IRS releases 48C program guidance
On May 31, 2023, the IRS published Notice 2023-44, which describes the process for submitting concept papers and applications for Department of Energy (DOE) recommendations and IRS consideration in respect of the section 48C(e) credit allocation program. The Treasury Department and the IRS anticipate providing at least two allocation rounds under the section 48C program, with at least 40 percent of the credits allocated to projects located in “Energy Communities.” The guidance notes that the DOE eXCHANGE portal will begin accepting concept papers for consideration no later than June 30, 2023. Concept papers must be submitted by July 31, 2023, by 12:00 PM Eastern Time to be considered. To be considered for an allocation of 48C credits in the 48C(e) program, taxpayers must submit a concept paper, which DOE will consider and provide a letter encouraging or discouraging the taxpayer’s submission of a section 48C(e) application. In each DOE notification, feedback will be provided on areas needing improvement. An applicant that has submitted a concept paper is eligible to submit an application, regardless of DOE’s response to its concept paper. In the next evaluation stage DOE will confirm eligibility and then evaluate proposed projects against four priority criteria that are intended to further the overall purposes of the Inflation Reduction Act of 2022: commercial viability; greenhouse gas emissions impacts; strengthening US supply chains and domestic manufacturing for a net-zero economy; and workforce and community engagement. The acceptance process for the application begins 7 days after the date of the letter of encouragement or discouragement from DOE, and such application must be submitted no later than 45 days after the acceptance process begins. The IRS will make all Round 1 allocation decisions by March 31, 2024. Eversheds Sutherland will provide a more detailed update soon regarding the contents of the Notice. In the meantime, please see our prior Legal Alert on Notice 2023-18: Treasury and the IRS provide initial guidance on section 48C ITC for manufacturers.
Additional guidance issued on section 48(e) low-income communities bonus credit program
On May 31, 2023, the Treasury Department and the IRS issued proposed regulations (REG-110412-23) supplementing prior guidance (Notice 2023-17) concerning the section 48(e) low-income communities bonus energy investment credit program (Program) established under the Inflation Reduction Act of 2022. Under the Program, taxpayers investing in certain electricity generation facilities may apply for an allocation of environmental justice solar and wind capacity limitation (capacity limitation) to increase the amount of an investment tax credit for the taxable year in which the facility is placed in service. Applicants with qualifying projects may receive increased investment tax credit amounts of 10 percentage points or 20 percentage points, depending on the category of the facility.
Among other items, the proposed regulations include definitions of key terms, requirements for seeking an allocation of capacity limitation, information regarding documentation and attestations for when a facility is placed in service and post-allocation compliance (including certain disqualification and recapture rules) that apply to 2023 applicants.
Eversheds Sutherland will provide a Legal Alert describing these proposed regulations in more detail. In the meantime, please see our prior Legal Alert on Notice 2023-17: Limited initial guidance issued for section 48(e) investment tax credit enhancer.
Tentative debt ceiling agreement avoids energy tax credits impact, rescinds some IRS funding
House Speaker Kevin McCarthy released the text of the Fiscal Responsibility Act of 2023 (the Act) on May 28, 2023. The Act memorializes the proposed deal reached with the White House to avoid breaching the United States’ debt ceiling, the legislatively mandated limit on how much the country can borrow. The need to reach an agreement is in the 11th hour, with US Treasury Secretary Janet Yellen indicating that the debt ceiling threshold would be reached by June 5, leaving the United States without means to pay its debts. With the passage of the Act by the House of Representatives, the legislation now heads to the Senate for the determinative vote.
Despite speculation, the Act did not amend the energy tax credit provisions enacted as part of the Inflation Reduction Act of 2022. The proposed legislation does add language to expedite the permitting process for energy projects, and provisions of the Act specifically facilitate completion of a Sen. Manchin-backed gas pipeline delayed due to permit issues.
In addition, under the Act, $1.39 billion of IRS funds allocated under the Inflation Reduction Act of 2022 will be rescinded. The White House has indicated that $20 billion of IRS funds for fiscal years 2024 and 2025 would be reallocated, although the current text of the bill only references the $1.39 billion amount. Press reports suggest that this reallocation is unlikely to affect the operations of the IRS in the near term. The official noted that the IRS may be required to request additional funding in 5-7 years, but that the reallocation did not impact the Biden administration’s plan to improve the agency.
