Administrative Requirements for an Election To Exclude Applicable Unincorporated Organizations From the Application of Subchapter K, 91617-91624 [2024-26962]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Proposed Rules]
[Pages 91617-91624]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26962]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-116017-24]
RIN 1545-BR36


Administrative Requirements for an Election To Exclude Applicable 
Unincorporated Organizations From the Application of Subchapter K

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; notice of public hearing.

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SUMMARY: This document contains proposed regulations that would provide 
certain administrative requirements for unincorporated organizations 
taking advantage of modifications to the rules governing elections to 
be excluded from the application of partnership tax rules. These 
proposed regulations would affect unincorporated organizations and 
their members, including tax-exempt organizations, the District of 
Columbia, State and local governments, Indian Tribal governments, 
Alaska Native Corporations, the Tennessee Valley Authority, rural 
electric cooperatives, and certain agencies and instrumentalities. The 
proposed regulations would also update the procedure for obtaining 
permission to revoke a section 761(a) election.

DATES: Written or electronic comments must be received by January 21, 
2025. A public hearing on these proposed regulations has been scheduled 
for February 7, 2025, at 10 a.m. Eastern Standard Time (EST). Requests 
to speak and outlines of topics to be discussed at the public hearing 
must be received by January 21, 2025. If no outlines are received by 
January 21, 2025, the public hearing will be cancelled. Requests to 
attend the public hearing must be received by 5 p.m. on February 5, 
2025.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-116017-24) by following the 
online instructions for submitting comments. Requests for a public 
hearing must be submitted as prescribed in the ``Comments and Public 
Hearing'' section. Once submitted to the Federal eRulemaking Portal, 
comments cannot be edited or withdrawn. The Department of the Treasury 
(Treasury Department) and the IRS will publish for public availability 
any comments submitted to the IRS's public docket.
    Send paper submissions to: CC:PA:01:PR (REG-116017-24), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
contact Cameron Williamson at (202) 317-6684; and concerning 
submissions of comments and requests for a public hearing, contact the 
Publications and Regulations Section at (202) 317-6901 (not toll-free 
numbers) or by email to [email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Authority

    This document contains proposed 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 or her 
delegate (Secretary) under the express authority granted under sections 
761(a), 6031(a), 6417(d) and (h), and 7805(a) of the Code (proposed 
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 a 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) requires the Secretary to issue regulations or other 
guidance as may be necessary to carry out the purposes of section 6417, 
including guidance to ensure that the amount of the payment or deemed 
payment made under this section is commensurate with the amount of the 
credit that would be otherwise allowable (determined without regard to 
section 38(c)).
    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.''

[[Page 91618]]

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 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 (March 2024 proposed regulations). 
Generally, the March 2024 proposed regulations would have amended 
certain provisions of Sec.  1.761-2 to provide that unincorporated 
organizations meeting certain requirements (applicable unincorporated 
organizations) are eligible for certain modifications to the existing 
requirements for making a section 761(a) election.
    Concurrently with the publication of these proposed regulations, 
the Treasury Department and the IRS are publishing in the Rules and 
Regulations section of this edition of the Federal Register a Treasury 
decision (TD 10012, RIN 1545-BR09) adopting certain provisions of Sec.  
1.761-2 of the March 2024 proposed regulations as final regulations 
under section 761(a) (final regulations). The provisions of Sec.  
1.761-2 of the final regulations are explained in greater detail in the 
preamble to the final regulations. The provisions of Sec.  1.761-2 in 
effect as of January 19, 2025, are referred to in this preamble as 
``revised Sec.  1.761-2.''

