No investment credit recapture for intragroup partnership transfers

Plain-English summary

A member of a consolidated corporate group held interests in partnerships that owned renewable energy projects generating section 48 tax credits. The group proposed moving those partnership interests to another member through a newly formed subsidiary and a series of contributions and a distribution. The parties represented that the partnerships would continue operating, the receiving member intended to retain the interests through the section 50 recapture period, and all relevant corporations would remain in the consolidated group. The IRS ruled under the consolidated return regulations that the transfers would not trigger investment credit recapture under section 50. The ruling did not decide whether the group originally qualified for the credits or protect against recapture from a later disposition or cessation event.

Ruling snapshot

• Question: Will transferring renewable-energy partnership interests among members of the same consolidated group trigger section 50 investment credit recapture?
• Outcome: Approved, no credit recapture from the proposed transaction
• Key authorities: IRC §§ 48, 50, and 1502; Treas. Reg. § 1.1502-3(f)(2)(i)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202347009                                              Third Party Communication: None
Release Date: 11/24/2023                                       Date of Communication: Not Applicable
Index Number: 1502.03-00
                                                               Person To Contact:
------------------------------------------------------------   ------------------------, ID No. ------------------
-------------------------------------                          ----------------------------------------------------
--------------------------                                     Telephone Number:
--------------------------------                               ---------------------
                                                               Refer Reply To:
                                                               CC:CORP:B1
                                                               PLR-107311-23
                                                               Date:
                                                               August 22, 2023



Legend

Parent                = -------------------------------------
                        --------------------------------------
                        -----------------------

M1                    = ---------------------------------
                        -------------------------------
                        -----------------------

M2                    = ---------------
                        --------------------------------------
                        -----------------------

Partnership 1         = --------------------------------------
                        ----------------------
                        -----------------------

Partnership 2         = ------------------------------------
                        ----------------------
                        -----------------------

Partnership 3         = ---------------------------------
                        ----------------------
                        -----------------------

Partnership 4         = -----------------------------------
                        ----------------------
                        -----------------------
PLR-107311-23                                         2

 Partnership 5       = --------------------------------------
                       ----------------------
                       -----------------------

 Partnership 6       = ------------------------------------------
                       ----------------------
                       -----------------------

 Partnership 7       = -----------------------------------------------
                       ----------------------
                       -----------------------

 Partnership 8       = ----------------------------------------------------------
                       ----------------------
                       ---------------------------
 Partnership 9       = ----------------------------------------------------------
                       ----------------------
                       -----------------------

 NewCo               = ------------------


Dear ----------------:

This letter responds to your representative’s letter dated March 28, 2023, requesting a
ruling under Treas. Reg. § 1.1502-3. The material information submitted in that letter
and in subsequent correspondence is summarized below.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for ruling, it is subject to verification on examination.

This office expresses no opinion as to the overall tax consequences of the Proposed
Transaction described in this letter or as to any issue not specifically addressed by the
ruling below.

                                                 FACTS

Parent is the common parent of an affiliated group of corporations that files a
consolidated return for U.S. federal income tax purposes (the “Parent Group”). Parent
owns all the issued and outstanding shares of stock of M1 and M2, both of which are
members of the Parent Group.
PLR-107311-23                                  3

M1 owns, either directly or through another partnership, interests in Partnership 1,
Partnership 2, Partnership 3, Partnership 4, Partnership 5, Partnership 6, Partnership 7,
Partnership 8, and Partnership 9 (together, the “Partnerships”) that have invested in
renewable energy projects that generate tax credits pursuant to section 48. The other
partners in the Partnerships are not related to members of the Parent Group.

                               PROPOSED TRANSACTION

For what are represented to be valid business reasons, M1 proposes to transfer its
interests in the Partnerships to M2 via the following steps:

    1. M1 will form a new, wholly owned subsidiary, NewCo.

    2. M1 will contribute all of its direct or indirect interests in the Partnerships to
      NewCo for no consideration.

    3. M1 will distribute all of the issued and outstanding stock in NewCo to Parent.

    4. Parent will contribute all the issued and outstanding stock in NewCo to M2 for no
      consideration, after which NewCo will elect to become a disregarded entity for
      federal income tax purposes.

                                   REPRESENTATIONS

   (a) The Partnerships invest in property that is energy property within the meaning of
       section 48 and that is subject to recapture under section 50.

   (b) The Proposed Transaction will not cause any of the Partnerships to terminate
       within the meaning of section 708(b), because the Partnerships will continue to
       have business activities, financial operations, or ventures.

   (c) M2 intends to hold the interests in the Partnerships for the same purposes that
       M1 originally held them, and M2 does not intend to dispose of any of the interests
       before the close of the recapture period under section 50.

   (d) There is no plan or intention for M1, M2, or NewCo (or their successors, as may
       be relevant) to leave the Parent Group.

   (e) Absent the application of the regulations under section 1502, the Proposed
       Transaction will give rise to a recapture of investment credits claimed with
       respect to investment credit property held by the Partnerships under section 50.

   (f) Treas. Reg. § 1.1502-3(f)(2)(ii) and (iii) are neither relevant nor applicable to the
       Proposed Transaction.
   (g) To the extent gain or loss is recognized in the Proposed Transaction, such gain
       or loss will be taken into account pursuant to Treas. Reg. § 1.1502-13.
PLR-107311-23                                 4


   (h) The Proposed Transaction will not result in basis adjustments under section
       743(b) by any of the Partnerships. In addition, the Proposed Transaction will also
       not result in basis adjustments under section 743(b) by any of the partnerships
       through which the Partnerships are held.

                                         RULING

The Proposed Transaction will not result in any credit recapture under section 50. See
Treas. Reg. § 1.1502-3(f)(2)(i).

                                        CAVEATS

Except as expressly provided in this letter, no opinion is expressed or implied
concerning the tax treatment of the Proposed Transaction under any other provisions of
the Code or regulations or the tax treatment of any conditions existing at the time of, or
effects resulting from the Proposed Transaction that is not specifically covered by the
above ruling. In particular, no opinion is expressed on whether M1 or members of the
Parent Group qualify for the credits. Moreover, the ruling does not protect the taxpayer
or an affiliate from a determination of recapture under section 50 that may result from a
disposition, or cessation, event occurring after the Proposed Transaction

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.



                                       Sincerely,



                                       Julie Wang
                                       Senior Counsel, Branch 2
                                       Office of Associate Chief Counsel (Corporate)


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