Election To Exclude Certain Unincorporated Organizations Owned by Applicable Entities From Application of the Rules on Partners and Partnerships

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 10012]</DEPDOC> <RIN>RIN 1545-BR09</RIN> <SUBJECT>Election To Exclude Certain Unincorporated Organizations Owned by Applicable Entities From Application of the Rules on Partners and Partnerships</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulations. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document sets forth final regulations that modify existing regulations to allow certain unincorporated organizations that are owned in whole or in part by applicable entities to be excluded from the application of partnership tax rules. These regulations 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 The final regulations also update certain outdated language in the existing regulations. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on January 19, 2025. <E T="03">Applicability date:</E> For the date of applicability, see § 1.761-2(f). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning these final regulations, contact Cameron Williamson at (202) 317-6684 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains amendments to the Income Tax Regulations (26 CFR part 1) under section 761(a) of the Internal Revenue Code (Code) issued by the Secretary of the Treasury (Secretary) pursuant to the authority granted under sections 761(a), 6031(a), 6417(d) and (h), and 7805(a) of the Code (final regulations). Section 761(a) provides, in part, an express grant of regulatory authority for section 761(a) stating, “[u]nder regulations the Secretary may, at the election of all the members of an unincorporated organization, exclude such organization from the application of all or a part of this subchapter.” Section 6031(a) provides an express grant of regulatory authority for the Secretary to prescribe in forms or regulations partnership reporting information required “for the purpose of carrying out the provisions of subtitle A.” Section 6417(d) provides several express delegations of authority to the Secretary to enforce requirements for elective payments of applicable credits under section 6417 and recapture excessive payments. Section 6417(h) provides an express delegation of authority with respect to elective payments under section 6417, stating, in part, that “[t]he Secretary shall issue such regulations or other guidance as may be necessary to carry out the purposes of this section.” Finally, section 7805(a) authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD2">I. Elective Payment of Applicable Credits</HD> 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 to provide rules for making elections under section 6417. Section 13801(g) of the IRA provides that section 6417 applies to taxable years beginning after December 31, 2022. On March 11, 2024, the Department of the Treasury (Treasury Department) and the IRS published in the <E T="04">Federal Register</E> (88 FR 40528) final regulations (TD 9988) providing guidance on the section 6417 elective payment election (section 6417 regulations). Section 1.6417-2(a)(1)(iv) provides that partnerships are not applicable entities described in section 6417(d)(1)(A) or § 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 § 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, § 1.6417-2(a)(1)(iii) provides that if an applicable entity is a co-owner in an applicable credit property (as defined in § 1.6417-1(e)), through an organization that has made a valid election under section 761(a) (section 761(a) election) 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 is 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 applicable credit property. Also on March 11, 2024, the Treasury Department and the IRS published in the <E T="04">Federal Register</E> (89 FR 17613) proposed amendments (REG-101552-24) to the regulations under section 761(a) to carry out the purposes of section 6417 (proposed regulations). Generally, the proposed regulations would have amended certain provisions of § 1.761-2 as in effect and contained in 26 CFR part 1 to provide that unincorporated organizations meeting certain requirements (applicable unincorporated organizations) are eligible for certain modifications (referred to in the proposed regulations as “exceptions”) to the existing requirements for making a section 761(a) election. The provisions of the proposed regulations are explained in greater detail in the preamble to the proposed regulations. Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing in the Proposed Rules section of this edition of the <E T="04">Federal Register</E> a notice of proposed rulemaking (REG-116017-24) proposing to further add to and revise the provisions of § 1.761-2 (November 2024 proposed regulations). The proposed revisions to the provisions of § 1.761-2 by the November 2024 proposed regulations are explained in greater detail in the preamble to the November 2024 proposed regulations. <HD SOURCE="HD2">II. Overview of Section 761(a) and Prior § 1.761-2(a)(3)</HD> 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 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, provided that the income of the members of the organization may be adequately determined without the computation of partnership taxable income. As discussed in the preamble to the proposed regulations, 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 availed of for the purposes listed in section 761(a)(2), that is, for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or extracted. Pursuant to the authority in section 761(a), prior § 1.761-2(a)(3) provides additional requirements for an unincorporated organization to elect to be excluded from the application of subchapter K under section 761(a)(2). Specifically, prior § 1.761-2(a)(3) requires that the participants in the joint production, extraction, or use of property: (i) own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights (co-ownership requirement), (ii) reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used (severance requirement), and (iii) 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 (one-year exception). These additional regulatory requirements are hereinafter referred to as the “existing regulatory requirements” and, along with the previously discussed statutory requirements, are referred to herein as the “existing requirements” to be eligible to elect out of the application of subchapter K. As discussed in ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 86k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━