Code of Federal Regulations · Section

§ 1.6418-5 — -5 Special Rules

26 C.F.R. § 1.6418-5

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(a) Excessive credit transfer tax imposed—(1) In general. If any specified credit portion that is transferred to a transferee taxpayer pursuant to an election in § 1.6418-2(a) or § 1.6418-3 is determined to be an excessive credit transfer (as defined in paragraph (b) of this section), the tax imposed on the transferee taxpayer by chapter 1 (regardless of whether such entity would otherwise be subject to chapter 1 tax) for the taxable year in which such determination is made will be increased by an amount equal to the sum of—

(i) The amount of such excessive credit transfer; and

(ii) An amount equal to 20 percent of such excessive credit transfer.

(2) Taxable year of the determination. The taxable year of the determination for purposes of paragraph (a)(1) of this section is the taxable year during which the excessive credit transfer determination is made and not the taxable year during which the eligible credit was originally determined by the eligible taxpayer, unless those are the same taxable years.

(3) Payments related to excessive credit transfer. Any payments made by a transferee taxpayer to an eligible taxpayer that directly relate to the excessive credit transfer (as defined in paragraph (b) of this section) are not subject to section 6418(b)(2), section 6418(b)(3), or § 1.6418-2(e). The amount of a payment that directly relates to the excessive credit transfer is equal to the total consideration paid in cash by the transferee taxpayer for the specified credit portion multiplied by the ratio of the amount of the excessive credit transferred to the transferee taxpayer to the amount of the transferred specified credit portion claimed by the transferee taxpayer.

(4) Reasonable cause. Paragraph (a)(1)(ii) of this section does not apply if the transferee taxpayer demonstrates to the satisfaction of the IRS that the excessive credit transfer resulted from reasonable cause. Determination of reasonable cause is made based on the relevant facts and circumstances. Generally, the most important factor is the extent of the transferee taxpayer's efforts to determine that the amount of specified credit portion transferred by the eligible taxpayer to the transferee taxpayer is not more than the amount of the eligible credit determined with respect to the eligible credit property for the taxable year in which the eligible credit was determined and has not been transferred to any other taxpayer. Circumstances that may indicate reasonable cause can include, but are not limited to, review of the eligible taxpayer's records with respect to the determination of the eligible credit (including documentation evidencing eligibility for bonus credit amounts), reasonable reliance on third party expert reports, reasonable reliance on representations from the eligible taxpayer that the total specified credit portion transferred (including portions transferred to other transferee taxpayers if an eligible taxpayer makes multiple transfer elections with respect to a single credit property) does not exceed the total eligible credit determined with respect to the eligible credit property for the taxable year, and review of audited financial statements provided to the Securities and Exchange Commission (and underlying information), if applicable.

(5) Recapture events. A recapture event under section 45Q(f)(4), 49(b), or 50(a) is not an excessive credit transfer.

(b) Excessive credit transfer defined—(1) In general. The term excessive credit transfer means, with respect to an eligible credit property for which a transfer election is made under § 1.6418-2 or § 1.6418-3 for any taxable year, an amount equal to the excess of—

(i) The amount of the transferred specified credit portion claimed by the transferee taxpayer with respect to such eligible credit property for such taxable year; over

(ii) The amount of the eligible credit that, without the application of section 6418, would be otherwise allowable under the Code with respect to such eligible credit property for such taxable year.

(2) Multiple transferees treated as one. All transferee taxpayers are considered as one transferee for calculating whether there was an excessive credit transfer and the amount of the excessive credit transfer. If there was an excessive credit transfer, then the amount of excessive credit transferred to a specific transferee taxpayer is equal to the total excessive credit transferred multiplied by the ratio of the transferee taxpayer's portion of the total specified credit to the total specified credit portions transferred to all transferees. The rule in this paragraph (b)(2) is applied on an eligible credit property basis, as applicable.

