken into account.
• Ineffective Elections: Taxpayers who do not make a valid election under § 6418 are not eligible to transfer credits. Thus, an ineffective election to transfer an eligible credit means no transfer has occurred.
• Minimum Documentation: An eligible taxpayer is required to provide minimum documentation to a transferee. This includes: (a) information that validates the existence of the eligible credit property, which could be prepared by a third party; (b) information substantiating any bonus credit amounts; and (c) evidence of the eligible taxpayer’s qualifying costs or qualifying production activities.
• Second Transfers: The proposed regulations further confirm that any specified credit portion cannot be transferred twice. Notwithstanding, the allocation of a transferred specified credit portion to a direct or an indirect owner of a passthrough does not constitute a second transfer.

6. Prohibitions on Elections to Transfer

• Progress Expenditures: Eligible credits that are determined based on progress expenditures are precluded from transferability. This significantly impacts projects that have a normal construction period of at least two years and are seeking to claim an investment tax credit (ITC) on progress payments made to a contractor during construction.
• Payments Other Than Cash: Eligible taxpayers who receive an amount not paid in cash are precluded from making a transfer election.
• Lessees of Property – ITCs: Credits under § 48 that are allowable to a lessee are not transferable.

7. Year Taken into Account

• First Taxable Year: A transferred credit is taken into account by a transferee in the first taxable year of the transferee ending, with the taxable year of the eligible taxpayer in which the credit was determined.
• Estimated Tax Payments: A transferee may also take into account a specified credit portion that they have purchased, or intend to purchase, when calculating their estimated federal income tax payments.

8. Excess Credit Transfers

• Liability and Penalties for Excess Credits: The transferee, not the eligible taxpayer, is liable for additional tax and penalties if the amount of the transferred specified credit portion claimed by the transferee taxpayer exceeds the allowable amount of the credit.
• Multiple Transferees: For purposes of allocating an excess credit where there are multiple transferees, the amount of an excess credit transferred to a specific transferee is equal to the total excess credit transferred multiplied by the transferee’s portion of the total credit transferred.

9. Recapture

• General: Recapture amounts are calculated and taken into account by a transferee, not the eligible taxpayer.
• Indemnifications: The proposed regulations confirm there is no prohibition under § 6418 for an eligible taxpayer and a transferee taxpayer to contract between themselves for indemnification of the transferee in the event there is a recapture event.
• Partners and S Corporation Shareholders: The proposed regulations confirm that recapture tax liability resulting from the reduction of an S corporation shareholder’s interest or a partner’s interest in general profit interests results in recapture to the applicable disposing shareholder or partner, not the transferor S corporation or transferor partnership.

10. Registration

• Timing: Eligible taxpayers must register before filing the return on which a transfer election is made. If they do not, they are not eligible to transfer an eligible credit.
• Prefiling: Prefiling registration processes will occur through an IRS electronic portal. After prefiling is complete, an eligible taxpayer will receive a unique registration number from the IRS for each registered eligible credit property for which they intend to transfer a specified credit portion.
• Requirements: The prefiling registration requirements provide that an eligible taxpayer must: (1) complete the preregistration process electronically through the IRS electronic portal; (2) satisfy the registration requirements prior to making a transfer election; (3) obtain a registration number for each eligible credit property; and (4) provide the specific information required to be provided as part of the prefiling registration process to the IRS.

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