Election To Exclude Certain Unincorporated Organizations Owned by Applicable Entities From Application of the Rules on Partners and Partnerships, 91552-91563 [2024-26944]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Rules and Regulations]
[Pages 91552-91563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26944]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10012]
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: Final regulations.

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SUMMARY: 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 The final regulations also update certain outdated 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.

DATES: 
    Effective date: These regulations are effective on January 19, 
2025.
    Applicability date: For the date of applicability, see Sec.  1.761-
2(f).

FOR FURTHER INFORMATION CONTACT: Concerning these final regulations, 
contact Cameron Williamson at (202) 317-6684 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

    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.''

Background

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 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 Federal Register (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 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 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, Sec.  1.6417-2(a)(1)(iii) provides that if an 
applicable entity is a co-owner in an applicable credit property (as 
defined in Sec.  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 Federal Register (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 Sec.  
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 Federal Register a notice of proposed 
rulemaking (REG-116017-24) proposing to further add to and revise the 
provisions of Sec.  1.761-2 (November 2024 proposed regulations). The 
proposed revisions to the provisions of Sec.  1.761-2 by the November 
2024 proposed regulations are explained in greater detail in the 
preamble to the November 2024 proposed regulations.

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II. Overview of Section 761(a) and Prior 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 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 Sec.  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 Sec.  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 the Summary of Comments and Explanation of 
Revisions, the proposed regulations would have modified some of the 
existing regulatory requirements for unincorporated organizations that 
meet certain requirements.

Summary of Comments and Explanation of Revisions

    The Treasury Department and the IRS received 11 written comments in 
response to the proposed regulations. The comments are available for 
public inspection at www.regulations.gov or upon request. A public 
hearing on the proposed regulations was scheduled for May 20, 2024. 
There were no requests to speak at the scheduled public hearing. 
Consequently, the public hearing was cancelled. See Election To Exclude 
Certain Unincorporated Organizations Owned by Applicable Entities From 
Application of the Rules on Partners and Partnerships; Hearing 
Cancellation, 89 FR 43349 (May 17, 2024). After full consideration of 
the comments received, these final regulations adopt the proposed 
regulations with modifications in response to the comments described in 
this Summary of Comments and Explanation of Revisions. The provisions 
of Sec.  1.761-2 as amended by the final regulations are referred to as 
``revised Sec.  1.761-2'' in this Summary of Comments and Explanation 
of Revisions.
    Comments merely summarizing the statute or proposed regulations, 
recommending statutory revisions to section 761 or other statutes, 
addressing unrelated issues, or recommending changes to IRS forms or 
procedures are generally not addressed in this Summary of Comments and 
Explanation of Revisions or adopted in these final regulations. These 
comments included recommendations and questions regarding fact patterns 
specific to section 6417, the domestic content rules of section 
45(b)(10), the credit for qualified commercial clean vehicles of 
section 45W, and the credit for alternative fuel vehicle refueling 
property of section 30C. While the Treasury Department and the IRS are 
studying some of those issues and intend to issue future guidance on 
those provisions, those recommendations and questions are unrelated to 
the purpose of these final regulations. Unless otherwise indicated in 
this Summary of Comments and Explanation of Revisions, provisions of 
the proposed regulations with respect to which no comments were 
received are adopted without substantive change.

I. Overview

    Proposed Sec.  1.761-2(a)(4)(ii) would have defined ``applicable 
unincorporated organizations'' as unincorporated organizations that 
meet several requirements. Proposed Sec.  1.761-2(a)(4)(iii) would have 
modified the regulatory requirements in prior Sec.  1.761-2(a)(3)(i) 
and (iii) for an applicable unincorporated organization that also met 
the regulatory requirements of prior Sec.  1.761-2(b) and (e).
    Part II of this Summary of Comments and Explanation of Revisions 
discusses comments received concerning the general effects of a section 
761(a) election. Part III of this Summary of Comments and Explanation 
of Revisions discusses the comments received on the definition of an 
applicable unincorporated organization. Part IV of this Summary of 
Comments and Explanation of Revisions discusses the comments received 
on the modifications to the existing regulatory requirements. Part V of 
this Summary of Comments and Explanation of Revisions discusses the 
applicability date of these final regulations, the elimination of 
certain obsolete language, and certain administrative requirements that 
are under consideration for organizations taking advantage of the 
modifications to the existing regulatory requirements. Part VI of this 
Summary of Comments and Explanation of Revisions summarizes two 
comments not addressed in these final regulations.

II. Effects of an Election Under Section 761(a)

A. General
    Subchapter K provides rules governing the taxation of partners and 
partnerships. When an unincorporated organization makes a valid section 
761(a) election out of subchapter K, the rules of subchapter K no 
longer apply to that organization. As a result, for purposes of 
subchapter K, the unincorporated organization ceases to be a 
partnership and each member of the unincorporated organization is 
generally treated as a co-owner, that is, as directly owning its 
proportionate share of the organization's assets.
    For example, an unincorporated organization that has made a valid 
section 761(a) election is not subject to section 704, which provides 
the rules for determining a partner's distributive share of a 
partnership's tax items. Instead, each member of an unincorporated 
organization that has