(3) Examples. The following examples illustrate the rules of this paragraph (b):

(i) Example 1—No excessive credit transfer. Taxpayer A claims $40x of an eligible credit and transfers $60x of an eligible credit to Transferee Taxpayer B related to a single facility that was expected to generate $100x of such eligible credit. In a subsequent year it is determined that the facility only generated $60x of such eligible credit. There is no excessive credit transfer in this case because the amount of the eligible credit claimed by Transferee Taxpayer B of $60x is equal to the amount of the credit that would be otherwise allowable with respect to such facility for the taxable year the transfer occurred. Taxpayer A is disallowed the $40x of the eligible credit claimed.

(ii) Example 2—Excessive credit transfer. Same facts as in paragraph (b)(3)(i) of this section (Example 1) except that Taxpayer A transfers $75x of the $100x of eligible credit to Transferee Taxpayer B in exchange for a cash payment of $67.5x. Taxpayer A claims $25x of the eligible credit and Transferee Taxpayer B claims $75x of the eligible credit. In this situation, a $40x reduction in credit results in a $15x excessive credit transfer to Transferee Taxpayer B because the amount of the credit claimed by Transferee Taxpayer B ($75x) exceeds the amount of credit otherwise allowable with respect to the facility ($60x) by $15x. Therefore, Transferee Taxpayer B's tax is increased for the determination year by $18x, which is equal to the amount of the excessive credit transfer plus 20 percent of the excessive credit transfer as provided in paragraph (a) of this section and section 6418(g)(2)(A). If Transferee Taxpayer B can show reasonable cause as provided in paragraph (a)(4) of this section and section 6418(g)(2)(B), then Transferee Taxpayer B will only have a tax increase of $15x. Taxpayer A is disallowed the $25x of the eligible credit claimed. Under paragraph (a)(3) of this section, the portion of the cash payment of $67.5x made by Transferee Taxpayer B that is attributable to the excessive credit transfer is $13.5x and is equal to Transferee Taxpayer B's cash payment of $67.5x multiplied by the ratio of the excessive credit transfer ($15x) to the transferred specified credit portion claimed by Transferee Taxpayer B ($75x). Pursuant to paragraph (a)(3) of this section, the payment of $13.5x made to Taxpayer A from Transferee Taxpayer B that directly relate to the excessive credit transfer are not subject to section 6418(b)(2), 6418(b)(3), or § 1.6418-2(e).

(iii) Example 3—Excessive credit with multiple transferees. Same facts as in paragraph (b)(3)(i) of this section (Example 1) except that Taxpayer A transfers $50x of the eligible credit to Transferee Taxpayer B and $30x of the eligible credit to Transferee Taxpayer C. In exchange for transfer of the credit, Transferee Taxpayer B made a cash payment of $45x and Transferee Taxpayer C made a cash payment of $27x. Taxpayer A claims $20x of the eligible credit, Transferee Taxpayer B claims $50x of the eligible credit, and Transferee Taxpayer C claims $30x of the eligible credit. In this situation, because there are multiple transferees, all transferees are treated as one transferee for determining the excessive credit transfer amount under paragraph (b)(2) of this section. There is a total excessive credit transfer of $20x because the amount of the credit claimed by the transferees in total ($80x) exceeds the amount of credit otherwise allowable with respect to the facility ($60x) by $20x. The excessive credit transfer to Taxpayer B is equal to ($50x/$80x * $20x) = $12.5x, and the excessive credit transfer to Taxpayer C is equal to ($30x/$80x * $20x) = $7.5x. Therefore, Transferee Taxpayer B and Transferee Taxpayer C are subject to the provisions in paragraph (a) of this section. Transferee Taxpayer B's and Transferee Taxpayer C's tax is increased for the determination year by the respective excessive credit transfer amount and 20 percent of the excessive credit transfer amount ($15x for Transferee Taxpayer B and $9x for Transferee Taxpayer C) as provided in paragraph (a) of this section and section 6418(g)(2)(A). If Transferee Taxpayer B or Transferee Taxpayer C can show reasonable cause as provided in paragraph (a)(4) of this section and section 6418(g)(2)(B), then the tax increase will only be $12.5x or $7.5x, respectively. Taxpayer A is disallowed the $20x of eligible credit claimed. Under paragraph (a)(3) of this section, the portion of the cash payment of $45x made by Transferee Taxpayer B that is attributable to its portion of the excessive credit transfer is $11.25x and is equal to Transferee Taxpayer B's cash payment of $45x multiplied by the ratio of the excessive credit transfer ($12.5x) to the transferred specified credit portion claimed by Transferee Taxpayer B ($50x). Similarly, the portion of the cash payment of $27x made by Transferee Taxpayer C that is attributable to its portion of the excessive credit transfer is $6.75x and is equal to Transferee Taxpayer C's cash payment of $27x multiplied by the ratio of the excessive credit transfer ($7.5x) to the transferred specified credit portion claimed by Transferee Taxpayer B ($30x). Pursuant to paragraph (a)(3) of this section, the payments made to Taxpayer A by Transferee Taxpayer B ($11.25x) and Transferee Taxpayer C ($6.75x) that directly relate to the excessive credit transfer are not subject to section 6418(b)(2), 6418(b)(3), or § 1.6418-2(e).

