Election To Exclude Certain Unincorporated Organizations Owned by Applicable Entities From Application of the Rules on Partners and Partnerships
| Published date | 11 March 2024 |
| Record Number | 2024-04606 |
| Citation | 89 FR 17613 |
| Court | Internal Revenue Service |
| Section | Proposed rules |
Federal Register, Volume 89 Issue 48 (Monday, March 11, 2024)
[Federal Register Volume 89, Number 48 (Monday, March 11, 2024)]
[Proposed Rules]
[Pages 17613-17619]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-04606]
Federal Register / Vol. 89 , No. 48 / Monday, March 11, 2024 /
Proposed Rules
[[Page 17613]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-101552-24]
RIN 1545-BR09
Election To Exclude Certain Unincorporated Organizations Owned by
Applicable Entities From Application of the Rules on Partners and
Partnerships
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that would modify
existing regulations to allow certain unincorporated organizations that
are organized exclusively to produce electricity from certain property
to be excluded from the application of partnership tax rules. These
proposed regulations would affect unincorporated organizations and
their members, including tax-exempt organizations, the District of
Columbia, State and local governments, Indian Tribal governments,
Alaska Native Corporations, the Tennessee Valley Authority, rural
electric cooperatives, and certain agencies and instrumentalities. The
proposed regulations would also update certain outdated language in the
existing regulations. This document also provides a notice of public
hearing on these proposed regulations.
DATES: Written or electronic comments must be received by May 10, 2024.
A public hearing on these proposed regulations has been scheduled for
May 20, 2024, at 10 a.m. ET. Requests to speak and outlines of topics
to be discussed at the public hearing must be received by May 10, 2024.
If no outlines are received by May 10, 2024, the public hearing will be
cancelled.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-101552-24) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Public
Hearing'' section. Once submitted to the Federal eRulemaking Portal,
comments cannot be edited or withdrawn. The Department of Treasury
(Treasury Department) and the IRS will publish for public availability
any comments submitted to the IRS's public docket.
Send paper submissions to: CC:PA:01:PR (REG-101552-24), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
contact Cameron Williamson at (202) 317-6684 (not a toll-free number);
and concerning submissions of comments and requests for a public
hearing, contact Vivian Hayes at (202) 317-6901 (not a toll-free
number) or by email to [email protected] (preferred).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 761(a) of the Internal
Revenue Code (Code) to carry out the purposes of section 6417 of the
Code (proposed regulations). This document also provides notice of a
public hearing on the proposed regulations.
I. Elective payment of applicable credits
Section 6417 was added to the Code by section 13801(a) of Public
Law 117-169, 136 Stat. 1818, 2003 (August 16, 2022), commonly referred
to as the Inflation Reduction Act of 2022 (IRA). Section 6417 allows an
``applicable entity'' (including tax-exempt organizations, the District
of Columbia, State and local governments, Indian Tribal governments,
Alaska Native Corporations, the Tennessee Valley Authority, rural
electric cooperatives, and certain agencies and instrumentalities) to
make an election to treat an ``applicable credit'' (as defined in
section 6417(b)) determined with respect to such entity as making a
payment by such entity against the tax imposed by subtitle A of the
Code, for the taxable year with respect to which such credit is
determined, equal to the amount of such credit. Section 6417 also
provides special rules relating to partnerships and directs the
Secretary of the Treasury or her delegate (Secretary) to provide rules
for making elections under section 6417. Section 6417(h) requires the
Secretary to issue regulations or other guidance as may be necessary to
carry out the purposes of section 6417. Generally, this includes
issuing guidance to ensure that applicable entities that comply with
the terms of section 6417 can benefit from its provisions. Section
13801(g) of the IRA provides that section 6417 applies to taxable years
beginning after December 31, 2022.