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made a valid section 761(a) election takes into account directly its 
ownership share of the organization's tax items. Accordingly, if an 
unincorporated organization with a valid section 761(a) election 
purchases depreciable property, an owner of a 30 percent interest in 
the organization may claim depreciation deductions as if it owned an 
undivided 30 percent interest in the organization's property (provided 
the owner is otherwise eligible for such deductions). That member 
cannot claim depreciation deductions beyond that member's ownership 
interest in the organization's property. Thus, any agreement among the 
members to specially allocate one member's depreciation deductions to 
another member would make the organization ineligible for a section 
761(a) election.
    One commenter asked for clarification of whether the following fact 
pattern is compatible with an election under section 761(a). A church 
(an applicable entity) forms a partnership with a nonprofit investor 
and a for-profit developer. The church contributes a site for energy 
property, which generates electricity and reduces the church's energy 
bill. The nonprofit investor makes grants and loans to the organization 
and is repaid by virtue of renewable energy credits or net metering 
from the clean energy property. The for-profit developer enters into a 
contract to maintain the system in exchange for a fee.
    The facts described in the comment letter do not provide sufficient 
information to determine whether this situation is compatible with a 
section 761(a) election. If the investor receives all payments in its 
capacity as a lender and the for-profit developer receives its profits 
in its capacity as a third-party service provider, there might not be 
an unincorporated organization at all. If there is an unincorporated 
organization and it intends to make a section 761(a) election, each of 
its members must reserve the right separately to take in kind or 
dispose of their shares of any property produced, extracted, or used. 
If the investor or developer receives payments in excess of its pro 
rata ownership interests, this requirement will not be met. Moreover, 
if the contributions mentioned in this situation are intended to be 
non-recognition transfers for Federal income tax purposes, the 
contributing members would generally need to make such contributions 
under section 721(a), which is part of subchapter K. However, if a 
section 761(a) election is made, the organization is not subject to 
subchapter K, and thus, section 721(a) is inapplicable to transfers to 
the organization. Without section 721(a), the transfers would generally 
be taxable events.
    One commenter asked how certain capital stacking combinations 
(including loans, forgivable loans, and grants) affect an 
organization's eligibility to make a section 761(a) election. To make a 
valid section 761(a) election, an unincorporated organization must 
comply with the requirements of section 761(a) and revised Sec.  1.761-
2. Provided that those requirements are met, the structure of an 
organization's capital stack would not appear to preclude it from 
making a valid section 761(a) election. Federal income tax law governs 
the treatment of these arrangements for purposes of determining whether 
an arrangement violates the requirements of section 761(a). For 
example, loans between members of the organization will be treated as 
debt to the extent they are treated as debt under Federal income tax 
law. Likewise, loans by a member to an organization would not be 
treated as a partnership liability under section 752, but a loan to 
each member of the organization in proportion to the member's ownership 
interest.
    One commenter asked that applicable entities who are members in an 
applicable unincorporated organization that makes a 761(a) election be 
permitted to claim all applicable tax credit bonuses and adders. Bonus 
credit amounts, such as amounts for applicable credit properties 
located in energy communities, apply to property co-owned through an 
applicable unincorporated organization. The Treasury Department and the 
IRS have determined that no change to the final regulations is required 
to clarify this issue.
B. Effect of a Section 761(a) Election on Sections of the Code Outside 
of Subchapter K
    One commenter requested a discussion of the effects of a section 
761(a) election on provisions of the Code outside of subchapter K that 
reference partnerships, including section 6417. A detailed discussion 
of the effects of a section 761(a) election on provisions of the Code 
outside of subchapter K would require a careful examination of numerous 
provisions of the Code apart from those relevant to these final 
regulations and is not necessary for purposes of these final 
regulations. However, the application of a section 761(a) election to 
section 6417 is fundamental to the purpose of these final regulations, 
which is to carry out the purposes of section 6417 and thus, is 
addressed herein.
    An organization with a valid section 761(a) election may be treated 
as a partnership for purposes of sections of the Code outside of 
subchapter K. In Bryant v. Commissioner, 46 T.C. 848 (1966), aff'd, 399 
F.2d 800 (5th Cir. 1968), the Tax Court concluded that an organization 
that made a section 761(a) election was still a partnership for 
purposes of other parts of the Code, including the $50,000 investment 
tax credit limit on partnership assets provided by then section 
48(c)(2)(D) of the Code. See also Cokes v. Commissioner, 91 T.C. 222 
(1988) (section 761 election did not affect partnership status under 
the self-employment tax provisions of section 1402(a) of the Code); 
Madison Gas and Electric Company v. Commissioner, 72 T.C. 521 (1979), 
aff'd, 633 F.2d 512 (7th Cir. 1980) (notwithstanding a section 761 
election, the startup costs of a joint venture were attributable to the 
partnership business and were not deductible under section 162(a) of 
the Code as the ordinary and necessary business expenses of the 
individual partners).
    Though section 6417 is not in subchapter K, a section 761(a) 
election affects whether an entity is treated as a partnership for 
purposes of section 6417. Section 6417(h) provides that the Secretary 
shall issue such regulations or other guidance as may be necessary to 
carry out the purposes of section 6417. Pursuant to this broad 
authority, the Treasury Department and the IRS published Sec.  1.6417-
2(a)(1)(iii), which provides that if an applicable entity is a co-owner 
in an applicable credit property through an organization that has made 
a valid section 761(a) election, then the applicable entity's undivided 
ownership share of the applicable credit property will be treated as a 
separate applicable credit property owned by such applicable entity, 
and the applicable entity may make an elective payment election for the 
applicable credits determined with respect to such applicable credit 
property. This means that a section 761(a) election effectively causes 
an unincorporated organization not to be treated as a partnership for 
purposes of section 6417, including section 6417(c). Thus, the effect 
of a valid section 761(a) election for purposes of section 6417 is that 
each member of the organization is treated as directly owning its 
proportionate share of the applicable credit property. As a result, 
each applicable entity member of the organization may make an elective 
payment election (or, if not an applicable entity member, a transfer 
election under section 6418) with