House Republicans introduce bill targeting Pillar Two taxes under OECD global tax deal The House Ways and Means Committee Chair, Jason Smith, introduced proposed legislation on May 25, 2023, that is in response to the “under taxed profits rule,” or “UTPR,” that is included in Pillar Two. The bill, known as the Defending American Jobs and Investment Act, creates a “reciprocal tax applicable to any foreign country that imposes unfair taxes on US businesses and workers under the OECD’s global tax deal.”
A Ways and Means Committee press release provides that the bill “Requires the Treasury Department to identify extraterritorial taxes and discriminatory taxes enacted by foreign countries that attack US businesses, such as the UTPR surtax. The bill provides for increased tax rates with respect to US source income such as dividends and interest, as well as income effectively connected with a US trade or business. The tax rate would increase by 5 percentage points each year for four years, after which the tax rates would remain elevated by 20 percentage points. The additional taxes would also be collected through the withholding tax mechanism currently in place. These reciprocal taxes would cease to apply after a foreign country repeals its “extraterritorial and discriminatory taxes.” The taxes would apply to (i) any individual (other than a citizen or resident of the United States) who is a citizen of a foreign country listed in the report submitted to Congress; (ii) certain foreign corporations that are created or organized in such foreign country or subject to the income tax laws of such foreign country; and (iii) foreign partnerships to the extent provided by the Secretary.
The press release adds that “Several countries have already made the wise decision to exclude the UTPR surtax from their implementation of the OECD global minimum tax”, the countries referenced are not specified. This draft legislation was introduced at a time shortly before an all-Republican contingent of House members traveled to Berlin and Paris to share concerns with OECD officials regarding the impact of the UTPR and recommend deferral.
IASB publishes amendments to International Accounting Standard 12, Income Taxes The International Accounting Standards Board (IASB) published amendments to International Accounting Standard 12, Income Taxes, on May 23, 2023. The amendments are intended to help companies respond to international tax reform, providing temporary relief from deferred tax accounting requirements while implementation of the OECD two pillar model rules for large multinational companies is uncertain.
The IASB amendments include (1) a temporary exception to accounting for deferred taxes arising from jurisdictions implementing the OECD global tax, and (2) targeted disclosure requirements to ensure investors understand a company’s exposure to potential OECD global tax liabilities. The amendments are effective for periods beginning on or after January 1, 2023. Separately, the IASB plans to publish proposed amendments to section 29, Income Tax, under the IFRS for SMEs Accounting Standard in the second quarter of 2023.
The Financial Accounting Standards Board (FASB) has indicated that the OECD Pillar Two tax is an alternative minimum tax for US GAAP purposes, and, therefore, deferred taxes are not recognized or adjusted under US GAAP for the effect of global minimum taxes that conform to the OECD pillar two rules, pursuant to existing guidance under ASC 740, Income Taxes.
IRS releases legal advice memorandum clarifying the regularly traded stock exception under section 897(c)(3) with respect to stock held by partnerships
On May 19, 2023, the IRS Office of Chief Counsel released a legal advice memorandum clarifying the application of the regularly traded stock exception under section 897(c)(3) to stock of a corporation held by a partnership. This memorandum is notable because, prior to its release, there was uncertainty regarding the level at which to apply section 897(c)(3) when a partnership is making an investment.
In general, section 897 requires a nonresident alien individual or foreign corporation to recognize gain or loss from the disposition of a Unites States real property interest (USPRI). Section 897(c) defines USPRI, which includes stock of a corporation that is a United States real property holding corporation (USRPHC). However, section 897(c)(3) provides that if any class of stock of a corporation is regularly traded on an established securities market, stock of such class is treated as a USRPI only in the case of a person who, at some time during the relevant holding period, held more than 5% of such class of stock. Section 897(c)(6)(C) provides that the constructive ownership rules of section 318, as modified, apply for purposes of determining whether any person holds more than 5% of any class of stock. Notably, section 897(c)(3) does not include its own definition of “person.”
In the memorandum, the IRS concluded that section 7701(a)(1) defines “person” for purposes of section 897(c)(3), which includes a partnership. As such, the IRS concluded that section 897(c)(3) applies at the partnership level, “unless it is more appropriate for the partnership to be treated as an aggregate of its partners for this purpose.” The IRS’ conclusion in this memorandum is particularly noteworthy for investment funds that utilize blocker corporations or intend on making investments in real property, because it links together section 7701(a)(1) and section 897(a)(3) for purposes of determining whether the regularly traded stock exception applies. Nevertheless, it is important to note that the IRS left open the possibility that a different approach could be pursued under certain circumstances.