(c) Basis reduction under section 50(c). In the case of any transfer election under § 1.6418-2 or § 1.6418-3 with respect to any specified credit portion described in § 1.6418-1(c)(2)(ix) through (xi), section 50(c) will apply to the applicable investment credit property (as defined in section 50(a)(6)(A)) as if such credit was allowed to the eligible taxpayer.

(d) Notification and impact of recapture under section 50(a)—(1) In general. In the case of any election under § 1.6418-2 or § 1.6418-3 with respect to any specified credit portion described in § 1.6418-1(c)(2)(ix) through (xi), if, during any taxable year, the applicable investment credit property (as defined in section 50(a)(6)(A)) 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)(A)), other than as described in § 1.6418-3(a)(6), such eligible taxpayer and the transferee taxpayer must follow the notification process in paragraph (d)(2) of this section, with recapture impacting the transferee taxpayer and eligible taxpayer as described in paragraph (d)(3) of this section. Rules similar to the rules of this paragraph (d) apply in determining the amount of and liability for any section 49(b) recapture as between an eligible taxpayer and the transferee taxpayer.

(2) Notification requirements—(i) Eligible taxpayer. The eligible taxpayer must provide notice of the occurrence of recapture to the transferee taxpayer. This notice must provide all information necessary for a transferee taxpayer to correctly compute the recapture amount (as defined under section 50(c)(2)), and the notification must occur in sufficient time to allow the transferee taxpayer to compute the recapture amount by the due date of the transferee taxpayer's return (without extensions) for the taxable year in which the recapture event occurs. The eligible taxpayer and transferee taxpayer can contract with respect to the form of the notice and any specific time periods that must be met, so long as the terms of the contractual arrangement do not conflict with the requirements of this paragraph (d)(2)(i). Any additional information that is required or other specific time periods that must be met may be prescribed by the IRS in guidance issued with respect to this notification requirement.

(ii) Transferee taxpayer. The transferee taxpayer must provide notice of the recapture amount (as defined in section 50(c)(2)), if any, to the eligible taxpayer. This must occur in sufficient time to allow the eligible taxpayer to calculate any basis adjustment with respect to the investment credit property by the due date of the eligible taxpayer's return (without extensions) for the taxable year in which the recapture event occurs. The eligible taxpayer and transferee taxpayer can contract with respect to the form of the notice and any specific time periods that must be met, so long as the terms of the contractual arrangement do not conflict with the requirements of this paragraph (d)(2)(ii). Any additional information that is required or other specific time periods that must be met may be provided in guidance prescribed by the IRS issued with respect to this notification requirement.

(3) Impact of recapture—(i) Section 50(a) recapture event. Except as provided in paragraph (d)(3)(iii) of this section, the transferee taxpayer is responsible for any amount of tax increase under section 50(a) upon the occurrence of a recapture event, provided that if an eligible taxpayer retains any amount of an eligible credit determined with respect to an investment credit property directly held by the eligible taxpayer, the amount of the tax increase under section 50(a) that the eligible taxpayer is responsible for is equal to the recapture amount multiplied by a fraction, the numerator of which is the total credit amount that the eligible taxpayer retained, and the denominator of which is the total credit amount determined for the eligible credit property. The amount of the tax increase under section 50(a) that the transferee taxpayer is responsible for is equal to the recapture amount multiplied by a fraction, the numerator of which is the specified credit portion transferred to the transferee taxpayer, and the denominator of which is the total credit amount determined for the eligible credit property.