On June 21, 2023, the Treasury Department and the IRS published in
the Federal Register (88 FR 40528) proposed regulations (REG-101607-23)
providing guidance on the section 6417 elective payment election
(section 6417 proposed regulations). Proposed Sec. 1.6417-2(a)(1)(iv)
provided that partnerships are not applicable entities described in
section 6417(d)(1)(A) or proposed Sec. 1.6417-1(c), regardless of how
many of their partners are themselves applicable entities. Accordingly,
any partnership making an elective payment election must be an electing
taxpayer (as defined in proposed Sec. 1.6417-1(g)), and, as such, the
only applicable credits with respect to which the partnership could
make an elective payment election would be credits determined under
sections 45Q, 45V, and 45X for the time periods allowed in section
6417(d). However, proposed Sec. 1.6417-2(a)(1)(iii) provided that if
an applicable entity is a co-owner in an applicable credit property
through an organization that has made a valid election under section
761(a) to be excluded from the application of the partnership tax rules
of subchapter K of chapter 1 of the Code (subchapter K), then the
applicable entity's undivided ownership share of the applicable credit
property would be treated as a separate applicable credit property
owned by such applicable entity. As a result, the applicable entity may
make an elective payment election for the applicable credit(s)
determined with respect to such share of the applicable credit
property.
Comments were received in response to the section 6417 proposed
regulations requesting that the Treasury Department and the IRS provide
additional guidance as to the types of applicable credit property co-
ownership arrangements that could validly elect under section 761(a) to
be excluded from the application of subchapter K. Specifically,
stakeholders stated that certain facts and circumstances common to
jointly owned and operated renewable energy projects appear to violate
certain provisions of Sec. 1.761-2(a). Stakeholders requested that the
Treasury Department and the IRS provide that applicable credit property
indirectly owned via ownership of an interest in an entity (other than
an entity required to be treated as a corporation under the Code) would
still be considered owned as co-owners for purposes of Sec. 1.761-
2(a)(3)(i). Stakeholders also requested that parties to a joint
ownership arrangement of applicable credit property producing
electricity be permitted to delegate the
[[Page 17614]]
authority to enter into multi-year power purchase agreements (PPAs).
II. Overview of section 761(a) and Sec. 1.761-2(a)(3)
Section 761(a) provides, in part, that under regulations the
Secretary may, at the election of all of the members of an
unincorporated organization, exclude such organization from the
application of all or part of subchapter K if the income of the members
of the organization may be adequately determined without the
computation of partnership taxable income and the organization is
availed of: (1) for investment purposes only and not for the active
conduct of a business, (2) for the joint production, extraction, or use
of property, but not for the purpose of selling services or property
produced or extracted, or (3) by dealers in securities for a short
period for the purpose of underwriting, selling, or distributing a
particular issue of securities.
The Treasury Department and the IRS understand that unincorporated
organizations seeking to be excluded from the application of subchapter
K so that one or more of their members can make an election under
section 6417 are likely to be formed for the joint production of
property, but not for the purpose of jointly selling services or
property produced or extracted. Section 1.761-2(a)(3) provides
additional requirements for such unincorporated organizations to elect
to be excluded from the application of subchapter K. These additional
requirements include that the participants in such unincorporated
organizations: (1) own the property as co-owners, either in fee or
under lease or other form of contract granting exclusive operating
rights (co-ownership requirement), (2) reserve the right separately to
take in kind or dispose of their shares of any property produced,
extracted, or used (severance requirement), and (3) do not jointly sell
services or the property produced or extracted (joint marketing
requirement), although each separate participant may delegate authority
to sell the participant's share of the property produced or extracted
for the time being for the participant's account, but not for a period
of time in excess of the minimum needs of the industry, and in no event
for more than one year. When an electing organization is no longer
eligible to elect to be excluded from subchapter K, its existing
election automatically terminates, and the organization must begin
complying with the requirements of subchapter K.
III. Reason for Proposed Regulations
A. Co-Ownership and Severance Requirements
Under the current regulations, the requirements of Sec. 1.761-
2(a)(3) are met only in situations in which interests in the property
of an electing unincorporated organization are owned directly by its
members, rather than indirectly through ownership of interests in an
entity that would otherwise be treated as a partnership under section
7701 and Sec. 301.7701-3 (for example, a limited liability company
with multiple owners).
Stakeholders have requested that co-ownership arrangements of
applicable credit property through an entity (other than one required
to be treated as a corporation under the Code) be treated as satisfying
the co-ownership and severance requirements. As support for this
request, stakeholders have pointed out that pre-IRA guidance allowing
for the use of partnership structures is widely used as a basis for
structuring projects within the renewable energy industry and is well
understood by all parties involved in the industry. However, direct co-
ownership of renewable energy projects that meet the co-ownership and
severance requirements is generally limited to projects directly
including a utility or an off-taker as a co-owner. Stakeholders have
argued that requiring renewable energy investments to be made directly,
rather than through an entity, will make it more difficult for parties
to such arrangements to obtain financing with respect to the
investments or negotiate contracts.
