Key Takeaways

• The IRS and the Treasury Department on April 25 published final regulations relating to the one-time transfer election under § 6418.
• The final regulations under § 6418 were issued approximately seven weeks after the final regulations under § 6417, relating to direct pay. Both sets of final regulations provide important guidance for taxpayers interested in monetizing certain renewable energy credits.
• The final regulations allow an eligible taxpayer to transfer a portion of specified credit, but prohibit “horizontal” slicing that would entail the transfer of the bonus portion of a credit.
• Credits that are transferred generally 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. The final regulations do not waver on this point.
• The final regulations contain an anti-abuse provision that disallows a transfer election under § 6418 where the parties to the transaction engage in a transfer with “a” principal purpose of avoiding tax liability. The preamble to the final regulations contains significant details regarding how the IRS will approach application of the anti-abuse rule, and should be carefully reviewed by eligible taxpayers and transferee taxpayers. The IRS expects to closely scrutinize transfers of credits at a significant discount.
• Similar to the final regulations under § 6417, the final regulations modify the proposed regulations to permit an extension of time to allow for an automatic six-month extension from the due date of a return to make the one-time transfer election under § 6418.
• 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 statute is clear on that point, and the preamble explains that any discounted purchase reflects the assumption of risk by a transferee.

Introduction[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 certain credits for cash one-time.[3] The one-time transfer provision provides new sources of capital to developers and owners of renewable energy projects by allowing them to monetize eligible credits through a one-time sale of a renewable energy credit to an unrelated party. Since issuing the proposed regulations under § 6418, the Treasury and IRS opened the prefiling registration tool allowing taxpayers to register for transfer elections. In addition, the transfer market for renewable energy credits has started to form. This alert expands on our prior alert discussing the one-time transfer proposed regulations.

Discussion

General Provisions

• Definition of Taxpayer: The final regulations further affirm that an “eligible taxpayer” is any person subject to any internal revenue tax other than those described in § 6417(d)(1)(A). Commenters requested that the definition be expanded to include taxpayers subject to the taxes of a territory of the United States, but the final regulations declined to accept this comment.
• Partnership with Tax-Exempt Partners: The final regulations clarify that a partnership that does not elect direct pay under § 6417 qualifies as an eligible taxpayer that can elect to transfer credits even if its partners are applicable entities (i.e., tax-exempt organizations, state or political subdivisions, etc.). However, the preamble notes that § 50(b)(3) and (4) still apply to limit the amount of any investment tax credits that are determined with respect to a tax-exempt or government entity partner.
• Partial Transfers: The final regulations adopt the specified portion concept from the proposed regulations. Under this approach, an eligible taxpayer may transfer a portion of the overall credit. The preamble confirms that eligible taxpayers may not transfer a horizontal portion of a credit, and provides as an example that a bonus credit (i.e., the increased credit that is available when the prevailing wage and apprenticeship requirement or the domestic content requirement is available) may not by itself be transferred. This is because bonus amounts are not themselves credits under the final regulations.
• Determination of Credits: An eligible credit is separately determined for each single eligible credit property. In addition, 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. The final regulations clarify that an eligible taxpayer with respect to credits under § 45X does not need to own the eligible credit property. They must, however, conduct the relevant activities that give rise to the § 45X credit.
• Carrybacks and Carry Forwards: 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 acquired via transfer. In addition, the final regulations modify the proposed regulations to clarify that transferee taxpayers can carry forward an unused credit amount.
• Brokers and Dealers: Multiple commenters requested an exception to the one-time transfer rule for transfers to a broker or dealer and a subsequent transfer by the broker or dealer. The final regulations did not amend the rules to allow for this. Instead, the preamble notes that all taxpayers are prohibited from making a second transfer if they were transferred a specified credit portion under § 6418.

Payment Considerations

• Paid in Cash: The final regulations adopt the definition of “paid in cash” 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.
• Upfront Payments: The preamble notes several commenters asked that the definition of “paid in cash” be modified to include upfront payments for production credits that will be generated in future years. The IRS and Treasury noted in response that upfront payments presented numerous administrative and legal questions, and therefore declined to modify the definition to allow for payments prior to the taxable year an eligible credit is determined.
• Transferee Loans: In discussing upfront payments, the IRS and Treasury also noted that there is no prohibition on a transferee taxpayer loaning funds to an eligible taxpayer, including loans secured by an eligible credit purchase and sale agreement, so long as the loans are at arm’s length and treated as loans for federal income tax purposes.
• 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. The final regulations amend the proposed regulations to clarify that the standard is “a” principal purpose, moving away from the language of “the” principal purpose. In addition, the final regulations do not adopt a safe harbor or contain a list of additional examples for what does, or does not, constitute “a” principal purpose of avoiding tax liability. The preamble also discusses transfers that deviate from the average transfer price of an eligible credit, and notes that the anti-abuse rule may apply where the price paid is not economically supportable and is unreasonable based on the facts and circumstances of the transaction.