(ii) Impact of section 50(a) recapture event on basis of investment credit property held by eligible taxpayer. The eligible taxpayer must increase the basis of the investment credit property (immediately before the event resulting in such recapture) by an amount equal to the recapture amount provided to the eligible taxpayer by the transferee taxpayer under paragraph (d)(2)(ii) of this section and the recapture amount on any credit amounts retained by the eligible taxpayer in accordance with section 50.

(iii) Impact of partner or shareholder recapture under § 1.6418-3(a)(6). To the extent that a partner in a transferor partnership or a shareholder in a transferor S corporation recognizes an amount of tax increase under section 50(a) or section 49(b) (that is, a recapture amount) for an investment tax credit determined with respect to investment credit property held directly by the transferor partnership or transferor S corporation that does not result in recapture liability to a transferee taxpayer pursuant to § 1.6418-3(a)(6), that amount reduces the remaining recapture amount under paragraph (d)(3)(i) of this section with respect to the investment credit property, and thus reduces the remaining recapture amounts to which a transferee taxpayer and eligible taxpayer (to the extent of retained credit amounts that have not been previously recaptured) is liable. The amount of the reduction to the transferee taxpayer is proportionate to the amount of the tax increase for the transferred specified credit portion (based on the partner's or shareholder's distributive share or pro rata share of tax exempt income, respectively, resulting from the transfer).

(iv) Example (1). Impact of transferor partner recapture event to transferee taxpayer—(A) Facts. A, B, C, and D are equal partners in ABCD partnership, a partnership for Federal tax purposes that accounts for tax items on a calendar year basis. The partnership agreement provides that A, B, C and D share equally in all items of income, gain, loss, deduction, and credit of ABCD partnership. ABCD partnership invests $1,000x in an energy property in accordance with section 48 and places the energy property in service on September 30, 2024. As of the end of 2024, ABCD partnership has $300x of eligible credits under section 48 with respect to energy property. Under § 1.6418-3(b)(2)(iv), each of A's, B's, C's, and D's distributive shares of the otherwise eligible section 48 credits is determined under §§ 1.46-3(f) and 1.704-1(b)(4)(ii) and is equal to $75x (based on each of A, B, C and D being allocated $250x of basis). Before the due date for ABCD partnership's 2024 tax return (with extension), A, B, C, and D agree that with respect to A's $75x distributive share of the otherwise eligible section 48 credits, $60x of eligible credits will be transferred and $15x of eligible credits (or $50x basis) will be allocated to A. A, B, C and D also agree that B, C, and D will each be allocated their respective $75x of the $250x of section 48 eligible credits (or basis). On November 15, 2024, ABCD partnership transfers $60x of its eligible section 48 investment credits to Y, an unrelated taxpayer. On January 1, 2025, A sells 50 percent of its interest in ABCD partnership, which results in recapture under § 1.47-6(a)(2).

(B) Analysis—recapture from partner A's disposition. Pursuant to § 1.6418-3(a)(6)(i), A is subject to the rules relating to recapture caused by the disposition of its interest under § 1.47-6(a)(2), and A calculates recapture based on half of its share of the basis of the investment credit property ($125x of basis) because A disposed of 50 percent of its interest in ABCD partnership. This results in a recapture amount of $37.5x to A (that is, the amount of the tax increase that A is responsible for due to the recapture event). Of the $37.5x recapture amount, $7.5x relates to $15x of credits retained by A, and $30x relates to the $60x of A's distributive share of the otherwise eligible section 48 credits that were transferred. This recapture event reduces the total potential recapture with respect to the investment credit property from $300x to $262.5x. Y is not subject to recapture because of partner A's disposition, but, if a recapture event with respect to the energy property takes place at a later date, the rules in § 1.6418-5(d)(3)(i) will take partner A's disposition and recapture amount into account when determining Y's recapture amount at that date.