In response to the concerns raised by stakeholders, the Treasury
Department and the IRS agree that ownership of certain applicable
credit property through an entity (other than one required to be
treated as a corporation under the Code) 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; provided that, the other requirements of
section 761(a) and Sec. 1.761-2, as it would be modified by these
proposed regulations, are met. As previously described, arrangements
treated as partnerships for Federal income tax purposes are not treated
as applicable entities and cannot make elective payment elections
except in the case of credits determined under sections 45V, 45Q, and
45X. Thus, the Treasury Department and the IRS agree with stakeholders
that to further the intent of Congress to encourage applicable entities
to build, operate, and own renewable energy projects, it is necessary
to expand the circumstances in which joint ownership arrangements of
applicable credit property can be excluded from the application of
subchapter K.
B. Joint Marketing Requirement
Under the current regulations, the joint marketing requirement
provides that members of an unincorporated organization making an
election under section 761(a) may not jointly sell services or the
property produced or extracted by the unincorporated organization,
except that each separate participant may delegate authority to sell
the participant's share of the property produced or extracted for the
time being for the participant's account, but not for a period of time
in excess of the minimum needs of the industry, and in no event for
more than one year.
Some stakeholders have requested that the current regulations under
section 761(a) be modified to provide that multi-year PPAs entered into
alongside other members of an unincorporated organization will not
violate the joint marketing requirement. In support of this position,
stakeholders have raised that utilities and other potential
counterparties may be averse to negotiating with multiple owners of a
single renewable energy project, especially if any such owners lack
relevant renewable energy expertise. If applicable entities are at a
disadvantage to negotiating with utilities and other potential
counterparties because of the requirements under section 761(a)(2) and
Sec. 1.761-2, investments in applicable credit property are unlikely
to materialize in the manner intended by Congress. Likewise, if
applicable entities cannot delegate authority to conduct such
negotiations with respect to long-term projects--as is anticipated to
be necessary for PPAs and similar arrangements--investments in
applicable credit property are unlikely to materialize in the manner
intended by Congress.
Explanation of Provisions
To carry out the purposes of section 6417 as intended by Congress,
the proposed regulations contained in this notice of proposed
rulemaking would amend the regulations under section 761(a) to provide
an exception to certain rules in Sec. 1.761-2(a)(3) in the case of an
unincorporated organization that meets four requirements. First, the
unincorporated organization must be owned, in part or in full, by one
or more applicable entities (as defined in section 6417(d)(1) and Sec.
1.6417-1(c)). Second, the unincorporated organization's
[[Page 17615]]
members must enter into a joint operating agreement with respect to the
applicable credit property in which the members reserve the right
separately to take in kind or dispose of their pro rata shares of the
electricity produced, extracted, or used, or any associated renewable
energy credits or similar credits. Third, the unincorporated
organization must, pursuant to a joint operating agreement, be
organized exclusively to jointly produce electricity from its
applicable credit property (as defined in Sec. 1.6417-1(e)) and for
which one or more of the applicable credits listed in section
6417(b)(2), (4), (8), (10), and (12) is determined. This requirement
may be satisfied prior to the applicable credit property being placed
in service (if necessary), provided the unincorporated organization is
in the process of completing the applicable credit property and will
operate the applicable credit property once it is placed in service.
Fourth, one or more of the applicable entities will make an elective
payment election under section 6417(a) for the applicable credits
determined with respect to its share of the applicable credit property.
Solely for purposes of an election under section 761(a) by an
unincorporated organization meeting those four requirements as well as
the other requirements applicable under Sec. 1.761-2 (an applicable
unincorporated organization), the proposed regulations would modify the
co-ownership and joint marketing requirements under Sec. 1.761-2(a)(3)
as follows.
The proposed regulations would modify the co-ownership requirement
in Sec. 1.761-2(a)(3)(i) to permit the participants in the
unincorporated organization to own the applicable credit property
through an organization that is an entity (other than an entity that is
required to be treated as a corporation under the Code).