II. Overview of Section 761(a) and Revised Sec.  1.761-2

    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.
    Unincorporated organizations seeking to make an election 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), revised 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, revised 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, 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.
    The final regulations modify the co-ownership and joint marketing 
requirements for ``applicable unincorporated organizations.'' Under 
revised Sec.  1.761-2(a)(4)(ii), an applicable unincorporated 
organization is defined as an unincorporated organization (1) 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), (2) 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, (3) 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)), (4) 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, (5) the members of which are able to compute their income 
without the necessity of computing partnership taxable income, and (6) 
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.
    Revised Sec.  1.761-2(b) provides rules for making a section 761(a) 
election. Revised Sec.  1.761-2(b)(2)(i) generally provides that a 
section 761(a) election

[[Page 91619]]

must be made in a statement attached to, or incorporated in, a properly 
executed partnership return, Form 1065, U.S. Return of Partnership 
Income, which must contain, in lieu of the information required by Form 
1065 and the instructions relating thereto, the following information: 
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) (taking into account revised Sec.  1.761-2(a)(4), 
as applicable); a statement that all of the members of the organization 
elect to 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).
    If an unincorporated organization does not make the section 761(a) 
election provided in this manner, revised Sec.  1.761-2(b)(2)(ii) 
provides (as it provided before the final regulations) that the 
organization 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 (deemed election rule). 
Although the following facts are not exclusive, the requisite intent 
may be indicated if (1) at the time of the formation of the 
organization there is an agreement among the members that the 
organization be excluded from the application of subchapter K beginning 
with the first taxable year of the organization, or (2) 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.

III. Reason for Proposed Regulations

    Section 6417(d)(5) provides that as a condition of, and prior to, 
any amount being treated as a payment that is made by an applicable 
entity, the Secretary may require such information or registration as 
the Secretary deems necessary for purposes of preventing duplication, 
fraud, improper payments, or excessive payments. Section 6417(h) 
requires the Secretary to issue regulations or other guidance to ensure 
that the amount of a payment or deemed payment made under section 6417 
is commensurate with the amount of the credit that would be otherwise 
allowable.
    The Treasury Department and the IRS have determined that additional 
guidance outlining certain administrative requirements is needed to 
comply with these statutory directives. After an unincorporated 
organization makes a section 761(a) election, each member may increase 
or reduce (even to zero) its interest in the unincorporated 
organization without affecting the validity of the section 761(a) 
election. As a result, the information submitted to the IRS in 
connection with an organization's section 761(a) election, as required 
under revised Sec.  1.761-2(b), can become inaccurate at any time 
without notice to the IRS. This lack of reliable and accurate 
information about the applicable entity owners (if any) of an 
applicable unincorporated organization constrains the IRS's ability to 
ensure that the amount of payments or deemed payments made under 
section 6417 are commensurate with the amount of applicable credits 
that would otherwise be allowable, as directed under section 6417(h).
    This problem is compounded by the deemed election rule in revised 
Sec.  1.761-2(b)(2)(ii). A deemed election obscures any record of an 
organization's members (including any applicable entities) that are 
subject to a section 761(a) election and can be discovered by the IRS 
only upon examination. In contrast, a written election is a relatively 
simple and effective means of identifying any applicable entity owners 
of applicable credit property held through an applicable unincorporated 
organization with a valid section 761(a) election. Moreover, members of 
an organization who form an entity or enter into long-term contracts 
together are especially likely to know that their activities could 
create a partnership subject to subchapter K. The Treasury Department 
and the IRS have concerns that deemed elections are not appropriate in 
such situations, especially when (as is anticipated to be typical) 
applicable entities intend to make section 6417 elections with respect 
to applicable credit property owned by an unincorporated organization, 
as such elections are generally permitted only when the organization 
has a valid section 761(a) election.