(v) Example (2). Impact of recapture from ABCD partnership's disposition of the investment credit property—(A) Facts. Same facts as Example (1), except that on October 15, 2025, ABCD partnership sells the investment credit property to an unrelated third party.

(B) Analysis—recapture event from ABCD partnership's disposition. As a result of ABCD partnership's disposition of the energy property to a third party after one year, but before two years after placing the energy property into service, under section 50(a)(1)(B), the recapture percentage is 80 percent. This means that 80 percent of the remaining $262.5x of eligible section 48 credits (or $210x) is subject to recapture. Because ABCD partnership retained eligible credits related to the energy property, the $210x recapture amount, which is the amount of the tax increase under section 50(a), must be split between ABCD partnership and Y. Under § 1.6418-5(d)(3)(i), ABCD partnership must recapture $186x of the $210x credit amount, which is determined by multiplying the $210x by a fraction, the numerator of which is $232.5x ($240x of retained eligible credits less $7.5x of retained eligible credits already recaptured by A) and the denominator of which is $262.5x ($300x of total credits determined for the energy property less $37.5x credits recaptured with respect to A's distributive share of the otherwise eligible section 48 credits transferred by ABCD partnership to Y and A's distributive share of the eligible credits retained by A). Also under § 1.6418-5(d)(3)(i), Y has a $24x recapture amount determined by multiplying the $210x recapture amount by a fraction, the numerator of which is $30x ($60x specified credit portion transferred to Y less the $30x recaptured by A that relates to A's distributive share of the otherwise eligible section 48 credits transferred by ABCD partnership to Y), and the denominator of which is $262.5x ($300x of total credits determined for the energy property less $37.5x credits recaptured with respect to A's distributive share of the otherwise eligible section 48 credits transferred by ABCD partnership to Y and A's distributive share of the eligible credits retained by A).

(e) Notification and impact of recapture under section 45Q(f)(4)—(1) In general. In the case of any election under § 1.6418-2 or § 1.6418-3 with respect to any specified credit portion described in § 1.6418-1(c)(2)(iii), if, during any taxable year, there is recapture of any section 45Q credit allowable with respect to any qualified carbon oxide that ceases to be captured, disposed of, or used as a tertiary injectant in a manner consistent with section 45Q, before the close of the recapture period (as described in § 1.45Q-5(f)), such eligible taxpayer and the transferee taxpayer must follow the notification process in paragraph (e)(2) of this section with recapture impacting the transferee taxpayer as described in paragraph (e)(3) of this section.

(2) Notification requirements. The notification requirements for the eligible taxpayer are the same as for an eligible taxpayer that must report a recapture event as described in paragraph (d)(2)(i) of this section, except that the recapture amount that must be computed is defined in § 1.45Q-5(e).

(3) Impact of recapture. The transferee taxpayer is responsible for any amount of tax increase under section 45Q(f)(4) and § 1.45Q-5 upon the occurrence of a recapture event, provided that if an eligible taxpayer retains any amount of an eligible credit determined with respect to a component of carbon capture equipment owned by the eligible taxpayer within a single process train described in § 1.45Q-2(c)(3), the amount of the tax increase under section 45Q(f)(4) that the eligible taxpayer is responsible for is equal to the recapture amount multiplied by a fraction, the numerator of which is the total credit amount that the eligible taxpayer retained, and the denominator of which is the total credit amount determined for the eligible credit property. The amount of the tax increase under section 45Q(f)(4) that the transferee taxpayer is responsible for is equal to the recapture amount multiplied by a fraction, the numerator of which is the specified credit portion transferred to the transferee taxpayer, and the denominator of which is the total credit amount determined for the eligible credit property.

(f) Notification and impact of recapture under section 48(a)(10)(C)—(1) In general. In the case of any election under § 1.6418-2 or § 1.6418-3 with respect to any specified credit portion described in § 1.6418-1(c)(2)(ix), if, during any taxable year, there is recapture under section 48(a)(10)(C) of the Code and § 1.48-13(c)(4) of any increased credit amount under section 48(a)(9)(B)(iii) before the close of the recapture period (as described in § 1.48-13(c)(6)), such eligible taxpayer and the transferee taxpayer must follow the notification process in paragraph (f)(2) of this section with the Federal income tax consequences of recapture impacting the transferee taxpayer as described in paragraph (f)(3) of this section.