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respect to its proportionate share of the applicable credit property.
    Another commenter requested confirmation that a Tribal Energy 
Development Organization that makes a section 761(a) election is not a 
partnership for purposes of sections 168(h)(5) and (6) and 50(b)(3).
    Section 168(h) describes tax-exempt use property (generally, 
certain property leased to a tax-exempt entity), the cost recovery of 
which is subject to special rules. Section 168(h)(5) generally provides 
that the determination of whether property leased to a partnership is 
tax-exempt use property shall be made by treating each tax-exempt 
entity partner's proportionate share as being leased to such partner. 
Section 168(h)(6) generally provides that, if any property which is not 
tax-exempt use property is owned by a partnership that has as partners 
both a tax-exempt entity and a person who is not a tax-exempt entity, 
an amount equal to such tax-exempt entity's proportionate share of such 
property is treated as tax-exempt use property. This rule applies only 
if any allocation to the tax-exempt entity of partnership items is not 
a ``qualified allocation,'' which (i) is consistent with such entity's 
being allocated the same distributive share of each item of income, 
gain, loss, deduction, credit, and basis and such share remains the 
same during the entire period the entity is a partner in the 
partnership, and (ii) has substantial economic effect within the 
meaning of section 704(b)(2). See section 168(h)(6)(B). Section 
50(b)(3) and (4) preclude certain property used by tax-exempt 
organizations, governmental entities, and foreign persons from 
qualifying for an investment tax credit. For these purposes, section 
50(b)(4)(D) provides that rules similar to those in section 168(h)(5) 
and (6) apply.
    The existence of a partnership for purposes of these sections does 
not change the amount of depreciation deductions attributable to each 
member of an unincorporated organization that has validly made a 
section 761(a) election. A valid section 761(a) election requires the 
shares of property leased to or owned by an organization to be treated 
as leased to or owned by the members of the organization in proportion 
to their shares of the organization. This is how partnership property 
would be treated under section 168(h)(5) and would cause all 
allocations to the partners to be treated as ``qualified allocations'' 
for purposes of section 168(h)(6). Similarly, the IRS has determined in 
other areas of the law that co-owners of property may make independent 
elections with respect to deductions affecting their taxable income. 
See Rev. Rul. 83-129, 1983-2 C.B. 105, in which the IRS ruled that the 
co-owners of mineral leases that make a section 761(a) election may 
independently elect to deduct or capitalize their shares of mining 
development costs under section 616 of the Code; see also Rev. Rul. 81-
261, 1981-2 C.B. 60, where the IRS noted that if a partnership makes a 
section 761(a) election, each partner is deemed to own directly its 
proportionate share of the partnership property for purposes of 
computing depreciation. Moreover, in the case of an applicable entity 
that makes an election under section 6417(a), section 6417(d)(2)(A) 
provides that applicable credits are determined without regard to 
section 50(b)(3) and (4)(A)(i).

III. Applicable Unincorporated Organizations

A. Applicable Entity Owner
    Proposed Sec.  1.761-2(a)(4)(ii)(A) would have required an 
applicable unincorporated organization to be owned, in whole or in 
part, by one or more applicable entities, as defined in section 
6417(d)(1)(A) and Sec.  1.6417-1(c). The Treasury Department and the 
IRS received no comments related to this section and adopt the proposed 
language without changes.
B. Joint Operating Agreements
    Proposed Sec.  1.761-2(a)(4)(ii)(B) would have provided that an 
applicable unincorporated organization must be an organization the 
members of which enter into a joint operating agreement (JOA) 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, 
and any associated renewable energy credits or similar credits. 
Proposed Sec.  1.761-2(a)(4)(ii)(C) would also have provided, in part, 
that an applicable unincorporated organization must be organized 
pursuant to a JOA.
1. General
    Commenters requested more information about the types of JOAs 
required by these provisions. Some commenters requested examples of 
permissible JOAs, and another commenter requested identification of any 
JOA provisions that would ``create issues'' for a JOA. One commenter 
asked whether JOAs that satisfy the requirements of Sec.  1.761-2(a)(3) 
would also satisfy the requirements of proposed Sec.  1.761-
2(a)(4)(ii)(B) and (C) and requested that any specific rules applicable 
to JOAs solely for purposes of the proposed regulations apply 
prospectively so as to avoid any uncertainty with respect to existing 
JOAs.
    As used in the proposed regulations, the term ``joint operating 
agreement'' is intended to refer to agreements similar to those used by 
organizations that made an election under section 761(a) prior to the 
proposed regulations. Such agreements typically provide the terms by 
which the members of the unincorporated organization will meet the 
existing requirements to make a section 761(a) election. JOAs should 
continue to serve this purpose under the final regulations, regardless 
of whether an applicable unincorporated organization holds its property 
in an entity organized under local law. Accordingly, as a general 
matter, a JOA that satisfies the requirements of revised Sec.  1.761-
2(a)(1) and (3) will satisfy the requirements in revised Sec.  1.761-
2(a)(4)(ii)(B) and (C), provided that the organization to which that 
JOA applies satisfies the existing regulatory requirements, as modified 
by revised Sec.  1.761-2(a)(4)(iii), if applicable. Because the final 
regulations do not change the rules currently applicable to JOAs, these 
final regulations do not need to make such rules apply prospectively. 
For the same reason, further clarification of the JOA requirements is 
unnecessary.
2. Right to Pro Rata Share
    Commenters requested clarification of how credits and ownership 
interests would be allocated when members of an unincorporated 
organization reserve the right separately to take in kind or dispose of 
their pro rata shares of the electricity produced, extracted, or used, 
and any associated renewable energy credits or similar credits.
    Pursuant to proposed Sec.  1.761-2(a)(4)(ii)(B), each member of an 
applicable unincorporated organization would have been required to 
reserve the right separately to take in kind or dispose of their pro 
rata shares of any property produced, extracted, or used, and any 
associated renewable energy credits or similar credits. The 
determination of each member's ownership interest of an unincorporated 
organization (and, accordingly, each member's proportionate share of 
property produced, extracted, or used) must be made by the members and 
based on their ownership interests in the same manner as if they were 
co-owners in the underlying properties.
    To illustrate, a co-owner of 40 percent of an unincorporated 
organization that has made a section 761(a) election must reserve the 
right separately to take in

