Treasury Official Sheds Light on Sec. 761(a), Clean Energy Credit Elective Payment Election Regs

Attorney Advisor Sarah Haradon of the Treasury Department Office of Tax Policy shared the rationale behind the issuance of proposed regs that provide exceptions to rules on Subchapter K opt-out elections to address elective payment elections for certain Inflation Reduction Act (PL 117-169) clean energy credits.

Haradon spoke May 3 at an American Bar Association’s Tax Section conference in Washington, DC, following Treasury’s release of two final reg packages clarifying Code Sec. 6417 and Code Sec. 6418.

The Inflation Reduction Act allows “applicable entities” to make elective payment elections available for 12 clean energy tax credits that directly reduce their federal income tax liabilities in lieu of claiming a nonrefundable credit. Eligible taxpayers considered applicable entities generally include tax-exempt organizations, state and local governments, and Native American tribal governments.

Final elective payment election regs were released in March. In April, the IRS released final regs regarding the transfer of certain inflation bill energy credits, as well as specific rules for partnerships and S corporations.

“There are three credits that any taxpayer can claim elective pay on — three production tax credits, but only for a period of five years,” said Haradon. Under Section 6417, she explained, elective payment elections are made at the entity level for partnerships and S corporations. “For those of us in the [Subchapter K] world, it’s a very entity-type rule,” she said. “It says you’re looking at the partnership.”

Before issuing proposed regulations, Haradon continued, Treasury immediately received questions from taxpayers on the treatment of partnerships involving an applicable entity and a non-applicable entity. In those cases, commenters asked, can the partnership claim elective pay, and if so, how much?

Treasury interpreted the statute to “very clearly” have an “entity approach” and that the “partnership itself is not treated as an applicable entity regardless of who its owners are,” said Haradon. Unincorporated organizations can elect out of Subchapter K under Code Sec. 761(a) and treat energy property or a qualifying facility as a “separate property or facility.” Applicable entity owners can claim elective pay “on their respective share of that,” Haradon said.

Haradon pointed to a “no joint marketing or selling requirement” in Section 761(a) that provides that owners can “delegate their authority to sell the property produced or extracted” if the period is less than a year.

An issue arising from that requirement, she explained, pertains to power purchase agreements (PPAs). For example, if an unincorporated organization wanted to delegate authority to a party to enter into a 15-year agreement with a utility provider, but the utility “just wants to deal with one party,” that would be disallowed under current regs.

To remedy this, Treasury issued proposed regs along with the final Section 6417 rules to allow partnerships with partners considered applicable entities to elect out of Subchapter K.

“[Y]ou can delegate the authority to enter into an agreement that would bind the members for a period of more than one year, provided that the agreement is actually entered into on an annual basis,” said Haradon. With this exception, an organization must be established “solely for the purpose of holding the property and producing electricity from that property,” she clarified.

Treasury also agreed with concerned stakeholders that “ownership of certain applicable credit property through an entity… is appropriate for purposes of satisfying the co-ownership and severance requirements in the context of an entity owned by one or more applicable entities seeking to make elections under Section 6417,” as illustrated in the text of the proposed regs.

To adhere with Congress’ intent to promote the building, operation, and ownership of renewable energy projects, Treasury said it is “necessary to expand the circumstances in which joint ownership arrangements of applicable credit property can be excluded from the application of” partnership rules.

The public comment period for the proposed regs ended May 10, and a rulemaking hearing is scheduled for May 20.