The proposed regulations would modify the joint marketing
requirement in Sec. 1.761-2(a)(3)(iii) to provide that a delegation of
authority to sell the participant's share of the property produced may
allow the delegee to enter into contacts that exceed the minimum needs
of the industry and may be for longer than one year, provided that the
delegation of authority to act on behalf of the participant may not be
for a period of time that exceeds the minimum needs of the industry,
and in no event for more than one year. In other words, a participant
would not be permitted to enter into an agreement binding the
participant to an agency relationship for longer than one year, but an
agent of a participant may enter into a PPA that binds a participant to
sell electricity generated by the participant's share of the applicable
credit property for longer than one year. The proposed regulations
would include an example illustrating this proposed rule.
The proposed regulations would also update certain outdated
references to Sec. 1.6031-1 and internal revenue officers. The
Treasury Department and the IRS are considering additional updates to
modernize the section 761(a) regulations, including rules addressing
section 761(a) elections made by dealers in securities described in
section 761(a)(3). The Treasury Department and the IRS are also
considering changes to the revocation procedures described in Sec.
1.761-2(b)(3). Comments are requested regarding these considerations
and any other potential updates to the section 761(a) regulations.
Comments are requested regarding the scope and requirements of
these proposed regulations, including whether similar exceptions are
necessary for applicable entities that own applicable credit properties
that do not produce electricity. The Treasury Department and the IRS
are considering a rule that would terminate a section 761(a) election
made by an applicable unincorporated organization relying on an
exception in proposed Sec. 1.761-2(a)(4)(iii) if any interest in the
applicable unincorporated organization is sold or exchanged unless the
resulting members in the unincorporated organization make a new section
761(a) election within a specified time period. In addition, the
Treasury Department and the IRS are considering a rule that would
prevent the deemed election rules in Sec. 1.761-2(b)(2)(ii) from
applying to any unincorporated organization relying on an exception in
proposed Sec. 1.761-2(a)(4)(iii). Comments are requested regarding
these considerations and other potential means of preventing abuse of
the exceptions in proposed Sec. 1.761-2(a)(4)(iii).
Proposed Applicability Dates
Proposed Sec. 1.761-2(a)(4), which would be applicable to
elections under section 761(a) by applicable unincorporated
organizations to be excluded from the application of all of subchapter
K, is proposed to apply to taxable years ending on or after the date
these proposed regulations are published in the Federal Register.
Special Analyses
I. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) generally
requires that a federal agency obtain the approval of the Office of
Management and Budget (OMB) before collecting information from the
public, whether such collection of information is mandatory, voluntary,
or required to obtain or retain a benefit. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless the collection of information displays a valid
control number.
This proposed regulation mentions reporting and recordkeeping
requirements that must be satisfied for unincorporated organizations to
elect out of subchapter K. These collections of information are
generally used by the IRS for tax compliance purposes and by taxpayers
to facilitate proper reporting and recordkeeping. The likely
respondents to these collections are businesses and tax-exempt
organizations.
Unincorporated entities meeting the requirements outlined in Sec.
1.761-2(a)(4) of this proposed regulation satisfy relevant reporting
requirements by submitting a statement attached to, or incorporated in,
a properly executed partnership return, Form 1065, containing, in lieu
of the information required by Form 1065 and by the instructions
relating thereto, only the name or other identification and the address
of the organization together with information on the return, or in the
statement attached to the return, showing the names, addresses, and
identification numbers of all the members of the organization; a
statement that the organization qualifies under paragraphs (1) and
either (2) or (3) of paragraph (a) of this section; a statement that
all of the members of the organization elect that it be excluded from
all of subchapter K; and a statement indicating where a copy of the
agreement under which the organization operates is available (or if the
agreement is oral, from whom the provisions of the agreement may be
obtained). These requirements and associated forms are already approved
by OMB under 1545-0123 for business filers. These proposed regulations
are not changing or creating new collection requirements not already
approved by OMB.
The recordkeeping requirements mentioned in this proposed
regulation are considered general tax records under Sec. 1.6001-1(e).
These records are required for the IRS to validate that electing
taxpayers have consistently met
[[Page 17616]]
the regulatory requirements outlined in Sec. 1.761-2. For PRA
purposes, general tax records are already approved by OMB under 1545-
0123 for business filers and 1545-0047 for tax-exempt organizations.
II. Regulatory Flexibility Act
The Secretary of the Treasury hereby certifies that the proposed
regulations will not have a significant economic impact on a
substantial number of small entities pursuant to the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
These proposed regulations would affect unincorporated
organizations that elect out of subchapter K in connection with an
election under section 6417, as well as the members of such
organizations.