[[Page 91556]]

kind or dispose of its 40 percent pro rata share of the property 
produced, extracted, or used by the co-owners. This is true even when 
the members of an applicable unincorporated organization own property 
through an entity, as permitted by revised Sec.  1.761-2(a)(4)(iii)(A). 
Example 1 has been added in revised Sec.  1.761-2(a)(5)(i) to 
illustrate the general rule.
    One commenter requested clarification that renewable energy 
certificates (RECs) produced through the generation of clean energy 
qualify as ``similar credits'' for these purposes. The Treasury 
Department and the IRS clarify that RECs are included as ``renewable 
energy credits or similar credits'' pursuant to revised Sec.  1.761-
2(a)(4)(ii)(B) and thus, each member of an unincorporated organization 
must reserve the right separately to take in kind or dispose of their 
pro rata shares of any RECs generated as a result of the organization's 
activities.
3. Joint Marketing
    Some commenters asked whether specific JOA provisions or activities 
would violate requirements that apply to applicable unincorporated 
organizations, including that the organization's members do not jointly 
sell services or property produced or extracted. One commenter asked 
whether appointing a manager, creating an ownership committee, having 
expense-sharing agreements or incurring project-level debt would 
violate the existing requirements to make a section 761(a) election. 
Another commenter requested clarification that a managing member or 
general partner-equivalent (presumably, if the unincorporated 
organization takes advantage of the modification in proposed Sec.  
1.761-2(a)(4)(iii)(A)) can conduct normal project management functions 
for an unincorporated organization without violating the joint 
marketing requirement. That commenter requested, in the alternative, a 
``roadmap'' setting forth how a managing member or general partner can 
comply with the joint marketing requirement in a practical manner. The 
same commenter also requested allowing representatives of an 
unincorporated organization to perform pre-filing and other ministerial 
services on behalf of the entities jointly owning applicable credit 
property.
    An applicable unincorporated organization must meet all applicable 
requirements, including the existing requirements with the 
modifications contained in these final regulations, to elect out of 
subchapter K under section 761(a) and to maintain a section 761(a) 
election. Generally, the members of an unincorporated organization are 
permitted to have a representative handle management and ministerial 
duties typical of a managing member of a limited liability company 
(LLC) or general partner of a limited partnership without violating 
these requirements. The Treasury Department and the IRS understand that 
representatives with such duties may be required by local law for 
entities that may hold the organization's property under Sec.  1.761-
2(a)(4)(iii)(A) of these final regulations. These final regulations, 
however, do not provide a ``roadmap'' for permissible arrangements or 
rights and duties of such representatives as the list would not be 
exhaustive and could cause unintentional inferences to be drawn.
    One commenter proposed allowing an applicable entity to direct some 
or all of its elective payments of applicable credit amounts under 
section 6417 to a separate account jointly owned by the applicable 
entity and other members of an applicable unincorporated organization 
to pay expenses directly related to the underlying applicable credit 
property's co-ownership. The commenter suggested applying rules similar 
to those applicable to assignments of payments under section 1603 
(regarding grants for specified energy properties in lieu of tax 
credits) of the American Recovery and Reinvestment Act of 2009, Public 
Law 111-5, 123 Stat. 115 (2009), including that each payment be 
assigned to a bank or other financing institution, that the assignment 
cover all amounts payable and not be subject to further assignment 
(except that any assignment may be made to one party acting as an agent 
or trustee for the co-owners), and that the assignee file a Notice of 
Assignment.
    As already discussed, Sec.  1.6417-2(a)(1)(iii) provides that if an 
applicable entity is a co-owner in an applicable credit property 
through an organization that has made a valid section 761(a) election, 
then the applicable entity's undivided ownership share of the 
applicable credit property will be treated as a separate applicable 
credit property owned by such applicable entity, and the applicable 
entity may make an election under section 6417(a) for the applicable 
credits determined with respect to such applicable credit property. 
When an applicable entity makes an election under section 6417(a), such 
entity is treated as making a payment against the tax imposed by 
subtitle A of the Code. If this payment causes the entity to have an 
``overpayment'' of tax in a taxable year, section 6402(a) generally 
provides that the entity may receive a refund equal to the amount of 
the overpayment over the entity's tax liability. This refund must be 
made to the person who made the overpayment (i.e., the applicable 
entity). If that applicable member is a partnership or S corporation, 
section 6417(c)(1)(A) specifies that the payment for such election is 
made to the partnership or S corporation that made the section 6417(a) 
election. Accordingly, similar to the general rule under section 
6417(a), refunds or payments under section 6417(c) generally cannot be 
paid to accounts in the name of someone other than the entity making 
the election. A valid section 761(a) election does not affect the 
application of this general rule and, therefore, these final 
regulations do not adopt the commenter's proposal.
C. Purpose of Organization
    Proposed Sec.  1.761-2(a)(4)(ii)(C) would have provided that an 
organization is an applicable unincorporated organization if it ``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 applicable credits listed in section 6417(b)(2), (4), (8), 
(10), and (12) is determined.'' The scope of this rule was intended to 
remove certain impediments for these types of applicable unincorporated 
organizations that would otherwise comply with existing requirements. 
The Treasury Department and the IRS sought comments on the scope and 
requirements of the proposed regulations, including whether 
modifications similar to those in proposed Sec.  1.761-2(a)(4)(iii) are 
needed for applicable entities that own applicable credit properties 
that do not produce electricity.
    Commenters generally recommended that the modifications in proposed 
Sec.  1.761-2(a)(4)(iii) are also needed for organizations organized to 
own applicable credit property with respect to which any other 
applicable credit listed in section 6417(b) is determined. Some 
commenters requested clarity that certain facilities, especially 
battery storage facilities, ``produce electricity'' for purposes of the 
definition of an applicable unincorporated organization. One commenter 
asserted that the ``non-generative'' credits from section 6417(b) that 
were not included in proposed Sec.  1.761-2(a)(4)(ii)(C) could be 
claimed by organizations ``availed of . . . for the joint . . . use of 
property'' and that such organizations should therefore be permitted to 
make a section 761(a) election if other existing requirements are met. 
The same commenter requested clarification that certain activities with