Explanation of Provisions

    The proposed regulations would impose new requirements on 
applicable unincorporated organizations whose section 761(a) elections 
would not be valid without the application of revised Sec.  1.761-
2(a)(4)(iii) (specified modifications for applicable unincorporated 
organizations). Proposed Sec.  1.761-2(a)(4)(iv)(A) would provide that 
a specified applicable unincorporated organization's section 761(a) 
election will terminate as a result of a ``terminating transaction.'' A 
terminating transaction is the acquisition or disposition of an 
interest in a specified applicable unincorporated organization, other 
than as the result of a transfer between a disregarded entity (as 
defined in Sec.  1.6417-1(f)) and its owner since such transfer does 
not change the identity of the applicable entity for purposes of 
section 6417. See Sec.  1.6417-2(a)(1)(ii); see also proposed Sec.  
1.6417-1(f) contained in the notice of proposed rulemaking Entities 
Wholly Owned by Indian Tribal Governments (REG-113628-21) published in 
the Federal Register (89 FR 81871) on October 9, 2024, which alters the 
definition of disregarded entities for purposes of section 6417.
    Terminating transactions will not terminate an applicable 
unincorporated organization's section 761(a) election if the 
organization meets the requirements to make a new section 761(a) 
election and makes such an election not later than the time prescribed 
by Sec.  1.6031(a)-1(e) (including extensions thereof) for filing a 
partnership return with respect to the period of time that would have 
been the organization's taxable year if, after the taxable year with 
respect to which the organization first made the section 761(a) 
election, the organization continued to have taxable years and such 
taxable years were determined by reference to the taxable year in which 
the organization made the section 761(a) election (hypothetical 
partnership taxable year). Such election will protect the 
organization's section 761(a) election against all terminating 
transactions in a hypothetical year only if it contains, in addition to 
the information required by Sec.  1.761-2(b), information about every 
terminating transaction that occurred in the hypothetical partnership 
taxable year, including the parties thereto and the interest(s) 
transferred. If a new election is not timely made, the section 761(a) 
election would terminate on the first day of the taxable year beginning 
after the hypothetical partnership taxable

[[Page 91620]]

year in which one or more terminating transactions occurred. Proposed 
Sec.  1.761-2(a)(5)(iv) would add Example 4 to illustrate this new 
rule. These provisions are inapplicable to an organization that is no 
longer eligible to elect to be excluded from the application of 
subchapter K. When an organization becomes ineligible to make a section 
761(a) election, the organization's section 761(a) election 
automatically terminates, and the organization must begin complying 
with the requirements of subchapter K.
    The proposed regulations would also clarify that the deemed 
election rule in Sec.  1.761-2(b)(2)(ii) does not apply to specified 
applicable unincorporated organizations. This change is necessary to 
ensure that an unincorporated organization cannot benefit from the 
modifications in revised Sec.  1.761-2(a)(4)(iii) without providing 
written information to the IRS about its members. The change also 
ensures that a specified applicable unincorporated organization that 
terminates as the result of a terminating transaction cannot have its 
election restored without making a new election in writing. However, if 
such an organization can make a valid section 761(a) election without 
the application of either of the specified modifications in revised 
Sec.  1.761-2(a)(4)(iii), the organization may be deemed to make such 
an election under the deemed election rule.
    In addition, the proposed regulations would clarify that an 
applicable unincorporated organization making a section 761(a) election 
must submit all information required by the instructions to Form 1065, 
U.S. Return of Partnership Income, for making a section 761(a) 
election. This requirement is intended to ensure that the organization 
making a section 761(a) election provides all of the information 
necessary for the IRS to properly administer section 6417 with respect 
to applicable unincorporated organizations making a section 761(a) 
election.
    The proposed regulations would also update the procedure for 
obtaining permission to revoke a section 761(a) election. Prior to 
revision in the final regulations, Sec.  1.761-2(b)(3) provided that 
taxpayers could revoke a section 761(a) election by submitting an 
application for permission to revoke a section 761(a) election 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. Though this language did not define 
what the application would include, it historically has been 
interpreted to mean a private letter ruling request. However, the 
language in Sec.  1.761-2(b)(3) was imprecise, lists an incorrect 
address, and was removed by the final regulations. The proposed 
regulations would clarify 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. This language would ensure 
that the process for making this application is up-to-date and clear. 
Taxpayers may continue to submit applications for permission to revoke 
an election by requesting a private letter ruling and can rely on the 
process in Revenue Procedure 2024-1 or successor guidance prior to the 
date regulations finalizing these proposed regulations are published in 
the Federal Register.