(2) Notification requirements. The notification requirements for the eligible taxpayer are the same as for an eligible taxpayer that must report a recapture event as described in paragraph (d)(2)(i) of this section, except that the recapture amount that must be computed is defined in § 1.48-13(c)(5).

(3) Impact of recapture—(i) Section 48(a)(10)(C) recapture event. The transferee taxpayer is responsible for any amount of tax increase under section 48(a)(10)(C) and § 1.48-13(c)(5) upon the occurrence of a recapture event under § 1.48-13(c)(4), provided that if an eligible taxpayer retains any amount of an eligible credit determined with respect to an energy property directly held by the eligible taxpayer, the amount of the tax increase under section 48(a)(10)(C) and § 1.48-13(c)(5) that the eligible taxpayer is responsible for is equal to the recapture amount multiplied by a fraction, the numerator of which is the total credit amount that the eligible taxpayer retained, and the denominator of which is the total credit amount determined for the energy property. The amount of the tax increase under section 48(a)(10)(C) that the transferee taxpayer is responsible for is equal to the recapture amount multiplied by a fraction, the numerator of which is the specified credit portion transferred to the transferee taxpayer, and the denominator of which is the total credit amount determined for the energy property.

(ii) Impact of section 48(a)(10)(C) recapture event on basis of energy property held by eligible taxpayer. The eligible taxpayer must increase the basis of the energy property (as of the first day of the taxable year in which the recapture event occurs) by an amount equal to the recapture amount provided to the eligible taxpayer by the transferee taxpayer pursuant to the notification required under paragraph (f)(2) of this section and the recapture amount on any credit amounts retained by the eligible taxpayer in accordance with section 48(a)(10)(C) and § 1.48-13(c)(4).

(g) Impact of an ineffective transfer election by an eligible taxpayer. An ineffective transfer election means that no transfer of an eligible credit has occurred for purposes of section 6418, including section 6418(b). Section 6418 does not apply to the transaction and the tax consequences are determined under any other relevant provisions of the Code. For example, an ineffective election results if an eligible taxpayer tries to elect to transfer a specified credit portion, but the eligible taxpayer did not register and receive a registration number with respect to the eligible credit property (or otherwise satisfy the requirements for making a transfer election under the section 6418 regulations) with respect to which the specified credit portion was determined.

(h) Carryback and carryforward. A transferee taxpayer can apply the rules in section 39(a)(4) of the Code (regarding the carryback and carryforward period for applicable credits) to a specified credit portion to the extent the specified credit portion is described in section 6417(b) (list of applicable credits, taking into account any placed in service requirements in section 6417(b)(2), (3), and (5)).

(i) Rules applicable to real estate investment trusts—(1) Treatment of eligible credits prior to transfer. If a real estate investment trust has eligible credits that it may transfer, the value of those credits is not included in either the numerator or denominator in determining the value of the REIT's total assets in section 856(c)(4) of the Code.

(2) Treatment of eligible credit transfer for purposes of section 857 safe harbor rules. The transfer of a specified credit portion pursuant to a valid transfer election under section 6418 is not a sale for purposes of section 857(b)(6)(C)(iii) and section 857(b)(6)(D)(iv) of the Code.

(j) Applicability dates—(1) In general. Except as provided in paragraph (j)(2) of this section, this section applies to taxable years ending on or after April 30, 2024. For taxable years ending before April 30, 2024, taxpayers, however, may choose to apply the rules of this section and §§ 1.6418-1 through 1.6418-3 provided the taxpayers apply the rules in their entirety and in a consistent manner.

(2) Paragraph (f) of this section. Paragraph (f) of this section applies to taxable years ending on or after December 12, 2024.

26 C.F.R. § 1.6418-4 26 C.F.R. § 1.642(a)(1)-1

Authorizing Statute