[[Page 91557]]

respect to applicable credits, including time-limited delegations of 
relevant powers, would not violate the existing requirements to make a 
section 761(a) election. Another commenter asked for clarification that 
common, non-electricity revenue streams related to jointly owned 
projects, such as revenues from the sale of capacity and ancillary 
services, do not violate the requirement that an organization must be 
organized exclusively to produce electricity.
    The Treasury Department and the IRS agree that organizations formed 
to own applicable credit property with respect to which any applicable 
credits (including non-generative credits) are determined should be 
permitted to apply the modifications to the existing section 761(a) 
rules contained in the proposed regulations. Section 761(a)(2) refers 
to organizations availed of ``for the joint production, extraction, or 
use of property,'' which is not limited to activities that produce 
electricity. Accordingly, pursuant to the authority in sections 761(a) 
and 6417(h), the final regulations revise the definition of an 
applicable unincorporated organization to include organizations 
organized exclusively to own and operate applicable credit property (as 
defined in Sec.  1.6417-1(e)). The adoption in the final regulations of 
this definition of applicable unincorporated organization should not be 
read to imply that any particular factual arrangement permits a valid 
section 761(a) election. To make a valid section 761(a) election, an 
unincorporated organization, including an applicable unincorporated 
organization, must meet all the requirements of section 761(a) and the 
regulations thereunder.
D. Section 6417 Election
    Proposed Sec.  1.761-2(a)(4)(ii)(D) would have provided that an 
unincorporated organization is an applicable unincorporated 
organization only if one or more of its applicable entity members 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.
    One commenter recommended extending the modifications in proposed 
Sec.  1.761-2(a)(4)(iii) to organizations for which no applicable 
entity member will make an election under section 6417. These final 
regulations are of limited scope and are promulgated, in part, pursuant 
to the authority in section 6417(h) to carry out the purposes of 
section 6417 by facilitating joint-ownership arrangements of applicable 
credit property by applicable entities. These final regulations do not 
adopt this commenter's recommendation because it is not necessary for 
purposes of these final regulations.
E. Other Requirements
    Proposed Sec.  1.761-2(a)(4)(ii) would have provided that an 
applicable unincorporated organization is an unincorporated 
organization described in prior Sec.  1.761-2(a)(1) that meets the 
requirements of proposed Sec.  1.761-2(a)(4)(ii)(A) through (D). The 
reference to prior Sec.  1.761-2(a)(1) was intended to emphasize the 
statutory requirements under section 761(a) and prior Sec.  1.761-
2(a)(1) that: (1) the members of the unincorporated organization must 
be able to compute their income without the necessity of computing 
partnership income, and (2) the unincorporated organization must not be 
a syndicate, group, pool, or joint venture which is classifiable as an 
association, or operate under an agreement which creates an 
organization classifiable as an association. For clarity, the final 
regulations remove the reference to prior Sec.  1.761-2(a)(1) in 
proposed Sec.  1.761-2(a)(4)(ii) and include the requirements of prior 
Sec.  1.761-2(a)(1) as revised Sec.  1.761-2(a)(4)(ii)(E) and (F). In 
the final regulations, therefore, an applicable unincorporated 
organization is an unincorporated organization that meets the 
requirements of revised Sec.  1.761-2(a)(4)(ii)(A) through (F).
    One commenter requested that a Tribal Energy Development 
Organization (TEDO) be permitted to make an elective payment election 
regardless of its partnership status and be permitted to make special 
allocations. A TEDO that is formed as a partnership and meets the 
requirements may make a 761(a) election. Section 761 does not apply, 
however, to entities formed as corporations. In addition, special 
allocations are inconsistent with a section 761(a) election, which is 
available under the statute only to organizations that satisfy the 
severance requirement and the members of which can compute their income 
without the necessity of computing partnership taxable income. 
Accordingly, the final regulations do not adopt these requested 
changes.
    Another commenter requested clarity about the eligibility of a 
``partnership flip'' structure to make a section 761(a) election. 
Generally, these structures involve allocations of income, gains, 
losses, deductions, or credits that change at some point after the 
partnership has been formed. In the commenter's proposed structure, a 
taxable member of an unincorporated organization does not control the 
organization but owns a profits interest in the organization that 
allows the member to earn preferred returns over the course of its 
investment. The commenter suggested that this type of member should be 
permitted to individually elect out of partnership tax treatment under 
subchapter K, and then elect back into partnership treatment under 
subchapter K after it has recouped its investment.
    Partnership flip structures, such as the one described by the 
commenter, violate the existing statutory requirements for electing out 
of subchapter K, even as modified by proposed Sec.  1.761-2(a)(4)(iii). 
This is because such structures provide members with disproportionate 
amounts of income, gains, losses, deductions, or credits and thereby 
require an unincorporated organization to compute partnership taxable 
income to determine each member's share of the organization's income. 
These arrangements are also incompatible with the severance 
requirement, under which members must reserve the right separately to 
take in kind or dispose of their shares of any property produced, 
extracted, or used because members do not have a determinate ``share'' 
of the applicable credit property. For these reasons, the Treasury 
Department and the IRS clarify that partnership flip structures are not 
eligible to make a section 761(a) election.

IV. Specified Modifications for Applicable Unincorporated Organizations

A. Modified Co-Ownership Requirement
    For applicable unincorporated organizations, proposed Sec.  1.761-
2(a)(4)(iii)(A) would have modified the co-ownership requirement such 
that the participants in the applicable unincorporated organization 
would be permitted to own applicable credit property through an 
unincorporated organization that is a legal entity, other than one 
treated as a corporation under any provision of the Code (modified co-
ownership requirement).
    One commenter requested confirmation whether the following 
situation is compatible with an election under section 761(a). A tax-
exempt entity forms an LLC to raise money and serve as a special 
purpose vehicle to own and operate a clean energy project. The tax-
exempt entity then sells equity securities in the LLC to investors. 
Prior to submitting the pre-filing registration with the IRS, the LLC 
makes an election under section 761(a). The tax-exempt entity or 
operator then decides if, and when, investors should be paid dividends 
based on their fractional ownership.