Proposed Applicability Dates

    These proposed regulations are proposed to apply to taxable years 
ending on or after November 20, 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 proposed regulations mention reporting and recordkeeping 
requirements that must be satisfied for unincorporated organizations to 
make and maintain an election 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.
    These proposed regulations would also require unincorporated 
organizations to provide all information required by the instructions 
to Form 1065 for making a section 761(a) election. This reporting 
requirement will be approved by OMB under 1545-0123 for business filers 
and 1545-0047 for tax-exempt organizations in accordance with the PRA 
procedures in 5 CFR 1320.10.
    These proposed regulations would include recordkeeping requirements 
for certain unincorporated organizations to track changes in ownership 
of interests in each such organization. The organizations can maintain 
these records in any manner they deem appropriate. The recordkeeping is 
needed to determine whether a new written section 761(a) election must 
be filed with the IRS. IRS will seek OMB approval under a new OMB 
Control Number (1545-NEW) for the burden on business filers and tax-
exempt organizations. The associated burden for the recordkeeping is 
estimated as follows:
    Estimated number of respondents: 1,000.
    Estimated average annual burden per response: 1 hour.
    Estimated total annual reporting burden: 1,000 hours.
    The recordkeeping in this proposed rulemaking has been submitted to 
OMB for review in accordance with the PRA under OMB Control Number 
1545-NEW. Commenters are strongly encouraged to submit public comments 
electronically. Written comments and recommendations for the proposed 
information collection should be sent to www.reginfo.gov/public/do/PRAMain, with copies to the IRS. Find this particular information 
collection by selecting ``Currently under Review--Open for Public 
Comments'' then by using the search function. Submit electronic 
submissions for the proposed information collection to the IRS via 
email at [email protected] (indicate REG-116017-24 on the Subject 
line). Comments on the collection of information should be received by 
January 21, 2025. Comments are specifically requested concerning: 
whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility; the accuracy of the estimated 
burden associated with the proposed collection of information; how the 
quality, utility, and clarity of the information to be collected may be 
enhanced; how the burden of complying with the proposed collection of 
information may be minimized,

[[Page 91621]]

including through the application of automated collection techniques or 
other forms of information technology; and estimates of capital or 
start-up costs and costs of operation, maintenance, and purchase of 
services to provide information.

III. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Unless an agency determines that a proposal is not likely to 
have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires the agency to present an 
initial regulatory flexibility analysis (IRFA) of the proposed rule. 
The Treasury Department and the IRS have not determined whether the 
proposed rule, when finalized, will likely have a significant economic 
impact on a substantial number of small entities. This determination 
requires further study. However, because there is a possibility of 
significant economic impact on a substantial number of small entities, 
an IRFA is provided in these proposed regulations. The Treasury 
Department and the IRS invite comments on both the number of entities 
affected and the economic impact on small entities.
    Pursuant to section 7805(f), this notice of proposed rulemaking has 
been submitted to the Chief Counsel of for the Office of Advocacy of 
the Small Business Administration for comment on its impact on small 
business.
1. Need for and Objectives of the Proposed Rule
    As discussed in this preamble, the proposed regulations are 
intended to ensure that each section 761(a) election by a specified 
applicable unincorporated organization provides all of the information 
necessary for the IRS to comply with the directives of section 6417(d) 
and (h).
2. Affected Small Entities
    The RFA directs agencies to provide a description of, and where 
feasible, an estimate of, the number of small entities that may be 
affected by the proposed rules, if adopted. The Small Business 
Administration's Office of Advocacy estimates in its 2024 Frequently 
Asked Questions that 99.9 percent of American businesses meet its 
definition of a small business. The applicability of these proposed 
regulations does not depend on the size of the business, as defined by 
the Small Business Administration. As described more fully in the 
preamble to these proposed regulations and in this IRFA, section 761(a) 
and these proposed regulations may affect a variety of different 
entities across several different industries as there are 12 different 
applicable credits for which an elective payment election under section 
6417(a) may be made. There is uncertainty as to the exact number of 
small businesses within this group. The current estimated number of 
respondents to the section 6417 regulations is 20,000 taxpayers, and it 
is likely that a fraction of that number would be respondents to these 
proposed regulations.
    The Treasury Department and the IRS expect to receive more 
information on the impact on small businesses through comments on this 
proposed rule and again when taxpayers start to make the section 761(a) 
election using the guidance and procedures provided in the final 
regulations and these proposed regulations.
3. Impact of the Proposed Rules
    The proposed regulations would require certain applicable 
unincorporated organizations to submit section 761(a) elections in 
writing more frequently than they otherwise would have (though no more 
than once per year). In addition, a specified applicable unincorporated 
organization will be responsible for identifying any transactions 
involving ownership interests therein. Applicable unincorporated 
organizations that make a section 761(a) election will have 
administrative costs related to reading and understanding the rules as 
well as recordkeeping and reporting requirements. The costs will vary 
across different-sized entities and across the type of project(s) in 
which such entities are engaged.
    Although the Treasury Department and the IRS do not have sufficient 
data to determine precisely the likely extent of the increased costs of 
compliance, the estimated burdens of complying with the recordkeeping 
and reporting requirements are described in the Paperwork Reduction Act 
section of the preamble.
4. Alternatives Considered
    The Treasury Department and the IRS considered alternatives to the 
proposed regulations. For example, in adopting the terminating 
transaction rules, the Treasury Department and the IRS considered 
requiring only the parties to a transaction involving an interest in a 
specified applicable unincorporated organization to report such 
transaction. However, the Treasury Department and the IRS decided that 
such an option would increase the opportunity for duplication, fraud, 
improper payments, or excessive payments under section 6417. Section 
6417(d)(5) specifically authorizes the IRS to require such information 
or registration as the Secretary deems necessary for purposes of 
preventing duplication, fraud, improper payments, or excessive payments 
under section 6417 as a condition of, and prior to, any amount being 
treated as a payment which is made by an applicable entity under 
section 6417. As described in the preamble to these proposed 
regulations, these proposed rules carry out that congressional intent 
by ensuring that every member of a specified applicable unincorporated 
organization is informed about all transactions involving interests in 
the specified applicable unincorporated organization that could affect 
the amount or owner of any payments under section 6417.
    Comments are requested on the requirements in the proposed 
regulations, including specifically whether there are less burdensome 
alternatives that do not increase the risk of duplication, fraud, 
improper payments, or excessive payments under section 6417.

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 
proposed regulations do not include any Federal mandate that may result 
in expenditures by State, local, or Tribal governments or by the 
private sector in excess of that threshold.

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 proposed regulations do not 
have federalism implications and do not impose

[[Page 91622]]