Data is not readily available about these organizations. Such
organizations could not have made an election out of subchapter K under
the current regulations, so information about existing organizations
that have made section 761(a) elections is not instructive.
Even if these proposed regulations affect a substantial number of
small entities, such impact will not be significant. The proposed
regulations do not make it more costly to make or maintain an election
under section 761(a).
These proposed regulations do not change the procedural
requirements under current Sec. 1.761-2(b) for making an election
under section 761(a). Other than to conform to modern formatting
conventions, the proposed regulations would amend Sec. 1.761-2(b) only
by adding a parenthetical to clarify that in making a valid section 761
election, which requires attaching certain statements to a Form 1065 as
required in accordance with the current regulations, proposed Sec.
1.761-2(a)(4) should be taken into account, as applicable, with regard
to the required statement that the organization qualifies under Sec.
1.761-2(a)(1) and either Sec. 1.761-2(a)(2) or (a)(3) ``(taking into
account Sec. 1.761-2(a)(4), as applicable)''. Otherwise, an
unincorporated organization making an election under these proposed
regulations would not be required to submit anything additional or
different than required under current Sec. 1.761-2(b).
These proposed regulations impose no new ongoing compliance costs.
Though any unincorporated organization that has made an election under
section 761(a) should ensure that it remains qualified under Sec.
1.761-2(a)(1) and either Sec. 1.761-2(a)(2) or (3) (taking into
account proposed Sec. 1.761-2(a)(4), as applicable), the proposed
regulations do not add to this obligation. In fact, these proposed
regulations could make it simpler for certain unincorporated
organizations to stay qualified, given their joint operating agreements
that satisfy the modified co-ownership and severance requirements and
multi-year PPAs that satisfy the modified joint marketing requirement.
For the reasons stated, a regulatory flexibility analysis under the
Regulatory Flexibility Act is not required. The Treasury Department and
the IRS invite comments on the number of entities affected and the
impact of the proposed regulations on small entities.
Pursuant to section 7805(f), this notice of proposed rulemaking has
been submitted to the Chief Counsel for the Office of Advocacy of the
Small Business Administration for comment on its impact on small
business.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandate Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). These
proposed regulations do not include any Federal mandate that may result
in expenditures by State, local, or Tribal governments or by the
private sector in excess of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These proposed regulations do not
have federalism implications and do not impose substantial, direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
V. Executive Order 13175: Consultation and Coordination With Indian
Tribal Governments
Executive Order 13175 (Consultation and Coordination With Indian
Tribal Governments) prohibits an agency from publishing any rule that
has Tribal implications if the rule either imposes substantial, direct
compliance costs on Indian Tribal governments, and is not required by
statute, or preempts Tribal law, unless the agency meets the
consultation and funding requirements of section 5 of the Executive
order. This proposed rule does not have substantial direct effects on
one or more federally recognized Indian tribes and does not impose
substantial direct compliance costs on Indian Tribal governments within
the meaning of the Executive order.
Nevertheless, on July 17, 2023, the Treasury Department and the IRS
held a consultation with Tribal leaders requesting assistance in
addressing questions related to the section 6417 proposed rules
published on June 14, 2023, which informed the development of these
proposed regulations.
VI. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to comments regarding the notice of
proposed rulemaking that are submitted timely to the IRS as prescribed
in the preamble under the ADDRESSES section. The Treasury Department
and the IRS request comments on all aspects of the proposed
regulations. All comments will be made available at https://www.regulations.gov. Once submitted to the Federal eRulemaking Portal,
comments cannot be edited or withdrawn.
A public hearing has been scheduled for May 20, 2024, beginning at
10:00 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111
Constitution Avenue NW, Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 30 minutes before the
hearing starts. Participants may alternatively attend the public
hearing by telephone.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit an outline of
the topics to be discussed and the time to be devoted to each topic by
May 10, 2024. A period
[[Page 17617]]
of ten minutes will be allocated to each person for making comments.
After the deadline for receiving outlines has passed, the IRS will
prepare an agenda containing the schedule of speakers. Copies of the
agenda will be available free of charge at the hearing. If no outline
of the topics to be discussed at the hearing is received by May 10,
2024, the public hearing will be cancelled. If the public hearing is
cancelled, a notice of cancellation of the public hearing will be
published in the Federal Register.