[[Page 91558]]

    This situation is inconsistent with the modified co-ownership 
requirement. Organizations that have made a section 761(a) election do 
not pay dividends for Federal income tax purposes. Because each member 
of such organization is generally treated as directly owning its 
proportionate share of the organization's assets, each member is 
entitled to payments or credits with respect to the member's share of 
property produced, extracted, or used, regardless of whether any other 
member would have approved the distribution of such amounts.
B. Joint Marketing Modification and Agent Delegation Rule
    For applicable unincorporated organizations, proposed Sec.  1.761-
2(a)(4)(iii)(B) would have modified the joint marketing requirement in 
prior 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 contracts the duration of which exceeds 
the minimum needs of the industry and may be for longer than one year 
(the joint marketing modification), 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 (the agent delegation rule). Proposed Sec.  
1.761-2(a)(4)(vi) would have provided an example illustrating this 
modification to the existing regulatory requirements, in which each 
member of an unincorporated organization grants to the same agent a 
one-year delegation (not exceeding the minimum needs of the industry) 
of the member's authority to sell the member's share of electricity 
produced by the organization. The agent commits each member to a 15-
year power purchase agreement (PPA). Because the delegation of 
authority is for a period no longer than one year, the requirements of 
proposed Sec.  1.761-2(a)(4)(iii)(B) are met.
    Commenters requested clarification on several issues relating to 
the joint marketing modification. Some commenters asked whether two or 
more members of an applicable unincorporated organization that has made 
a section 761(a) election may sell their share of the organization's 
output in the same contract. Some commenters also asked whether the 15-
year period for the contract in the example is intended to serve as a 
safe harbor or limitation on the duration of such agreements.
    Provided that the agent delegation rule and all other requirements 
under section 761(a) are satisfied, the joint marketing modification 
allows members of an applicable unincorporated organization to enter 
into contracts of any duration. Multiple members of the same applicable 
unincorporated organization may be party to the same contract. Members 
can also choose to sell their shares without a multi-year contract. The 
example merely illustrates the joint marketing modification and is not 
intended to be a safe harbor. No clarification is required to the joint 
marketing modification in the final regulations.
    Commenters also requested clarification of the agent delegation 
rule. One commenter asked whether an agent would be subject to the rule 
if it was an Indian Tribal government or other applicable entity. Some 
commenters suggested eliminating the one-year limitation on agent 
delegations or allowing agent delegations to automatically renew after 
each year. One commenter suggested that certain organizations would 
need to sell their output into an organized market rather than pursuant 
to a fixed PPA. In this situation, according to the commenter, 
authority to sell the output for each applicable entity may need to be 
pursuant to an agreement that automatically renews annually. Another 
commenter suggested that the one-year limitation on agent delegations 
will harm applicable entities without technical expertise because non-
applicable entities with their own expertise will not require an agent 
and could be able to take advantage of an applicable entity that is 
only able to use an agent for one year. Another commenter asked for 
clarification that a member of an unincorporated organization may 
delegate powers to an agent without limitation as long as no other 
member makes such a delegation.
    The purpose of the agent delegation rule is to fulfill the 
statutory requirement in section 761(a)(2) that no organization making 
a section 761(a) election is formed ``for the purpose of selling 
services or property produced or extracted.'' This is a prohibition on 
joint marketing; accordingly, any member of an unincorporated 
organization may have an agent for any duration of time, provided that 
the agent does not represent more than one member of the applicable 
unincorporated organization. The agent delegation rule applies to any 
person or group of people acting on behalf of more than one member of 
an unincorporated organization, regardless of their status as an 
applicable entity.
    The longstanding one-year exception to the joint marketing 
requirement in the existing regulations reflects a balancing of the 
statutory language with commercial necessities, and the proposed 
regulations reflected a similar balancing. Section 761(a)(2) does not 
permit an electing organization to conduct sales through an agent with 
indefinite authority on behalf of multiple members. Such a structure is 
necessarily ``availed of . . . for the purpose of selling services or 
property produced or extracted'' and is not eligible to elect out of 
subchapter K. These final regulations, therefore, do not adopt the 
suggestions to eliminate the agent delegation rule or allow agent 
delegations to automatically renew. However, in any given year, an 
agent may be delegated authority on terms identical to those in a past 
year, provided that the delegation of authority to act is not for a 
period of time that exceeds the minimum needs of the industry and each 
member delegating authority to that agent consents to those terms in 
writing at least once per year. Example 3 has been added in revised 
Sec.  1.761-2(a)(5)(iii) to illustrate this rule.
    One commenter requested that the phrase ``minimum needs of the 
industry'' be either clarified or deleted. That phrase is intended to 
be fact-sensitive; like the rest of the joint marketing requirement, 
the phrase is intended to balance statutory requirements with 
commercial necessities. These final regulations, therefore, do not 
adopt the commenter's request to clarify or eliminate it.
C. Specific Examples
    Several commenters generally asked for more examples showing 
applications of the proposed regulations. In response, the Treasury 
Department and the IRS have added two examples to the final 
regulations.

V. Additional Information

A. Applicability Date
    Except as provided in Sec.  1.761-2(d), these final regulations 
apply to taxable years ending on or after March 11, 2024, the date on 
which the proposed regulations were published in the Federal Register. 
An applicable unincorporated organization that validly made a section 
761(a) election meeting the requirements of these final regulations for 
a taxable year ending on or after March 11, 2024, will be treated as 
having made a valid section 761(a) election even if the election was 
made prior to the publication of these final regulations in the Federal 
Register.
B. Administrative Requirements
    The preamble to the proposed regulations noted that the Treasury 
Department and the IRS were considering certain rules to prevent

[[Page 91559]]

abuse of the modifications in proposed Sec.  1.761-2(a)(4)(iii). One 
rule described in the preamble to the proposed regulations would have 
prevented the deemed election rules in prior Sec.  1.761-2(b)(2)(ii) 
from applying to any unincorporated organization relying on a 
modification in proposed Sec.  1.761-2(a)(4)(iii). One commenter 
recommended against adopting such a rule, which the commenter believed 
would be inconsistent with the goals of the proposed regulations and 
increase the likelihood of inadvertent disallowances of section 761(a) 
elections in non-abusive situations.
    Although these final regulations do not adopt any rules regarding 
deemed elections, more administrative guidance is needed under section 
761(a) to fulfill the purposes of section 6417. As a result, 
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 Federal Register the November 2024 
proposed regulations under section 761(a) (REG-116017-24), which would 
provide rules affecting the validity of elections under section 761(a) 
by applicable unincorporated organizations whose elections would not 
have been valid without the application of revised Sec.  1.761-
2(a)(4)(iii).
C. Obsolete Language
    Section 1.761-2(b)(3)(i) provides, in part, that an application for 
permission to revoke a section 761(a) 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. This language no longer reflects the 
correct procedure for obtaining permission to revoke a section 761(a) 
election and is therefore eliminated by these final regulations. The 
November 2024 proposed regulations would instead provide that such an 
application must be made by submitting a letter ruling request that 
complies with the requirements of Rev. Proc. 2024-1 or successor 
guidance. Section 1.761-2(b)(3)(i) also provides, in part, that a 
section 761(a) will be effective unless a member of the organization 
sends proper notice to the Commissioner ``within 90 days after the 
formation of the organization (or by October 15, 1956, whichever is 
later) . . .''. The final regulations would strike the parenthetical 
language to update and streamline the paragraph.