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. This proposed rule does not have substantial direct effects on 
one or more federally recognized Indian tribes and does not impose 
substantial direct compliance costs on Indian Tribal governments within 
the meaning of the Executive order.
    Nevertheless, on 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 helped inform the development of 
these proposed 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 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 proposed regulations are 
necessary for compliance with sections 6417(d)(5) and (h) and do not 
impose undue burdens on Tribal sovereignty.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to comments regarding the notice of 
proposed rulemaking that are submitted timely to the IRS as prescribed 
in the preamble under the ADDRESSES section. The Treasury Department 
and the IRS request comments on all aspects of the proposed 
regulations. All comments will be made available at https://www.regulations.gov. Once submitted to the Federal eRulemaking Portal, 
comments cannot be edited or withdrawn.
    A public hearing has been scheduled for February 7, 2025, beginning 
at 10 a.m. EST, in the Auditorium at the Internal Revenue Building, 
1111 Constitution Avenue NW, Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. Participants may alternatively attend the public 
hearing by telephone.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit an outline of 
the topics to be discussed and the time to be devoted to each topic by 
January 21, 2025. A period of ten minutes will be allocated to each 
person for making comments. After the deadline for receiving outlines 
has passed, the IRS will prepare an agenda containing the schedule of 
speakers. Copies of the agenda will be available free of charge at the 
hearing. If no outline of the topics to be discussed at the hearing is 
received by January 21, 2025, the public hearing will be cancelled. If 
the public hearing is cancelled, a notice of cancellation of the public 
hearing will be published in the Federal Register.
    Individuals who want to testify in person at the public hearing 
must send an email to [email protected] to have your name added to 
the building access list. The subject line of the email must contain 
the regulation number REG-116017-24 and the language ``TESTIFY In 
Person.'' For example, the subject line may say: Request to TESTIFY In 
Person at Hearing for REG-116017-24.
    Individuals who want to testify by telephone at the public hearing 
must send an email to [email protected] to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-116017-24 and the language 
``TESTIFY Telephonically.'' For example, the subject line may say: 
Request to TESTIFY Telephonically at Hearing for REG-116017-24.
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to [email protected] to have 
your name added to the building access list. The subject line of the 
email must contain the regulation number REG-116017-24 and the language 
``ATTEND In Person.'' For example, the subject line may say: Request to 
ATTEND Hearing In Person for REG-116017-24. Requests to attend the 
public hearing must be received by 5 p.m. EST on February 5, 2025.
    Individuals who want to attend the public hearing by telephone 
without testifying must also send an email to [email protected] to 
receive the telephone number and access code for the hearing. The 
subject line of the email must contain the regulation number REG-
116017-24 and the language ``ATTEND Hearing

[[Page 91623]]

Telephonically.'' For example, the subject line may say: Request to 
ATTEND Hearing Telephonically for REG-116017-24. Requests to attend the 
public hearing must be received by 5 p.m. EST on February 5, 2025.
    Hearings will be made accessible to people with disabilities. To 
request special assistance during a hearing please contact the 
Publications and Regulations Section of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
[email protected] (preferred) or by telephone at (202) 317-6901 
(not a toll-free number) by 5 p.m. EST on February 4, 2025.

Statement of Availability of IRS Documents

    IRS notices and other guidance cited in this preamble are published 
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are 
available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at https://www.irs.gov.