Individuals who want to testify in person at the public hearing
must send an email to [email protected] to have your name added to
the building access list. The subject line of the email must contain
the regulation number REG-101552-24 and the language ``TESTIFY In
Person.'' For example, the subject line may say: Request to TESTIFY In
Person at Hearing for REG-101552-24.
Individuals who want to testify by telephone at the public hearing
must send an email to [email protected] to receive the telephone
number and access code for the hearing. The subject line of the email
must contain the regulation number REG-101552-24 and the language
``TESTIFY Telephonically.'' For example, the subject line may say:
Request to TESTIFY Telephonically at Hearing for REG-101552-24.
Individuals who want to attend the public hearing in person without
testifying must also send an email to [email protected] to have
your name added to the building access list. The subject line of the
email must contain the regulation number REG-101552-24 and the language
``ATTEND In Person.'' For example, the subject line may say: Request to
ATTEND Hearing In Person for REG-101552-24. Requests to attend the
public hearing must be received by 5:00 p.m. ET on May 16, 2024.
Individuals who want to attend the public hearing by telephone
without testifying must also send an email to [email protected] to
receive the telephone number and access code for the hearing. The
subject line of the email must contain the regulation number REG-
101552-24 and the language ``ATTEND Hearing Telephonically.'' For
example, the subject line may say: Request to ATTEND Hearing
Telephonically for REG-101552-24. Requests to attend the public hearing
must be received by 5:00 p.m. ET on May 16, 2024.
Hearings will be made accessible to people with disabilities. To
request special assistance during a hearing please contact the
Publications and Regulations Section of the Office of Associate Chief
Counsel (Procedure and Administration) by sending an email to
[email protected] (preferred) or by telephone at (202) 317-6901
(not a toll-free number) by May 15, 2024.
Statement of Availability of IRS Documents
IRS notices and other guidance cited in this preamble are published
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website
at https://www.irs.gov.
Drafting Information
The principal author of these proposed regulations is Cameron
Williamson. However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by revising
the entry for Sec. 1.761-2 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.761-2 also issued under 26 U.S.C. 6417(h).
* * * * *
0
Par. 2. Section 1.761-2 is amended by:
0
a. Revising and republishing paragraphs (a)(1), (a)(2)(i), and
(a)(3)(i);
0
b. Adding paragraph (a)(4);
0
c. Revising and republishing paragraphs (b)(1), (b)(2)(i) and (ii),
(b)(3)(i), (c), and (e); and
0
d. Adding paragraph (f).
The revisions and additions read as follows:
Sec. 1.761-2 Exclusion of certain unincorporated organizations from
the application of all or part of subchapter K of chapter 1 of the
Internal Revenue Code.
(a) * * *
(1) In general. Under conditions set forth in this section, an
unincorporated organization described in paragraph (a)(2) or (3) of
this section (taking into account paragraph (a)(4) of this section, as
applicable) may be excluded from the application of all or a part of
the provisions of subchapter K of chapter 1 of the Code. Such
organization must be availed of (i) for investment purposes only and
not for the active conduct of a business, or (ii) for the joint
production, extraction, or use of property, but not for the purpose of
selling services or property produced or extracted. The members of such
organization must be able to compute their income without the necessity
of computing partnership taxable income. Any syndicate, group, pool, or
joint venture which is classifiable as an association, or any group
operating under an agreement which creates an organization classifiable
as an association, does not fall within these provisions.
(2) * * *
(i) Own the property as co-owners,
* * * * *
(3) * * *
(i) Own the property as co-owners, either in fee or under lease or
other form of contract granting exclusive operating rights, and
* * * * *
(4) Exception for certain joint ownership arrangements of
applicable credit property--(i) Scope. Paragraph (a)(4)(iii) of this
section provides certain exceptions to specified rules in paragraph
(a)(3) of this section in the case of an applicable unincorporated
organization meeting the requirements of paragraph (a)(4)(ii) of this
section.