VI. Comments That Are Not Addressed in These Final Regulations

    Two comments received were related to section 761 but outside the 
scope of these final regulations. These comments are summarized in this 
Part VI.
A. Implementation
    One commenter asked for clarification of how audits of joint 
structures would take place, including by identifying the specific 
parts of Treasury and the IRS involved in such audits and the standard 
of review for such audits. Another commenter requested the development 
of educational materials, ``office hours,'' and other guidance to 
improve understanding of the regulations and uptake of applicable 
credits. Another commenter requested that the Treasury Department and 
the IRS provide clear rules for the pre-registration filing process for 
applicable credit property co-owned by taxpayers making transferability 
elections. These final regulations do not provide information about 
audit procedures or the development of further guidance, but the 
Treasury Department and the IRS will continue to monitor the elective 
payment process to determine whether there are areas in which more 
efficiencies can be created.
B. Tribal Organizations
    One commenter noted that wholly owned Tribal corporations appear to 
be incapable of making an election under section 761(a) because such 
entities are corporations for Federal tax purposes. The treatment of 
entities wholly owned by Tribal governments is addressed by a separate 
rulemaking and is therefore outside the scope of these final 
regulations. For information on how to provide comments in response to 
that separate rulemaking, see the notice of proposed rulemaking (REG-
113628-21), Entities Wholly Owned by Indian Tribal Governments, 
published in the Federal Register (89 FR 81871) on October 9, 2024.

Special Analyses

I. 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.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
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.
    These final regulations mention 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 these final regulations satisfy relevant reporting 
requirements by submitting a statement attached to, or incorporated in, 
a properly executed partnership return, Form 1065, U.S. Return of 
Partnership Income, 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 Sec.  1.761-2(a)(1) and either Sec.  1.761-2(a)(2) or 
(3); 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 
final regulations are not changing or creating new collection 
requirements not already approved by OMB.
    The recordkeeping requirements mentioned in these final regulations 
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 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

[[Page 91560]]

filers and 1545-0047 for tax-exempt organizations.

III. Regulatory Flexibility Act

    The Secretary of the Treasury hereby certifies that the final 
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 final 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 preexisting regulations, so information about existing 
organizations that have made section 761(a) elections is not 
instructive.
    Even if these final regulations affect a substantial number of 
small entities, such impact will not be significant. The final 
regulations do not make it more costly to make or maintain an election 
under section 761(a).
    These final regulations do not change the procedural requirements 
under Sec.  1.761-2(b) for making an election under section 761(a). 
Other than to conform to modern formatting conventions, the final 
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 preexisting regulations, 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 (3) ``(taking into account Sec.  1.761-2(a)(4), as 
applicable)''. Otherwise, an unincorporated organization making an 
election under these final regulations would not be required to submit 
anything additional or different than required under the preexisting 
version of Sec.  1.761-2(b).
    These final 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 Sec.  1.761-2(a)(4), as applicable), the final regulations do 
not add to this obligation. In fact, these final 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 contracts that 
satisfy the modified joint marketing requirement.
    For the reasons stated, a regulatory flexibility analysis under the 
Regulatory Flexibility Act is not required.
    Pursuant to section 7805(f), the notice of proposed rulemaking 
preceding these regulations was submitted to the Chief Counsel for the 
Office of Advocacy of the Small Business Administration for comment on 
its impact on small business, and no comments were received.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandate Reform Act of 1995 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 final 
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.

V. 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 final 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.

VI. 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. These final rules do not have substantial direct effects on one 
or more federally recognized Indian tribes and do not impose 
substantial direct compliance costs on Indian Tribal governments within 
the meaning of the Executive order.
    Nevertheless, on April 5, 2024, the Treasury Department and the IRS 
held a consultation with Tribal leaders requesting assistance in 
addressing questions related to the section 761(a) proposed rules 
published on March 11, 2024, which informed the development of these 
final regulations.

VII. Executive Order 14112: Reforming Federal Funding and Support for 
Tribal Nations To Better Embrace Our Trust Responsibilities and Promote 
the Next Era of Tribal Self-Determination

    Executive Order 14112 (Reforming Federal Funding and Support for 
Tribal Nations to Better Embrace Our Trust Responsibilities and Promote 
the Next Era of Tribal Self-Determination) reaffirms the executive 
branch's support for Tribal self-determination as the most effective 
policy for the economic growth of Tribal Nations and the economic well-
being of Tribal citizens. Executive Order 14112 requires agency heads 
to take certain actions, consistent with applicable law and to the 
extent practicable, to increase access to ``Federal funding and support 
programs for Tribal Nations''; provide Tribal Nations with the 
flexibility to improve economic growth and address the specific needs 
of their communities; and reduce administrative burdens. Section 2(b) 
of the Executive order defines ``Federal funding and support programs 
for Tribal Nations'' as including ``funding, programs, technical 
assistance, loans, grants, or other financial support or direct 
services that the Federal Government provides to Tribal Nations or 
Indians because of their status as Indians.'' As section 1 of the 
Executive order explains, ``As we continue to support Tribal Nations, 
we must respect their sovereignty by better ensuring that they are able 
to make their own decisions about where and how to meet the needs of 
their communities. No less than for any other sovereign, Tribal self-
governance is about the fundamental right of a people to determine 
their own destiny and to prosper and flourish on their own terms.'' 
These commitments build on a recognition of principles of sovereignty, 
sovereign immunity, and self-governance that have been repeatedly 
reaffirmed by the Supreme Court. See, e.g., Three Affiliated Tribes of 
the Fort Berthold Reservation v. Wold Engineering, P.C., et al., 476 
U.S. 877, 890-91 (1986); Oklahoma Tax Comm'n v. Citizen Band Potawatomi 
Indian Tribe of Oklahoma, 498 U.S. 505, 510 (1991). The Treasury Tribal 
Advisory Committee has advised that Tribes

[[Page 91561]]

consider ``financial support'' in Executive Order 14112 to include tax 
matters that range from tax credits to Federal tax rules that regulate 
Tribal revenue.
    Consistent with Executive Order 14112, the Treasury Department and 
the IRS recognize the importance of protecting and supporting Tribal 
sovereignty and self-determination. These final regulations would 
further Tribal self-determination and self-governance and reduce 
administrative burdens by providing Tribes the ability to directly make 
section 6417 elections for applicable credit property held through 
applicable unincorporated organizations provided all applicable 
statutory and regulatory requirements are satisfied.