Drafting Information

    The principal author of these proposed regulations is Cameron 
Williamson of the Office of Associate Chief Counsel (Passthroughs and 
Special Industries). However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1, as amended in a final 
rule published elsewhere in this issue of the Federal Register, 
effective January 19, 2025, continues 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, as amended in a final rule published elsewhere 
in this issue of the Federal Register, effective January 19, 2025, is 
further amended by:
0
a. Adding paragraphs (a)(4)(iv) and (a)(5)(iv).
0
b. Revising the last sentence of paragraph (b)(2)(i).
0
c. Revising the first sentence of paragraph (b)(2)(ii).
0
d. Adding a sentence to the end of paragraph (b)(3)(i).
0
e. Revising paragraph (f).
    The additions and revisions 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) * * *
    (4) * * *
    (iv) Termination upon change in interest--(A) In general. Except as 
provided in paragraph (a)(4)(iv)(E) of this section, an election under 
this paragraph (a) by a specified applicable unincorporated 
organization (as defined in paragraph (a)(4)(iv)(C) of this section) 
will terminate as the result of a terminating transaction (as defined 
in paragraph (a)(4)(iv)(D) of this section) involving an interest in 
that organization. Such termination will be effective beginning on the 
first day of the taxable year beginning after the hypothetical 
partnership taxable year (as defined in paragraph (a)(4)(iv)(B) of this 
section) in which the terminating transaction occurred.
    (B) Hypothetical partnership taxable year. The term hypothetical 
partnership taxable year means, with respect to a specified applicable 
unincorporated organization, the period of time that would have been 
the organization's taxable year if, after the taxable year with respect 
to which the organization first made the election under this paragraph 
(a), the organization continued to have taxable years and such taxable 
years were determined by reference to the taxable year required to be 
used by the organization to make the election.
    (C) Specified applicable unincorporated organization. The term 
specified applicable unincorporated organization means an applicable 
unincorporated organization that has made an election under this 
paragraph (a) and such election would not be valid without the 
application of either paragraph (a)(4)(iii)(A) or (B) of this section.
    (D) Terminating transaction. The term terminating transaction means 
an acquisition or disposition of an interest in a specified applicable 
unincorporated organization (including transfers among members of the 
organization), other than as the result of a transfer between a 
disregarded entity (as defined in Sec.  1.6417-1(f)) and its owner.
    (E) Exception. If a specified applicable unincorporated 
organization meets the requirements to make a new election under this 
paragraph (a) and makes such an election no later than the time that 
would have been prescribed by Sec.  1.6031(a)-1(e) (including 
extensions thereof) for filing a partnership return with respect to the 
hypothetical partnership taxable year in which one or more terminating 
transactions occurred, the organization's election will not terminate 
under paragraph (a)(4)(iv)(A) of this section as a result of any 
terminating transaction occurring during that hypothetical partnership 
taxable year. Such election must contain, in addition to the 
information required by paragraph (b) of this section, information 
about every terminating transaction that occurred in the hypothetical 
partnership taxable year, including the parties thereto and the 
interest(s) transferred.
    (5) * * *
    (iv) Example 4--(A) Facts. The facts are the same as in paragraph 
(a)(5)(ii)(A) of this section (Example 2), except that T owns a 60% 
interest in TLLC and Y owns a 40% interest in TLLC. TLLC's first 
taxable year ends on September 30th of year 1. On or before the 15th 
day of the third month following that date, TLLC makes a valid election 
under section 761(a) with respect to year 1. On August 31 of year 3, T 
sells all of T's interest in TLLC to Q.
    (B) Analysis. TLLC is a specified applicable unincorporated 
organization. Accordingly, the sale of T's interest is a terminating 
transaction and will terminate TLLC's section 761(a) election unless 
TLLC makes a new section 761(a) election on or before the 15th day of 
the third month following September 30th of year 3. This analysis would 
not be different if, sometime between the end of TLLC's first taxable 
year and the hypothetical partnership taxable year ending on September 
30th of year 3, TLLC's taxable year would have changed under the rules 
of subchapter K (for example, as a result of a change in T's taxable 
year).
    (b) * * *
    (2) * * *
    (i) * * * Such partnership return must contain the following 
information: 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

[[Page 91624]]

(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; 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); 
and all information required by the form and instructions to the Form 
1065 for an election under paragraph (a) of this section.
    (ii) * * * If an unincorporated organization described in paragraph 
(a)(1) of this section and either paragraph (a)(2) or (3) of this 
section (but not a specified applicable unincorporated organization) 
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. * * *
    (3) * * *
    (i) * * * Application for permission to revoke the election must be 
made by submitting a letter ruling request that complies with the 
requirements of Rev. Proc. 2024-1 or successor guidance.
* * * * *
    (f) Applicability date--(1) In general. Except as provided in 
paragraphs (d) and (f)(2) of this section, this section applies to 
taxable years ending on or after March 11, 2024.
    (2) Exceptions. Paragraphs (a)(4)(iv) and (a)(5)(iv) of this 
section, the fifth sentence of paragraph (b)(2)(i) of this section, the 
first sentence of paragraph (b)(2)(ii) of this section, and the last 
sentence of paragraph (b)(3)(i) of this section, apply to taxable years 
ending on or after November 20, 2024.

Heather C. Maloy,
Acting Deputy Commissioner.
[FR Doc. 2024-26962 Filed 11-19-24; 8:45 am]
BILLING CODE 4830-01-P