(ii) Applicable unincorporated organization. For purposes of this
section, an applicable unincorporated organization is an unincorporated
organization described in paragraph (a)(1) of this section:
(A) That is owned, in part or in whole, by one or more applicable
entities, as defined in section 6417(d)(1) and Sec. 1.6417-1(c),
(B) The members of which enter into a joint operating agreement in
which the members reserve the right separately to take in kind or
dispose of their pro rata shares of the electricity produced,
extracted, or used, or any associated renewable energy credits or
similar credits,
(C) That, pursuant to the joint operating agreement, is organized
exclusively to produce electricity from its applicable credit property
(as defined in Sec. 1.6417-1(e)) and with respect to which one or more
of the applicable credits listed in section 6417(b)(2), (4), (8), (10),
and (12) is determined, and
(D) For which one or more of the applicable entities will make an
elective payment election under section 6417(a)
[[Page 17618]]
for the applicable credits determined with respect to its share of the
applicable credit property.
(iii) Specified exceptions for applicable unincorporated
organizations. Solely for purposes of an election under section 761(a)
by an applicable unincorporated organization that meets the
requirements of paragraphs (b) and (e) of this section:
(A) The requirement in paragraph (a)(3)(i) of this section is
modified such that the participants are permitted to own the applicable
credit property through an unincorporated organization that is an
entity, other than one required to be treated as a corporation under
any provision of the Code; and
(B) The requirement in paragraph (a)(3)(iii) of this section is
modified such that the delegation of authority to sell the
participant's share of the property produced may allow the delegee to
enter into contracts the duration of which exceeds the minimum needs of
the industry and may be for more than one year, provided that the
delegation of authority to act on behalf of the participant may not be
for a period of time that exceeds the minimum needs of the industry,
and in no event for more than one year.
(vi) Example. This example illustrates the application of the
specified exceptions for applicable unincorporated organizations
described in paragraph (a)(4) of this section.
(A) Facts. T is an Indian tribal government as defined in Sec.
1.6417-1(c) and an applicable entity, and T and Y own an applicable
credit property that will produce electricity through a limited
liability company organized under T's tribal law (TLLC). No election
under Sec. 301.7701-3 of this chapter has been made to treat TLLC as
an association for Federal tax purposes. T and Y enter into a joint
operating agreement with respect to the ownership and operation of the
applicable credit property in which each of T and Y reserve the right
separately to take in kind or dispose of their pro rata shares of the
electricity produced and any associated renewable energy credits or
similar credits. On January 1st of year 1, T and Y enter into
delegation agreements with Q that delegate T's and Y's authority to Q
to sell electricity generated by T's and Y's shares of the applicable
credit property. The term of the delegation agreements is one year,
which does not exceed the minimum needs of the industry. On June 1st of
year 1, Q enters into a power purchase agreement with Utility on T's
and Y's behalf that commits T and Y to sell the electricity produced
from their shares of the applicable credit property to Utility for a
term of 15 years. At the end of the day on December 31st of year 1, the
delegation agreements terminate.
(B) Analysis. Because T and Y did not delegate authority for a
period of more than one year to sell the electricity produced from
their shares of the applicable credit property, the requirements of
paragraph (a)(4)(iii)(B) of this section are met. Assuming that TLLC
otherwise meets the requirements of paragraphs (a)(1) and (a)(4)(ii) of
this section, TLLC is an organization described in paragraph
(a)(4)(iii)(A) of this section and can make an election under
paragraphs (b) and (e) of this section to be excluded from the
application of all of subchapter K under section 761(a). As such, T can
make an elective payment election for the applicable credits determined
with respect to its share of the applicable credit property held by
TLLC, assuming the requirements of section 6417 are otherwise met. The
analysis in this example would be the same whether Y is also an Indian
tribal government, another applicable entity, or some other person.
(b) * * *
(1) Time for making election for exclusion. Any unincorporated
organization described in paragraph (a)(1) of this section and either
paragraph (a)(2) or (3) of this section (taking into account paragraph
(a)(4) of this section, as applicable) which wishes to be excluded from
all of subchapter K must make the election provided in section 761(a)
not later than the time prescribed by paragraph (e) of Sec. 1.6031(a)-
1 (including extensions thereof) for filing the partnership return for
the first taxable year for which exclusion from subchapter K is
desired. Notwithstanding the prior sentence such organization may be
deemed to have made the election in the manner prescribed in paragraph
(b)(2)(ii) of this section.