Elections

• Transfers to Multiple Taxpayers: The final regulations adopt the approach that 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.
• Lease Passthrough Elections: One commenter requested that a lessee that makes a lease passthrough election under former § 48(d) be allowed to make a transfer election with respect to investment tax credits it can claim. The preamble, though, notes that in order to make a one-time transfer election, the eligible credit must be determined with respect to the eligible taxpayer making the transfer election, and that a lessee would not satisfy this requirement. Thus, the final regulations decline to amend the proposed regulations to address this point.
• Made on Original Return: The final regulations adopt the proposed regulations’ requirement that a one-time transfer election be made on an original filed return (including time extensions). However, the final regulations note two additional points: first, that an eligible taxpayer may make or revise a one-time transfer election on a superseding return but not an amended return, and second, that a taxpayer may correct a numerical error on an amended return.
• Manner of Election: Generally, a taxpayer makes a valid transfer election as part of filing a return and must include with their return (1) a properly completed relevant source credit form for the eligible credit; (2) 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 (3) 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 minimum documentation to the transferee that validates the existence of the eligible credit property, any bonus credit amounts and evidence of credit qualification. The preamble to the final regulations confirms that any document, including a written partnership agreement, may serve as a transfer election statement so long as it meets the requirements under the final regulations.
• 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.
• 9100 Relief: Similar to the final regulations under § 6417, the final regulations modify the proposed regulations to permit an extension of time to allow for an automatic six-month extension from the due date of a return to make the one-time transfer election under § 6418.
• 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.

Passive Activity Rules

• General Application: The preamble to the final regulations dedicates significant attention to the applicability of the passive activity rules to transferee taxpayers that acquire renewable energy credits. In general, 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. The final regulations do not waver on this point, and instead state that nothing in § 6418 supports disregarding the passive activity rules. The IRS and Treasury go on to note that a transferred specified credit portion is not determined in connection with the conduct of an investment or as a capital asset.

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. The statutory language is clear on that point. The preamble discusses case law addressing bargain purchases, notes that the final regulations do not conflict with the case law, and explains that any discounted purchase merely reflects the assumption of risk that a transferee taxpayer is taking on by purchasing a credit.
• Partner’s Distributive Share: 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. The final regulations confirm that a partnership agreement may be revised up until the due date of the partnership’s annual tax return to address 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.

Logistics on Transfers

• Transfers by Disregarded Entities: The owner of a disregarded entity is eligible to make the transfer election under § 6418.
• Minimum Documentation: An eligible taxpayer is required to provide minimum documentation to a transferee. This includes (1) information that validates the existence of the eligible credit property, which could be prepared by a third party; (2) information substantiating any bonus credit amounts; and (3) evidence of the eligible taxpayer’s qualifying costs or qualifying production activities. Numerous commenters asked for additional guidance on minimum documentation, but the final regulations did not further modify the list from the proposed regulations.

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. The preamble provides an example of when an eligible taxpayer has a June 30 year-end and a transferee taxpayer has a December 31 year-end. The example notes that the relevant credit is transferred in November 2023, and states that the transferee would take the transferred credit into account in its first taxable year ending after June 30, 2024.
• Estimated Tax Payments: The preamble to the final regulations reiterates that 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. However, the final regulations do not add a specific rule addressing this.

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. The final regulations confirm that excess credit determinations will be made by the IRS under established examination procedures and that taxpayers will be able to challenge any adverse determination through IRS appeals and, if necessary, a petition to the U.S. Tax Court.
• Deductibility of Payments – Excess Transfers: The IRS also addressed instances where a transferee taxpayer purchased a credit that is ultimately denied and whether the payment should then be deductible to the taxpayer. The final regulations provide that any payment made by a transferee taxpayer that relates to an excessive credit transfer is deductible by the taxpayer.

Recapture

• The final regulations confirm that the risk of recapture is borne by the transferee taxpayer for all types of recapture events. The final regulations do not address the notice requirements for recapture. Instead, they note that those requirements will be addressed in the final regulations under § 48.

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: After the proposed regulations were issued, the IRS opened its prefiling registration portal. Eligible taxpayers must register eligible credit property through this portal to receive a unique registration number for each registered eligible credit property for which they intend to transfer a specified credit portion. The preamble to the final regulations notes that for some eligible credits, the prefiling registration portal allows eligible credit property information to be uploaded by way of a spreadsheet, but the preamble otherwise declined to allow taxpayers to group their registrations.
• Requirements: The prefiling registration requirements provide that an eligible taxpayer must (1) complete the prefiling registration 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.

[1] All “§” references are to the Internal Revenue Code of 1986, as amended.

[2] P.L. 117-169.

[3] Credits that are eligible for transfer include § 30C (alternative fuel vehicle refueling property), § 45 (renewable electricity production), § 45Q (carbon oxide sequestration), § 45U (zero-emission nuclear power production), § 45V (clean hydrogen production), § 45X (advanced manufacturing production), § 45Y (clean electricity production), § 45Z (clean fuel production), § 48 (energy investment), § 48C (advanced energy project) and § 48E (clean electricity investment).

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