VIII. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs has designated this 
rule as a ``major rule,'' as defined by 5 U.S.C. 804(2).

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 final 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.

Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS 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. 446(b), 761(a), 
6031(a), 6417(d), and 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 paragraphs (a)(4) and (5);
0
c. Revising and republishing paragraphs (b)(1) and (2), (b)(3)(i), (c), 
and (e); and
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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 the 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 Internal Revenue 
Code (subchapter K). Such organization must be availed of for 
investment purposes only and not for the active conduct of a business, 
or 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 treated as a 
corporation for Federal tax purposes does not fall within the 
provisions in this paragraph (a)(1).
    (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) Modifications for certain joint ownership arrangements of 
applicable credit property--(i) Scope. Paragraph (a)(4)(iii) of this 
section provides certain modifications 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:
    (A) That is owned, in whole or in part, by one or more applicable 
entities, as defined in section 6417(d)(1)(A) 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 any property produced, extracted, 
or used, and any associated renewable energy credits or similar 
credits;
    (C) That, pursuant to the joint operating agreement, is organized 
exclusively to own and operate applicable credit property (as defined 
in Sec.  1.6417-1(e));
    (D) For which 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;
    (E) The members of which are able to compute their income without 
the necessity of computing partnership taxable income; and
    (F) Which is not a 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.
    (iii) Specified modifications 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 that is treated as a corporation for Federal tax 
purposes; 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 or used 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.
    (5) Examples. The following examples are intended to illustrate the 
principles of this section.
    (i) Example 1--(A) Facts. G and H enter into a joint operating 
agreement to own and operate a facility that will produce solar energy. 
G, an applicable entity, is entitled under the joint operating 
agreement to take in kind or dispose of 40% of the energy produced by 
the unincorporated organization and H, which is not an applicable 
entity, is entitled to the remaining 60%. G and H

[[Page 91562]]

form LLC, a limited liability company, to hold the solar energy 
property that G and H intend to operate pursuant to the joint operating 
agreement. In accordance with the joint operating agreement, G owns a 
40% ownership interest in LLC and H owns the remaining 60% ownership 
interest. G will sell its share of energy produced by the facility in a 
manner designed to generate applicable credits under section 45(a) and 
will make an election under section 6417(a) with respect thereto. LLC 
makes a valid election under section 761(a) to be excluded from 
subchapter K.
    (B) Analysis. G will be entitled to any credits under section 45(a) 
generated by its sale of energy produced by LLC that G has the right to 
take in kind or dispose of (which, under the joint operating agreement, 
is 40% of the energy produced by LLC). Assuming all other requirements 
are met, G will be able to make an elective payment election under 
section 6417 for the applicable credits determined with respect to its 
ownership share of the solar energy property.
    (ii) Example 2--(A) Facts. T is an Indian Tribal government as 
defined in Sec.  1.6417-1(c) and an applicable entity. Through a 
limited liability company organized under T's Tribal law (TLLC), T and 
Y own and operate applicable credit property that will generate 
electricity the sale of which will generate applicable credits under 
section 45(a). TLLC is not treated as an association taxable as a 
corporation for Federal tax purposes and no election under Sec.  
301.7701-3 of this chapter has been made to treat TLLC as such. 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 property produced, extracted, or used and any associated 
renewable energy credits or similar credits. TLLC is formed exclusively 
to own and operate an applicable credit property with respect to which 
section 45(a) credits will be determined. 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 the 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 output from their shares of 
the applicable credit property, the requirements of paragraph 
(a)(3)(iii) of this section (as modified by paragraph (a)(4)(iii)(B) of 
this section) are met. Assuming that TLLC otherwise qualifies as an 
applicable unincorporated organization, 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.
    (iii) Example 3--(A) Facts. The facts are the same as in paragraph 
(a)(5)(ii)(A) of this section (Example 2), except that at the end of 
the day on December 31, T and Y each agree, in writing, to a new agent 
delegation agreement with Q with substantively identical terms as the 
agent delegation agreement in effect during year 1.
    (B) Analysis. Because each of T and Y have agreed, in writing, to 
engage Q in an agency relationship lasting no longer than one year, the 
results are the same as in paragraph (a)(5)(ii)(B) of this section 
(Example 2). In contrast, if the agent delegation agreement renewed 
automatically, T and Y have effectively entered into an agent 
delegation agreement lasting longer than one year and have violated the 
requirements of paragraph (a)(4)(iii)(B) of this section. In that case, 
TLLC would not be eligible to make or maintain an election under 
section 761(a). As such, T could not make an elective payment election 
for the applicable credits determined with respect to its share of the 
applicable credit property held through TLLC.
    (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) that 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 Sec.  1.6031(a)-1(e) (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) In general. 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, U.S. Return of Partnership Income, which 
must 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 Sec.  1.6031(a)-1(e) (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 must 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 
taxpayer 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) Deemed election rule. If an unincorporated organization 
described in paragraph (a)(1) of this section and either paragraph 
(a)(2) or (3) of this

[[Page 91563]]

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 will 
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 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) * * *
    (i) In general. An election under this section to be excluded will 
be effective unless within 90 days after the formation of the 
organization 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.
* * * * *
    (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 must set forth the 
sections of subchapter K from which exclusion is sought and must 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 will 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.

Heather C. Maloy,
Acting Deputy Commissioner.
    Approved: November 6, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-26944 Filed 11-19-24; 8:45 am]
BILLING CODE 4830-01-P