(2) Method of making election. (i) Except as provided in paragraph
(b)(2)(ii) of this section, any unincorporated organization described
in paragraph (a)(1) of this section and either paragraph (a)(2) or (3)
of this section (taking into account paragraph (a)(4) of this section,
as applicable) which wishes to be excluded from all of subchapter K
must make the election provided in section 761(a) in a statement
attached to, or incorporated in, a properly executed partnership
return, Form 1065, which shall contain the information required in this
paragraph (b)(2)(i). Such return must be filed with the Internal
Revenue Service Center where the partnership return, Form 1065, would
be required to be filed if no election were made. To determine the
appropriate Internal Revenue Service Center, the principal office or
place of business of the person filing the return will be considered
the principal office or place of business of the organization. The
partnership return must be filed not later than the time prescribed by
paragraph (e) of Sec. 1.6031(a)-1 (including extensions thereof) for
filing the partnership return with respect to the first taxable year
for which exclusion from subchapter K is desired. Such partnership
return shall contain, in lieu of the information required by Form 1065
and by the instructions relating thereto, only the name or other
identification and the address of the organization together with
information on the return, or in the statement attached to the return,
showing the names, addresses, and identification numbers of all the
members of the organization; a statement that the organization
qualifies under paragraph (a)(1) of this section and either paragraph
(a)(2) or (3) of this section (taking into account paragraph (a)(4) of
this section, as applicable); a statement that all of the members of
the organization elect that it be excluded from all of subchapter K;
and a statement indicating where a copy of the agreement under which
the organization operates is available (or if the agreement is oral,
from whom the provisions of the agreement may be obtained).
(ii) If an unincorporated organization described in paragraph
(a)(1) of this section and either paragraph (a)(2) or (3) of this
section (taking into account paragraph (a)(4) of this section, as
applicable) does not make the election provided in section 761(a) in
the manner prescribed by paragraph (b)(2)(i) of this section, it shall
nevertheless be deemed to have made the election if it can be shown
from all the surrounding facts and circumstances that it was the
intention of the members of such organization at the time of its
formation to secure exclusion from all of subchapter K beginning with
the first taxable year of the organization. Although the following
facts are not exclusive, either one of such facts may indicate the
requisite intent:
(A) At the time of the formation of the organization there is an
agreement among the members that the organization be excluded from
subchapter K beginning with the first taxable year of the organization,
or
(B) The members of the organization owning substantially all of the
capital interests report their respective shares of the items of
income, deductions, and credits of the organization on their respective
returns (making such
[[Page 17619]]
elections as to individual items as may be appropriate) in a manner
consistent with the exclusion of the organization from subchapter K
beginning with the first taxable year of the organization.
(3) Effect of election--(i) In general. An election under this
section to be excluded will be effective unless within 90 days after
the formation of the organization (or by October 15, 1956, whichever is
later) any member of the organization notifies the Commissioner that
the member desires subchapter K to apply to such organization, and also
advises the Commissioner that the member has so notified all other
members of the organization by registered or certified mail. Such
election is irrevocable as long as the organization remains qualified
under paragraph (a)(1) of this section and either paragraph (a)(2) or
(3) of this section (taking into account paragraph (a)(4) of this
section, as applicable), or unless approval of revocation of the
election is secured from the Commissioner. Application for permission
to revoke the election must be submitted to the Commissioner of
Internal Revenue, Attention: T:I, Washington, DC 20224, no later than
30 days after the beginning of the first taxable year to which the
revocation is to apply.
* * * * *
(c) Partial exclusion from subchapter K. An unincorporated
organization which wishes to be excluded from only certain sections of
subchapter K must submit to the Commissioner, no later than 90 days
after the beginning of the first taxable year for which partial
exclusion is desired, a request for permission to be excluded from
certain provisions of subchapter K. The request shall set forth the
sections of subchapter K from which exclusion is sought and shall state
that such organization qualifies under paragraph (a)(1) of this section
and either paragraph (a)(2) or (3) of this section (taking into account
paragraph (a)(4) of this section, as applicable), and that the members
of the organization elect to be excluded to the extent indicated. Such
exclusion shall be effective only upon approval of the election by the
Commissioner and subject to the conditions the Commissioner may impose.
* * * * *
(e) Cross reference. For requirements with respect to the filing of
a return on Form 1065 by a partnership, see Sec. 1.6031(a)-1.
* * * * *
(f) Applicability date. Except as provided in paragraph (d) of this
section, this section applies to taxable years ending on or after March
11, 2024.
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2024-04606 Filed 3-5-24; 8:45 am]
BILLING CODE 4830-01-P
